Why People should Invest in Mutual Funds Than Directly Into Shares

Why People should Invest in Mutual Funds Than372.7
Directly Into Shares387.6
Now a days, everybody is in a dilemma when comes8.9
for their hard earned money investment decisions in1.8
these volatile markets. Investment is a way whichQ
can multiply your money in many folds beyond your20%
expectations and in similar way it can dry out your466.8
money completely if invested in wrongly avenues.490.1
Therefore, people are seeking advice from539.1
experienced professionals for investment activities.458.2
My experience & observation suggest that476.6
those people who have adopted ‘get rich quick2.1
mentality’ lost their money very soon because0.4
they did not do their ‘need based selfTotal
assessment’ before making investment decisions.8.5
Through this article, I will try to explain variousAgain here you will find out that returns due to
reasons why people should invest in mutual fundsdiversification are 8.5% vs. 2.1%. It also conveys that
than directly investing in shares.fund manager is continuously gaining from the market
First, mutual fund managers are highly experiencedand could be trusted for the investment purposes.
and well qualified to take decisions to investINR / SHARE
domestically and internationally. Asset managementYear 3
companies keep the track record of every companyReturn %
which are in their portfolio or expected to beCompany Name
included. Asset management companies also haveAllocation
their own research team which constantly keepsCMP
focusing on performing sectors and sectors whichQuarter I
are anticipated to out perform in coming future. Quarter II
Before making any decision, fund managers doQuarter III
fundamental analysis (this kind of analysis is done toQuarter IV
find out the best scrips in the market) and technicalYOY
analysis (this kind of analysis suggest when to enterWeighted
and when to exit).X
Second, mutual fund gives you the advantage of25%
diversification. In my most of the meetings with the285.4
investors I found that investors do not understand314.0
this point clearly so I will focus more on this point.345.4
Diversification is nothing but the allocation of assets293.6
into different sectors. Diversification minimizes the risk305.3
because money is invested into various industries,7.0
had that money been invested only in one industry /1.7
company it would have been exposed to more riskY
due to volatility and government policies pertaining to10%
particular sector. Let’s take an example to245.3
elaborate this point.272.3
Investor ‘A’ invests Rs. 50,000 in company299.5
X, assumed this company is operating in telecom254.6
industry, @250 per share and acquires 200 shares264.8
with 3 years time horizon. Investor ‘B’ also7.9
invests Rs. 50,000 @ 20 and acquires 2500 units of0.8
this fund. This sectorial mutual fund is focusing onZ
telecom industry only. Let’s see the prospects25%
after 3 years down the line:132.8
INR / SHARE175.2
Year 1192.8
Return %163.8
Company Name170.4
Allocation28.4
IP*7.1
Quarter IP
Quarter II20%
Quarter III387.6
Quarter IV418.6
YOY460.5
Weighted391.4
X407.1
25%5.0
2501.0
287.5Q
316.320%
268.8476.6
279.6509.9
11.8560.9
3.0476.8
Y495.8
10%4.0
2000.8
218.0Total
239.811.4
203.8I think now, it is needless to say that diversification
212.0not only reduces the risk but also beneficial to garner
6.0more and safe returns.
0.6Total Returns In Three Years
ZINR / SHARE
25%Price
100Allocation
117.0Returns in %
128.7Company Name
109.4IP
113.8CMP
13.8Invt. 'A'
3.4Invt. 'B'
PInvt. 'A'
20%Invt. 'B'
300X
366.0250
402.6305.3
342.2100%
355.925%
18.622%
3.76%
QY
20%200
400264.8
480.010%
528.03%
448.8Z
466.8100
16.7170.4
3.325%
Total18%
14.1P
- IP stand for Investment Price or prices at which300
shares were purchased. Here, I have excluded the407.1
transaction cost20%
7%
From the above table it is clear that returns due toQ
diversification are higher than investing in one400
particular share of the company.495.8
INR / SHARE20%
Year 25%
Return %Total
Company Name22%
Allocation38%
CMPFrom the above table it is clear that mutual fund
Quarter Isuccessfully managed to give 38% returns where as
Quarter IIinvestment in company X has just provided 22%.
Quarter IIINow just imagine if diversification is done in various
Quarter IVsectors. Here, I did not consider dividend &
YOYother returns.
WeightedThirdly, mutual fund also provides various tax
Xbenefits. People can take tax advantages when they
25%are investing in mutual funds and also when they are
279.6exiting from the schemes. Just they need to maintain
293.5and follow time horizon guidelines which SEBI and
322.9AMFI have put in place.
274.5Fourth, cost of managing the fund for expertise
285.4services is minimal. This benefit is due to higher
2.1volume. Before people used to say that, due to
0.5entry and exit load, investing in mutual fund is costlier
Ybut now as per SEBI guidelines there is not entry and
10%exit load, if investment was made after August 4,
212.02009, for investing in mutual fund schemes. It means
252.3that services of the experienced and well skilled fund
277.5managers are free of cost. Thanks for the SEBI to
235.9make these services without cost.
245.3List of advantages of mutual fund is long and it is
15.7increasing as volatility & uncertainty is increasing
1.6in the market. As we know that there is nothing in
Zthis world which is flawless and mutual fund is of no
25%exception. There are some mutual funds in India also
113.8which are not performing upto the mark. Investors
136.5need to be very cautious while investing in mutual
150.2funds. My next article will be based on ‘How to
127.7select the best mutual fund’ for investment
132.8purposes.
16.7Having said that all the views are personal and
4.2authenticity of these thoughts is based on various
Pmutual funds & financial institutions websites. I
20%can not be held responsible for any wrong
355.9information or untoward happening.
398.6.
438.5