Can We Master Mutual Funds as Amateur?

As Indians, we are no longer new to mutual funds. Asset management companies (AMCs) and fund distributors like to aggressively promote their investment products as a part of their routine. However, there are a few of us who still do not understand how these investment instruments work?

To explain better, mutual fund-s are simple investment plans which are started by asset management giants where retail investors (normal people) can pool their money and then experienced portfolio managers invest this further into buying shares of companies for good returns as an outcome.

This is a simple phenomenon that can be easily mastered if you take logical steps.

The mutual fund companies charge a small percentage of the investment in return for their services from every qualified investor. This is also called the Expense Ratio (ER).

Here, how the flow works: The system of mutual funds is basically about hiring an entity on your behalf for investments. The idea is that a mutual fund company would not like to invest their money into mutual funds, the way you do to make profits/losses to be borne by you eventually. The responsibility is precisely laid on the investor, who else!

We need to understand that there are 3 parties involved in every transaction.

The one who wants to make an investment, the facilitator (like the mutual fund distributor or investment advisor) & the mutual fund company (essentially the asset management company)

However, you may also choose to buy your mutual fund units, directly from the fund company. So, under this arrangement, the middlemen get eliminated. The only drawback of making a direct purchase from a mutual fund company is that you cannot manage or track multiple investments if exists.

Let’s steer our minds towards the benefits of Mutual Funds if we plan to master it:

Mutual funds have a lot to offer to ordinary investors because it’s not as difficult as we think.

1. There’s no worry related to selecting stocks & constantly monitoring on a screen. Instead, you have a portfolio manager who works as an expert for you.

2. You get an option to diversify your risks because if you’re allowed to invest in multiple companies’ shares from multiple industries.

3. You can easily get higher returns on your long-term investments in comparison to typical investments like bank FDs (fixed deposits) and PFs (provident funds).

Issues of Mutual Funds

1. There are too many mutual fund schemes in India to make your pick. It can be tricky to choose the best mutual fund for your investment needs.

2. There is a huge possibility that investment/mutual fund crooks will try to misguide gullible investors into buying mutual funds that give them better commissions to their distributors. And eventually, the returns will not be at par. This is only applicable to regular funds alone.

3. Mutual funds have some really difficult terms like TER, Exit Load, TREPS, ETFs, Sharpe Ratio, Beta, Weighted Average Risk, etc. So, you will first have to spare tome to master the terminologies.

So, if you think this doesn’t sound too complicated, then you must learn Mutual funds as an amateur.