Back in December 2012 an aggressive futures & options trader was boasting about the fantastic annualised returns that he had earned during the calendar year. What he was delighted about was that his trading and leveraging had resulted in a net return of 42% during the full year, net of all costs. What he, probably, did not realize was that had he invested the money in a diversified mutual fund on the first day of the year, he would have ended up with returns of 45%, net of all costs. So he would have actually done better without the pressures, without the ulcers and also without the taxes. Welcome to the world of mutual funds.
Let the professionals do the job…
One of the key arguments in favour of mutual fund is that an investment decision is best left to experts. You have an army of analysts, fund managers, a CIO and a CEO who have collectively spent over 75-100 man-years understanding and evaluating the nuances of the market. They understand risk; they understand return and above all they understand when to enter and exit equities. When you invest through mutual funds, you know that your money is in safe hands. More importantly, their team of analysts and fund managers talk to the who’s who of the market. They are obviously in a much better position to do the job of investing on your behalf.
Diversification is a necessity…
No other investment helps you diversify your risk more than mutual funds. If the fund manager finds that the steel sector is getting into a downturn, the portfolio automatically gets modified in favour of other sectors. If the fund manager expects a series of rate cuts, the portfolio automatically swerves in favour of rate sensitive stocks. This not only enhances return but also reduces the risk of being stuck in non-performing sectors. That is something, you as an individual, will never be in a position to do on your own. Even a static fund spread across sectors and themes gives you an in-built hedge against the vagaries of the market.
Secondly, mutual funds have millions of unit holders like you. That gives them scale and clout to spread your money across different sectors. Imagine you are holding on to Tata Motors and you realize after a 20% correction that it was due to slowdown in JLR sales. Imagine that you are holding on to Larsen & Toubro and you realize after a nasty fall that the capital cycle had turned negative. These are the kind of data points an individual will never be able to pin-point and capitalize on. A professional mutual fund manager manages to reduce your risk by giving an in-built diversification.
It is not just about equities; but a lot more
The advantage with mutual funds is that they are not just about equities. You have debt mutual funds that are invested in sovereign and corporate debt. You have balanced mutual fund which draw a half-way between equity and debt. For the more aggressive investors, mutual funds also give you a choice of dedicated sector and theme funds. Of course, they will not give you the benefit of diversification but then it is a compelling choice nevertheless. To top it all, you have gold ETFs that enable you to participate in the movement of gold prices.
You get the Beta and the Alpha…
What is implied here is that you manage to mirror the market and you also get to beat the market returns through mutual funds. Also professional fund management ensures that there is a fund manager who knows that he will be constantly evaluated based on whether he beats the index or not. And of course, if you are not interested in the alpha, but only want to move with the index, then the index funds may be the ideal product for you.
In a nutshell, mutual funds give you choice, professional management, the benefit of diversification as well as transparent management of your money. It is your best choice to participate in the power of equities without the concomitant hassles of monitoring. The time to start may be now!
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