As day by day active participating of Indians in capital markets growth is drastically increasing. So if you are about to start your investment journey , Investing in Mutual funds for beginners is better than directly investing in to stocks.
Beginners guide to mutual funds
What is Mutual fund?
A mutual fund is a pool of money managed by a professional fund manager employed by asset management firm.
He/she invest the money collected from common shareholders on various asset classes like stocks, bonds, money market instruments, etc. to meet the investment objectives.
The gain generated from the investment is disturbed among the investors after deducting the expenses by calculating schemes “Net asset value” or “NAV”.
Best mutual funds for beginners
If you are beginners, its prudent to go with investing index fund. By investing index fund ,He/she would have done well for himself in the long run.
Even renowned investors like Warren buffet favors investing Index fund
Top Reasons to investing in mutual funds for beginners:
Investing in Pool of stocks:-
By Opting to invest in a mutual fund you are investing in a collection of stocks rather than individual shares. A typical fund owns more than 30 stocks in its portfolio. Due to this, less risk for investors’ capital & their capital is widely spread, less volatility compared to holding individual shares or stocks.
Managed by experts:-
Your money is managed by a fund manager. They are experts in the field and have their team to do the research to looking for new investment opportunities & maximizing the fund return by taking less risk.
Imagine if your money lies in a bank savings account that yields 3.50 % interest. In the case of fixed deposit, an average yield interest is 6.50 % p.a. Let’s look at the inflation rate in India for 2020, it is 6% on an average year.
Your purchasing power gets reduced as time goes by parking your money in FD’s or savings accounts.
Investing in a mutual fund gives a average return of over 10 % per annum . You will be beating inflation, your capital makes you wealthy in the long run.
The dividends announced by the companies is used to increase the value of NAV in a selected fund which in turn helps your investment value to appreciate.(In growth option, the fund house doesn’t pay dividends to its investors)
By investing in a mutual fund you are befriending compound interest. It’s the 8th wonder of the world if you used it rightly.
Your investment gets compounded year on year which grows to a significant amount in the long run i.e. minimum 5 years and more.
There is no asset class that comes close to a mutual fund in buying & selling the units without any hassles unless there is a lock-in period: eg: ELSS fund has 3 years lock-in period.
People go through pains in selling their house or land for months, years to meet their emergency needs. But investments in the open-end fund can be bought & sold in a click from units which are allotted to you.
Collateral for rainy day:
Banks are accepting mutual fund investment as a collateral in issuing loans.
For a debt fund, bank offers loan of 80 percent from the total value of your investment.
Equity fund, loan of 50 percent from the total value of invested. Also please keep the interest rates in mind which hovers around 10% per annum.
Things to keep in mind
If you are not paying attention to the expense ratio charged by the fund house, you may lose a lot of money from your hand. Anything above 1 % as expense ratio is considered as expensive for an actively managed fund. These fees will have an impact on the overall return of your investment.
For eg: If your portfolio value is 5 lac INR, your fund is charging a 1 % expense fee, 5000 INR will be charged. what if your fund’s expense ratio is 0.60 %, 3000 INR will be charged. You have saved Rs 2000 INR straight by paying attention to the expense ratio.
But in index fund, the expense ratio is as low as 0.20 %, This reason makes index fund as best mutual funds for beginners.
You have an exit load fee charged by the fund house at the time of exiting the fund. This fee is charged to discourage investors from redeeming their units for some time. Exit load for most of the funds would be for 1 year.
If a fund has a high turnover ratio it implies the fund manager is aggressively selling & buying stocks which may cause dent in the performance of a fund.
By investing in a wide variety of stocks you are avoiding the risk. At the same time, it can reduce your profits.
No matter how attractive the opportunity is , fund manager cannot have a large position on a single stock for high profit.
Also, Investing in too many mutual funds doesn’t help if you are aiming for a decent rate of return. Focusing on 3 or 4 good schemes will help you generate decent return.
If you hold a full time job , by Investing in mutual funds for beginners saves you from studying the market, researching companies, etc.
I hope this post acts as your beginners guide to mutual funds.
By doing your due diligence, investing in a top-rated fund helps your chance of winning in the world of mutual funds.
Tools I use for selecting fund: www.morningstar.in