WE go to a doctor when we need medical advice or a lawyer for legal guidance.
Similarly, mutual funds are investment vehicles managed by professional fund managers. And unless you really possess the skills to invest in equities directly, we recommend you use this option for investing.
There are many reasons for this.
Investing is becoming more complex
There was a time when things were quite simple - the stock market shot up with the arrival of the first monsoon showers and around Diwali every year.
With the opening up of the economy, since India started integrating with the world (with the start of the liberalisation process), complex factors such as an increase in short-term US interest rates, the collapse of the Brazilian currency or default on its debt by the Russian government, and other such major events have started having an impact on the Indian stock market.
Although it is possible for an individual investor to understand Indian companies (and investing) in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose asset management company invests in research) provide an option of investing without getting lost in the complexities.
Risk diversification
Diversification of a portfolio is amongst the primary tenets of portfolio structuring. Moreover, diversification is essential in order to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.
Returns offered
Since mutual funds are not asset classes themselves, the returns you can expect from mutual funds depends on the performance of the underlying asset class. So an equity mutual fund should ideally perform as well as the equity market.
Well regulated
A key factor in their favour is that they are more regulated and hence offer investors the ability to analyse and evaluate their track record.
Of course, nothing comes for free. So you will be charged a ‘load’ by the mutual fund company for all the trouble it takes for managing your money.
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