Understanding Mutual Funds

A chartered accountant and MBA, is an entrepreneur and financial literacy advocate. She has over 15 years of combined experience in consulting, advisory and travel industries. A national ranker in CA, Aarti is a published author, who has written a plethora of books for children's financial education and is currently helping build awareness for financial literacy for women through her platform, Sthreedhan.

 

The sage of Omaha, Warren Buffet once said, "We don't have be smarter than the rest; we have to be more disciplined than the rest". When first read this, felt compelled to re-read this line over and over again. So simple and so profound. What does consistency have to do with the world of money and finance, you may ask? Well, your expenses tend to be consistent. The outflow of money, sometimes faster and sometimes a little slower, tends to be pretty regular top. That's why you need consistency in your income, right? You need the assurance of that salary hitting your bank account every month to ensure that those recurring bills keep getting paid. But is that enough? Will this take care of you when you are past the age when the salary comes in at the end of each month? Perhaps not. Many people find it rather hard to invest. Do you too? Do you feel that there isn't money every month to make ends meet, so where is the scope of parking precious bucks in an account that may or may not give you a good return? Do you feel like you are potentially ruining your present in the race to secure a ratner unpredictable future? Or do you feel like you don't know enough to take a risk of putting your life's savings into someone else's hands? Investing regularly is something you need to do not just to secure your future when you may not be able to, or simply may not want to work, but also to ensure that as your needs rise, so does your ability to take care of them. The lack of knowledge of how to invest or the inability to do so consistently should not deprive you of a secure life. Whatever your issue, mutual funds are one of the best tools on the market for you. But what are they and how do they work? Mutual funds are basically companies that take money from scores of people who want to invest but don't want to take that responsibility up individually, and put their money collectively into a certain type of security, be it shares, government bonds or any other kind of securities. They are experts at investment and unlike you and me, they do this for a living. So if we don't have the knowledge to buy securities of different types to enfure a good return on our investment or the time to manage and monitor them, we can always opt for a mutual fund. There is a lot of confusion associated with types of mutual funds. They can be divided based on various criteria - structure, asset class, investment goals and risk appetite. Based on structure, mutual funds can be open-ended or close-ended. Open ended mutual funds are those in which you can invest money at any point in time while close-ended mutual funds have a deadline after which you cannot invest in them. Based on asset class or the type of security in which the money is invested, mutual funds can be equity funds (those that invest only in shares on the stock market), debt funds (those that invest only in bonds or debt securities) or hybrid funds (that invest part of the money in both equity and debt). Finally, mutual funds can be based on investment goals such as growth funds (for those who want to create an asset and get high rate of return in the long run), ELSS (those who want to save taxes and also get good returns), fixed maturity funds (who want to invest for a particular goal at the end of a particular period of time and pension funds (for securing your post-retirement life). The biggest benefit of putting your money into a mutual fund is two-fold. Firstly, you are putting an expert's job into an expert's hand. Secondly, since it goes out of your bank account on a designated date, the issue of consistency is taken away. You can achieve this by taking the SIP option under the mutual fund of your choice. SIP stands for Systematic Investment Plan. It puts a fixed sum of money at fixed intervals into the given mutual fund, meaning you don't have to remember to do anything. If you choose to keep putting in the money during the period your salary is credited into your account, you'll never have to worry about managing the funds for the investment. It will be taken care of automatically. It will also protect you from the volatility of the market and you will end up getting a good return on your investment in the long run. The magic of consistency of investment can be summed up in something Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it".


This article originally appeared in the TeacherTribe Magazine January 2022 edition.