Mutual fund is an ideal investment vehicle if your financial goals are clear

Click on the link below to read my article on Mid-day Mumbai edition (Gujarati)

http://epaper.gujaratimidday.com//epaperpdf/gmd/07092015/07092015-md-gm-15.pdf


The English translation is as under:

Mutual funds have been in India for a while now. Still, many misconceptions prevail about what exactly mutual funds are. One such misconception is that mutual funds are complex products and are suitable only for expert investors.

The reality is: Experts manage mutual funds for the benefit of novice investors. A mutual fund is not really an investment by itself, but a way to invest. Instead of managing our money ourselves, we can outsource the job to a team of experts.

As we have seen in one of the articles earlier, a mutual fund is a vehicle that allows investors to invest in a portfolio of securities. The portfolio is created with an investment objective and a fund management team manages the same on behalf of these investors. Each mutual fund scheme has a defined scheme objective and style. The investment universe is also stated upfront. An investor has to select the scheme that matches with one’s own investment objectives.

This is where the expertise of an investor and that of a professional differs. A professional manager decides why certain investments must be made. Most of the retail investors are not clear about their investment strategy and hence find it difficult to select appropriate mutual fund schemes. While selection of individual securities requires a detailed work, selection of a mutual fund portfolio is a relatively easy task. Simply by outsourcing the task of fund management to a professional team saves a lot of time and efforts.

Add to that various conveniences offered by mutual funds, e.g. SIP, STP, switches, investment of any amount, any time, etc. and you have a very flexible investment vehicle. You can suit any of your requirements through mutual funds.

Mutual funds are ideal if you know your financial goals. Planning to reach your goals can be very easily done using mutual funds. You can also periodically check your progress towards the goals.

In fact, investing through mutual funds is so easy that it is recommended investment strategy for all the beginners. One needs to follow these steps:

1.     Start with your risk profile and statement of goals. Based on that, arrive at an asset allocation plan.

2.     Implement the plan through buying proper funds in line with the asset allocation plan.

3.     The selection of funds is done through subjective and objective filtering. Some of the parameters the objective filtering looks at are:

a.     the past performance of the fund – but remember, it is not only about the returns generated by the fund in question;

b.     the general behavior of the fund’s NAV with respect to the broader market;

c.      the risk associated with the fund (as represented by the standard deviation), etc.;

4.     Some of the parameters the subjective filtering looks at are:

a.     the conduct of the fund house,

b.     services of the fund house,

c.      the adherence to or the deviation from the objectives of the scheme, if any, etc.

So go ahead, take the advantage of mutual funds.

-        Amit Trivedi

The author runs Karmayog Knowledge Academy. Recently, Amit has authored a book titled “Riding the Roller Coaster – Lessons from Financial Market Cycles We Repeatedly Forget”. The views expressed are his personal opinions.