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Why should people invest in mutual funds are not directly share
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Why People should Invest in Mutual Funds Than Directly Into Shares
Now a days, everybody is in a dilemma when comes for their hard earned money investment decisions in these volatile markets. Investment is a way which can multiply your money in many folds beyond your expectations and in similar way it can dry out your money completely if invested in wrongly avenues. Consequently, people are seeking advice from experienced professionals for investment activities. My experience & observation recommend that those people who have adopted ‘get rich quick mentality’ lost their money very soon because they did not do their ‘need based self assessment’ before making investment decisions. Through this article, I will try to clarify various reasons why people should invest in mutual funds than directly investing in shares.
First, mutual fund managers are highly experienced and well qualified to take decisions to invest domestically and internationally. Asset management companies keep the track record of every company which are in their portfolio or expected to be included. Asset management companies also have their own research team which constantly keeps focusing on performing sectors and sectors which are anticipated to out go in coming future. Before making any pronouncement, fund managers do fundamental analysis (this kind of analysis is done to find out the best scrips in the market) and technical analysis (this kind of analysis recommend when to enter and when to exit).
Second, mutual fund gives you the advantage of diversification. In my most of the meetings with the investors I found that investors do not know this point clearly so I will focus more on this point. Diversification is nothing but the allocation of assets into different sectors. Diversification minimizes the risk because money is invested into various industries, had that money been invested only in one industry / company it would have been exposed to more risk due to volatility and government policies pertaining to particular sector. Let’s take an example to elaborate this point.
Investor “invested Rs. 50.000 X Company, the Company took over operations in the telecommunications industry, 250 per share and buys 200 shares, with a time horizon of three years. Investor B “is also the investment of Rs 50,000 @ 20 and bought 2500 units of this fund. These sector funds that focus on the telecommunications industry only. Let prospects see after three years, all on the line:
INR / SHARE
Year 1
Return %
Company Name
Allocation
IP *
Quarter I
Quarter II
Quarter III
Quarter IV
YOY
Weighted
X
25%
250
287. 5
316th 3
268. 8
279th 6
11. 8
3. 0
Y
10%
200
218. 0
239. 8
203. 8
212. 0
6. 0
0. 6
Z
25%
100
117. 0
128. 7
109. 4
113. 8
13. 8
3. 4
P
20%
300
366. 0
402. 6
342. 2
355. 9
18. 6
3. 7
Q
20%
400
480. 0
528. 0
448. 8
466. 8
16. 7
3. 3
Total
14. 1
From the above table it is clear that returns due to diversification are higher than investing in one particular share of the company.
INR / SHARE
Year 2
Return %
Company Name
Allocation
CMP
Quarter I
Quarter II
Quarter III
Quarter IV
YOY
Weighted
X
25%
279. 6
293. 5
322nd 9
274. 5
285. 4
2. 1
0. 5
Y
10%
212. 0
252. 3
277. 5
235. 9
245th 3
15. 7
1. 6
Z
25%
113. 8
136th 5
150. 2
127. 7
132. 8
16. 7
4. 2
P
20%
355. 9
398th 6
438. 5
372. 7
387. 6
8th 9
1. 8
Q
20%
466. 8
490. 1
539. 1
458. 2
476. 6
2. 1
0. 4
Total
8th 5
Again here you will find out that returns due to diversification are 8. 5% vs. 2. 1%. It also conveys that fund manager is continuously gaining from the market and could be trusted for the investment purposes.
INR / SHARE
Year 3
Return %
Company Name
Allocation
CMP
Quarter I
Quarter II
Quarter III
Quarter IV
YOY
Weighted
X
25%
285. 4
314. 0
345. 4
293. 6
305. 3
7th Midnight
1. 7
Y
10%
245. 3
272nd 3
299. 5
254. 6
264. 8
7th 9
0th 8
Z
25%
132. 8
175. 2
192. 8
163. 8
170. 4
28. 4
7. 1
P
20%
387. 6
418. 6
460. 5
391. 4
407. 1
5. 0
1. 0
Q
20%
476th 6
509. 9
560. 9
476. 8
495. 8
4. 0
0. 8
Total
11. 4
I judge that it is needless to say, in order to diversify not only reduces risk, but also more useful and safe return of Garner.
Total Returns In Three Years
INR / SHARE
Price
Allocation
Returns in %
Trade name
IP
CMP
Invt. ‘A’
Invt. ‘B’
Invt. ‘A’
Invt. ‘B’
X
250
305. 3
100%
25%
22%
6%
Y
200
264. 8
10%
3%
Z
100
170. 4
25%
18%
P
300
407. 1
20%
7%
Q
400
495. 8
20%
5%
Total
22%
38%
From the above table it is clear that mutual fund successfully managed to give 38% returns where as investment in company X has just provided 22%. Now just imagine if diversification is done in various sectors. Here, I did not consider dividend & other returns.
Thirdly, mutual fund also provides various tax repayment. People can take tax advantages when they are investing in mutual funds and also when they are exiting from the schemes. Just they need to maintain and follow time horizon guidelines which SEBI and AMFI have place in place.
Fourth, the costs of administering the fund of knowledge air force is minimal. This advantage is due to higher volume. Before we used to say that due to load and exit, investment funds are more expensive, but now there are no guidelines for the SEB’s entry and exit load if the investment in the fourth August 2009 were for investment funds. This means that the air force of experienced and well-qualified fund managers are free. Thanks for the SEB’s air force are available on a free conveying.
List of advantages of mutual fund is long and it is increasing as volatility & uncertainty is increasing in the market. As we know that there is nothing in this world which is flawless and mutual fund is of no exception. There are some mutual funds in India also which are not performing upto the mark. Investors need to be very cautious while investing in mutual funds. My next article will be based on ‘How to select the best mutual fund’ for investment purposes.
Having said that all the views are private and authenticity of these thoughts is based on various mutual funds & financial institutions websites. I can not be held responsible for any incorrect information or inappropriate experience.
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article source:Mutual Fund Advisor Research Analysis
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- Are Mutual Funds a Good Way to Invest for Your Future?
- Should You Invest in Mutual Funds?
- Balanced Mutual Funds
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