investophobia

Hi guys, hope all of you are fine by the grace of god. My name is Aditya and iam from India. There is an popular advertisement in our country related to the mutual fund and that is ‘mutual fund sahi hai’ . In english it means that mutual fund is right. Does this word really worth it or people just made it overhyped. So today we are going to talk about the mutual fund

I want to give you an example. Suppose you want to go to a place which is very far from your home and you also have a car. But unfortunately you don’t know how to drive that car. At that time you will be dependent upon a driver so that you can reach to that place at a very less time. In investing world mutual fund exactly does exactly the same thing. Every mutual fund has a fund manager who has the responsibility to manage your portfolio whether it can be shares or bonds. They have the experience in managing the portfolio. So if you don’t have time to research about the shares which will takes a lot of time. At that time you can believe on these fund managers. You can invest your money in the mutual fund either in the form of sip or lump sum. Here the full form of sip is systematic investment plan where you can invest in mutual fund on monthly basis. You should invest lump sum in mutual fund when the market is going down because after some time the market will goes up so don’t need to worry about it.

There are different types of mutual fund like debt mutual fund, hybrid mutual funds etc. So first of all you have to understand how much risk you can take. If you are an conservative investor who is afraid of taking risk, they can put their money in debt mutual fund. There are different kinds of debt mutual fund like gilt fund(only investment in government securities), liquid fund, dynamic bond funds etc. But if you want to take risk then obviously there are alot of mutual fund houses who invest their money in the stock market. But here also there are different types of categories in mutual fund who invest their money in the stock market which is a little bit confusing.

Types of mutual fund

1. Active fund

In active mutual fund, the fund managers try their best to beat the market. Sometimes they can able to beat the market and sometimes they can’t. In simple words, the performance of the active funds depends upon the performance of the fund manager because they never try to replicate the market they always try to give more returns to the investor as compare to the market. As active fund managers takes alot of risk to beat the returns of the market, they charge high expanse ratio . Here expanse ratio refers to the charges fixed by that fund manager which has to be paid by the investor as he/she invested his money in the market.

Types of active mutual fund

i. Large cap funds

These are also known as bluechip funds. It means that these type of fund will invest your money in some large or reputable companies whose businesses are already in the devloped stage. These types of funds are less volatile (volataile refers to ups and downs in the price of shares). So if you are an conservative investor and still want to invest your money in the stock market, then this fund is a right platform for you. When the bear run in the market start where the stock market goes down on continue basis, these type of funds tends to fall less and it will save your return.

ii. Midcap funds

Another type of equity mutual fund is midcap funds. These types of funds invest in medium sized companies. These type of companies or funds can generate more returns than the large cap funds but it is more volatile as compare to the large cap mutual funds. It means that when the market falls, it will fall more than the large cap mutual fund . However still you can say that it’s risk is at moderate level.

iii. Small cap funds

If you are not familiar with the ups and downs(volatality) of the market, then these type of mutual fund is not good for your financial health. It gives more returns than the large cap and midcap funds but is also falls more as compare to these funds. The main problem with these kind of fund is not they won’t recover as speed as large cap or mid cap funds. It also has that power to convert your postive return into negative. During the period of recession it will fall more but takes alot of time to recover from it. So along with the small cap funds you should also keep the buch of large cap funds so that whenever the market goes down it will save your return and whenever the market goes up these small cap funds generates more return than the large cap funds.

iv. Flexi cap fund

This fund is the combination of large cap, midcap and smallcap companies. This category is one of my favourite of all time. Because here it depends upon the fund managers in which type of companies they want to invest. If they want to give the exposure to the bluechip stocks(large companies), they can do it. They can also do the same thing with the midcap and smallcap stocks. They can invest anywhere they want. Sebi has not fixed any fixed regulations about how much percent they should invest in large, midcap or smallcap companies.

v. Multicap funds

Unfortunately sebi has fixed certain regulations for these funds. As per current sebi rules, the fund managers of these funds can invest 25 percent of investors money in large cap funds, 25 percent in midcap funds and 25 percent in the small cap funds . For this reason i think that maybe NFO(New Fund Offer) of these categories will not come in future. Here ‘NFO’ refers to the new funds that has recently entered into the market.

vi. Sectoral funds

If you are new to the mutual fund industry, then let me clear you one thing that never ever invest your money in this garbage. Because instead of investing your money in different sectors like IT(Information technology), FMCG(Fast moving consumer goods), they will invest your money in a particular or you can say a single sector which makes quite risky. Market bis always uncertain and you can’t predict that which sector will goes up or goes down. Have you ever heard of .com bubble? At that time internet companies were in the loss and that’s the reason why the market went down. In the US stock market NASDAQ( it is an index where all technology companies are traded) goes down upto 78 percent. So think about that person who put all of his money in a single sector. Sectoral funds does exactly the same thing. But people made this fund so overrated now a days. So beware from being trapped into these funds.

2. Index funds

In my previous article i have written everything about index funds. If you haven’t read that article then please go through it. Index is purely different from active mutual funds. Here they don’t have the aim to beat the market. They have the aim to go with the indices. In simple words these funds always try to give the same returns as the indices/ market has given. In india index fund is still in the devloping stage. But in future it has the capability to compete with the active funds when people comes to know about the existence of such funds. It is also known as passive funds.

Now it’s my time to tell you guys about whether that word “mutual fund sahi hai” has any importance or not? My answer is both yes and no. My answer is yes because if you don’t have time to research about the each and every company/stocks or you don’t have money for the investment then mutual fund is a great place for you. Because SIP in mutual fund generally starts from rs500 to rs 1,000. My answer is also no because there are different types of categories in equity mutual funds which will make you confuse specially in active mutual funds. There are alot of brokers or financial institutions who will try to convince you to put your money in NFO (New Fund Offer) just because they will get their commission for it. I will suggest you to not to hear their advice. Because whenever a new mutual fund/NFO enters into the market they will not give any kind of information to you regarding the past returns . These NFO’s are getting famous day by day especially in india because of the false information spread by brokers or any kind of financial institutions so beware of it and try to avoid these kind of schemes as far as possible.