| June 28, 2020
Mutual Funds and its importance in daily life
It was Madhu’s 25th birthday, but she was far away from home. She wasn’t very familiar with her new friends in the class, so she dropped her celebration plans and decided to return home early. But when her class friends got to know about her birthday, do you know what happened next? Of course, they bumped into her and excitedly asked "Where is the Party today?”
It was indeed a good reason to meet up and get to know her new classmates in the university. So, she anxiously agreed but realized she had no sufficient money to feed her friends for the party. Disappointingly, she changed her plans and told her friends that ‘No Money, No Party.
There was this new restaurant opened in their neighborhood that served delicious burgers. But it looked like the plans got canceled. But, No, it wasn’t like this. There were 10 people including Madhu, and they all mutually decided to pour in little money, and together they paid while also enjoying the burgers.
So, what we are trying to explain to you is Mutual Funds are like a birthday party, but there is no one host in it. Everyone pays some amount of money that gets collected and is further invested in stocks, money market instruments, assets, and bonds by a professional fund/money manager on behalf of you.
Also, Mutual Funds has a specifically defined portfolio designed according to your investment requirements. So you gain what you desire. It is both a short-term and long-term investment that offers incredible financial benefits to you. When you plan to invest in Mutual Funds, you will be asked these questions that help the analyst assist your risk-assessment capabilities and develop a portfolio.
Invest in Mutual Funds
How much is your risk exposure?
- It means how much money are you willing to invest in Mutual Funds.
How much is your time frame?
- It emphasizes short/long term investment or an individual time horizon respectively.
What is your age?
- There are different kinds of Mutual Funds like equity funds that fit best for people who are in the 20-45 age bracket and retirement funds for people who fall into the 60-70 age bracket. So, again age is a major factor in Mutual Funds, it is always great if you start young, but even if you start a bit older, it will still give you a lot of leverage.
How do you want to invest?
- SIP or lump sum are two ways you can invest in Equity Mutual Funds. SIP or Systematic Investment Plan is a way through which you can contribute small but regular amounts. Both of these provide leverage so that they can help you analyze which is more suitable for you.
Portfolio development is extremely important, and thus you must answer these questions with clarity. You can invest into several categories based on your investment purpose that matches your portfolio. Your investment is diversified across different securities, and you can easily start with low investment amounts. You can even start with investing Rs. 100 only!
In simple words, when you invest or buy a unit of Mutual Funds (also called a share of Mutual Funds) you are investing into that share’s portfolio value. It is similar to evaluating the performance of a share. This is a reason why the price of the Mutual Funds is called NET ASSET VALUE or NAV.
NAV keeps on changing every day because of the volatile nature of the market value of the assets. So NAV is also like a navigator that helps you understand the performance of the scheme you have invested in. It can give you a long-term analysis for further speculations.
Remember that restaurant where Madhu and her friends enjoyed burgers? In that restaurant’s menu, there were more items to give a variety of choices to the customers.
It is similar to Mutual funds investment, here, you get to choose from different types of Mutual Funds available in the market like open-ended or close-ended funds. Then comes equity funds which also include sector-specific or index funds. Then debt funds or fixed-income funds, balanced funds, tax-saving funds, and retirement funds. These are some significant Mutual Funds that exist in the market today.
Also, some great advantages that are offered by this kind of investment are that they are easy to access because they are liquid investments, professionally managed by a proficient investor, provide higher expected returns with diversified investment.
Mutual Funds are inclined towards growth investing, but we always urge you to read the complete details before making a move.
Also, do you know what advice Madhu's friends give her in the cafe?
It was to start investing in mutual funds so that Madhu can enjoy her next birthday with her own savings from the returns of mutual funds without asking for help from anyone. And make her own choices and enjoy financial freedom just like she wishes to.