Why Mutual Funds?

Professional Management
One of the main benefits of mutual funds is that an investor avails services of experienced and skilled professionals. The funds invested are managed by experienced fund managers. A good investment manager is certainly worth the fees you will pay. They are backed by dedicated investment research team which analyses the performance and prospects of companies and invests accordingly to give maximum benefit to the investors. It’s very difficult for any individual to do research on any company before buy the shares of that company. It requires lot of hard work, time and patience.
Diversification
Mutual fund invests across many sectors and industries. This diversification reduces the risk because hardly all stocks decline at the same time. You can achieve this diversification through Mutual Fund with far less money than you can do on your own. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security.
Low Cost
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets.
Good Returns
Over a medium to long term Mutual Funds have the potential to give good returns as they diversify over a number of securities.
Convenience and Liquidity
In open ended schemes you can conveniently withdraw partially or fully at any time though this practice should be strictly avoided. Thus the liquidity is very high in Mutual Funds.
Transparency
Regular information can be obtained any time from the Mutual Fund house. The information can be of any kind like the actual value of your investments, the companies in which you money has been invested, the proportion invested in each asset class etc.
Well Regulated
All Mutual Funds are registered with SEBI (Securities and Exchange Board of India) and they act according to the strict regulations to protect the interests of investors. The working of Mutual Funds is regularly monitored by SEBI.

Chosing a Mutual Fund.

The boom in the share market has increased the number of mutual funds in the market. With so many funds it becomes a difficult choice to select the right mutual fund. Any wrong selection can make a huge difference in the returns. We should keep few things in mind before investing.
Ascertaining the risk profile.
The first step before investing in any Mutual Fund is to check our risk profile. There are various schemes in the market which carry high risk. Mostly sector funds which invest only in one particular industry like power or infrastructure offer high returns, but at the same time are very risky. The investor should always ascertain what his risk taking capacity is, high, medium or low.
Past performance
while it is clearly mentioned in the offer document that the past performance is not an indicator of the future, it does help us in selecting the fund. While checking the past performance we should have a look at the time frame of more than 3 years. There are few funds which perform in haphazard manner by giving returns inconsistently. One should also check how the funds have performed in the bull and bear markets of the immediate past? Tracking the performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls in a bad market.
Know your fund manager
Check the track record of other schemes managed by the same fund manager. Check out if the fund manager has changed recently. If a new fund manager has just taken up the assignment then check previously managed funds by him.
Read the Offer Document
The offer document of the scheme tells you its objectives and provides useful details like the track record of other schemes of the same fund house.
Keep an Open Eye
The revolution in print and television industry has benefited many. Why shouldn’t we take the advantage of such a revolution? There are so many financial news channels and newspapers that we can have enough knowledge about various types of funds. There are experts who give advice on how to select a good mutual fund on these channels.

Types of Mutual Funds

Open-ended schemes
Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units on any business day. This provides good liquidity.
Close ended schemes
Schemes that have a fixed maturity period are called close-ended schemes. One can invest in this type of scheme only at the time of initial issue. The initial issue period of the scheme can be one month 2 months or more depending on the scheme. After closing of the initial issue investors cannot invest in the scheme.
Growth Schemes
They Provide capital appreciation over the medium to long term. These schemes normally invest majority of their funds in equities. Growth funds are suitable for investors who can afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income.
These schemes can further be classified into the following
1. Small Cap Fund: - these funds primarily invest in companies which are small in nature. They invest in companies that have started recently. Usually small cap comes under a very high risk category because they invest in companies which have a limited track record.
2. Mid Cap Fund: - These funds primarily invest in companies which are medium in size. These funds carry less risk as compared to small cap funds.
3. Large Cap Fund: - As the name suggest it invests in well established companies.
4. Sectoral Fund: - These funds invest only in one particular sector such as health care, technology, power or infrastructure. For example a Power fund will invest only in companies related to power and not in companies related to textiles or pharmaceuticals. Similarly and infrastructure fund will invest only in companies such as cement, steel, etc which are vital for developing infrastructure.

Balance Schemes
Balance schemes invest in both shares as well as fixed income securities according to the proportion mentioned in the offer documents. These funds are for those who don’t want to put their entire money in equities. Returns as well as risk in these schemes are less as compared to growth schemes. Such funds usually invest a portion in safer instruments such as treasury bills, certificate of deposits etc.

Money Market Funds/Liquid Funds
For the conservative investor, these funds provide a very high stability of principal while seeking a moderate to medium returns. They invest in highly liquid, virtually risk-free, short-term debt securities of agencies of the Indian Government, banks and corporations and Treasury Bills.

Fighting Inflation

One common mistake we make while planning for investment is not adjusting inflation against the returns. In general inflation means a rise in the level of prices. The price we paid for buying one kilo onion in 2006 was quite less as compared in 2008. Inflation reduces the power of money as the medium of exchange. If we invest in any financial instrument which gives us 8% returns and the inflation increases by 3%, then by roughly adjusting the rate of inflation the net result would only be 5%. Inflation can hugely impact our long term savings. Any x amount 20 years hence might look very big now but its actual value will definitely be far less if we take inflation into consideration. Apart from that we have to pay the tax on the maturity value of our investment thereby reducing the value of our investment further. We should invest in instruments which will beat the inflation and will be tax free. Equities are the best to beat inflation. Though they have an element of risk, the returns offered by the equities are far the best as compared to other avenues of investment. One important thing to remember is that we should not put the entire money in equities but only a portion of our savings and that too at regular intervals over a longer period of time. Inflation not only erodes your interest but your principal amount too. Before chalking out any financial plan we should always calculate the inflation rate. Inflation plays an important part in deciding investments so do not forget this vital factor while deciding to invest.