With the rate on interests on Fixed Deposits going down every year, many common citizens like you and me are left with the question where to invest the surplus money.
The ads on Tv, Radio and Papers will suggest you an answer - Mutual Funds.
This is my layman's attempt to explain in simple terms about Mutual Funds. For more clarity refer some good websites for technical and exact financial knowledge.
So what is Mutual Funds - Mutual funds is a fund of amount of sum which is invested in a typical group of company shares depending upon the type of mutual funds you are buying. So basically when you are buying a mutual funds, then you are buying various company shares at a time. So the performance of the mutual funds depends on the performance of individual company shares. It also depends on how much % of total fund is invested in which companies. Hence the top companies in which your majority of funds are invested mostly will drive the performance of overall fund.
Mutual funds are of different types, e.g industry based, company size based, index based, fund of funds etc and any more. There is no limit to creativity of fund managers to chose the various companies and make a fund. Hence depending upon the performance of respected industry or category the performance of fund will change.
There are two ways on investing in Mutual Funds.
- Lumpsum
- SIP - Systematic Investment Plan.
In lumpsum you put money in mutual fund in one go and the returns will depend upon the performance of the market as compared to the date on which mutual funds was purchased. The advantage is you get good returns if funds performs well. Disadvantage is loss is equally proportional in case market goes down. Also this option is for people who have lumpsom money available for investment.
In SIP you invest a particular small sum every month in the given MF like an recurring deposit. So the depending upon the NAV of that MF in that day of month you get the number of units. SIP has two advantages. 1. You can invest small amounts hence no need to stretch in financial plan. 2. it distributes the risk over 12 months. So it takes care of markets ups and downs. SIP in past few years have given better returns too.
Since if a developing growing economy with sizable domestic consumption it is expected that as the economy will grow in future the investments in markets will keep giving better returns than Ban FD's and many a times returns will be in multiple times against FD.
Only hitch remains, as they in say MF advertisements, that since investment is done in share market ultimately the returns are subject to market risks. There is a chance that you might loose money too and there is a chance that you can get quite good returns too.
So if you have your basic finance & expenses covered and have surplus funds which you can take a bit of risk with you can put money in MF. MF in past few years have been giving better returns than banks & gold.
