Wednesday, 1 February 2012

Why Should you invest in Mutual Funds?

You have got two ways of investing into stocks.  Directly buying the stocks of individual companies or Investing via Mutual Funds. Investing into stocks directly might sound thrilling for various reasons but it is also associated with big risk factor.  
Investing directly into stocks will give you complete control of your portfolio; you decide when to buy and when to sell. However the associated challenges cannot be ruled out.

Click to know why investing directly into stock is risky.
Investing Via mutual funds has got quite a lot of advantages.Peace of mind is the biggest one.You would not lose your sleep.  In case of direct investment, you will have to spend time in analyzing the company prospectus, the balance sheet and stability. This is quite challenging and will need time, skills and patience. In case of investing into stocks Via Mutual funds, your analysis will be limited to selecting a good mutual fund and THAT’S IT.
The mutual fund you have selected will give you exposure to various companies. Generally Mutual funds would have exposure to 30 to 40 companies. The companies are selected by a panel of experts after looking into various parameters and detailed analysis. Mutual Fund Companies have professionals that keep close eye on the performance of the companies that are in their portfolio. They also look out for budding companies with strong management and growth potential. 
Reasons why you should invest into stocks Via Mutual Funds:
  • Diversification is the key. You get exposure to 30 to 40 companies.
  • Mutual Funds are less volatile in comparison to direct investment in stocks.
  • Mundane activities like buying, selling, research of companies are not your headache.
  • Managed by professionals who understand stock market better than you do.
  • Mutual Funds are transparent. You can see the companies that are part of the portfolio.
  • SIP Facility helps in reducing risk of market fluctuations. Every month a fixed amount is invested in buying units of mutual funds. The biggest advantage of SIP is Rupee Cost Averaging.
  • Easy Liquidity. Settlement time is 2 to 3 days.
  • Investing into ELSS Mutual funds will give you tax benefit -80C. This has lock-in Period of 3 years
Lets us see what would be the current Value if one Lakh was invested in these funds on day of inception.
Fund NameInception DateCurrent NAVAbsolute returnsCurrent Value
HDFC Top 20019-Aug-961941940%1940000
Franklin India Blue Chip30-Nov-932062060%2060000
Reliance Growth8-Sep-954154150%4150000
HDFC Tax Saver18-Dec-952122120%2120000
Reliance Vision 7-Sep-952432430%2430000
Few observations: 
  • On an average if you observe, Most of the funds have given returns close to 20 folds. This means one lakh invested would have grown to 20 Lakhs, in about 16 years or so.
  • Can we match this? Do you think individual investor will be able to beat this returns?
  • The entire amount is tax free.
Let us see what would be the current value if the same one lakh was deposited for 16 years in bank @ 10.5%, compounded quarterly.
  • One Lakh would have grown close to 5.25 lakhs.
  • Further the interest earned is taxable.
Take away: Diversification is the key to reduce the risk in stock market. A mutual fund is right tool for individual investors who want to invest in stock with optimum diversification.
Do you agree that Mutual Fund is the right tool to make money in stocks?


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