Reasons to Invest in Mutual Funds

13 May, 2024

Synopsis

• Mutual funds provide a beginner-friendly solution amidst the overwhelming world of investing.

• Enjoy benefits like diversification, compounding, and rupee cost-averaging.

• Begin with small SIPs, starting as low as ₹100, ensuring accessibility for all.

• Seamlessly start your mutual fund journey with just a few clicks on the HDFC SmartWealth App.
  
  

Investing in Mutual Funds: Your Key to a Secure Financial Future

Rahul was having lunch with his friend Neha when the conversation drifted towards investments.

Rahul: This whole world of investing confuses me, Neha. I know I should start somewhere to secure my financial future, but it is overwhelming.

Neha: I can understand, Rahul. I used to feel the same way when I started. But let me tell you, investing in mutual funds is a great starting point for beginners like you.

Rahul: Mutual funds? 
What are mutual funds? And aren't these quite complicated to understand?

Neha: Not really! A mutual fund is just a basket of different investment avenues managed by a professional fund manager, including stocks, bonds, and commodities. 

Rahul: Ok, but please explain how a mutual fund works.

Neha: Let us get started.
Suppose you, I, and a few other friends pool ₹1000 each into a mutual fund. There are 10 of us, so the mutual fund now has ₹10,000. The fund manager then invests this money into different securities, usually in a single asset like stocks, bonds, commodities, etc. So, our pooled money gets diversified across multiple securities instead of just one. That reduces the overall risk in the portfolio.

Rahul: Okay, so an expert manages and invests our money wisely. But how do we make money from the mutual fund, then?

Neha: Good question! See, the value of the assets the fund manager buys keep changing every day. When the overall value of the fund's investments increases, the price or NAV (net asset value) of the mutual fund units also rises.

The value of the mutual funds’ investments keeps fluctuating daily, right? So, the 10 units we purchased initially at ₹1,000 each may become ₹1,100 or ₹1,200 later if the market trends upwards. But there could also be periods where the value drops below the purchase price, say to ₹900 per unit if the market trends downwards.

The key is to not worry too much about short-term ups and downs. As long-term mutual fund investors, we need to focus on the overall performance, over time and stay disciplined.

If we get too caught up in tracking daily market movements, we may end up losing out on the long-term growth potential. What matters is being patient and staying invested to earn good returns ultimately.

Rahul: I am getting interested now. Tell me, what are the reasons to invest in mutual funds, especially when there are other options like stocks, gold, etc?

Neha: Absolutely, there are several investment avenues available today. But mutual funds score over most other options due to advantages like:

• Professionally Managed
  
  The fund manager and his research team have the skills and expertise to make prudent investment decisions across assets and markets.
  
  

• Diversification
  
  Investments are spread across various assets ranging from equity, debt, and gold to real estate.
  ​​​​​​​

• Rupee Cost Averaging
  
  You can leverage through SIPs in mutual funds. It means investing fixed amounts regularly, no matter how the markets move. For instance, investing ₹5,000 monthly:
  
  

• Month 1: At ₹50 per unit, 100 units are bought.
• Month 2: At ₹40 per unit, 125 units are purchased.
• Month 3: At ₹60 per unit, 83.33 units are acquired.

After three months, 308.33 units accumulated with an average cost of ₹49.17 per unit. Despite market fluctuations, the average unit cost remains below the average unit price.

• Liquidity
  
  You can redeem your mutual fund investments and get your money back within 1-3 working days. 
  
  

• Transparency
  
  SEBI tightly regulates mutual fund investments, and mutual fund houses provide regular updates on portfolio holdings, fund performance, fees, etc. 
  
  

• Flexibility
  
  You can start investing as low as ₹100, so mutual funds are quite accessible. 
  
  

Rahul: Thank you for elaborating, Neha! The advantages of mutual funds are much clearer to me now. I'm getting convinced that I should start my investment journey with mutual funds.
But don't mutual funds have many categories? Can you elaborate on the types of mutual funds and how to choose the right mutual fund?

Neha: I get your point, Rahul. Let’s get started. The most popular type of mutual funds are:

• Equity

• Debt

• Commodities
  
  

For e.g., one of the ways Equity Mutual Funds offer option to invest is basis market capitalisation. You have options to choose from any of the below categories or a combination of them:

• Large-Cap

• Mid-Cap

• Small-cap mutual funds
  
  

Now, depending on your financial health, goal, and risk tolerance, you can choose a suitable mutual fund, Rahul.

Rahul: For now, I think I'll start investing with a mutual fund for long-term wealth creation. Please tell me on which platform I can begin my investment journey.

Neha: Wonderful decision, Rahul! HDFC Bank's SmartWealth App can help you start your mutual fund journey in just a few clicks. It asks you to set your risk tolerance and offers suitable funds that match your risk tolerance so that you realise your dreams.

Rahul: Thanks, Neha. I think I’m ready to download the App and get started.

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