Mutual Funds 101

In my last article, I wrote about three ways of investing in stock markets: 1. Mutual Funds 2. Direct Stocks 3. Buying index. In this article I would delve into investing via Mutual Funds route and how it helps generate wealth over a long-term.

I was introduced to Mutual Funds by one of my ex-colleagues in the year 2003 and I had no clue what it was then. I was very skeptical when he explained that my money will be deployed in stock markets. I had heard some horror stories of people losing money in stock market crashes and after expressing my concerns, he convinced me to just start with one thousand rupees. I trusted him and gave twelve post-dated checks (online platforms didn't exist then) and he'd invested my money in Franklin Templeton Prima fund. I used to receive a statement from the company every month and I was elated to see the money I deployed started giving great returns (10% and sometimes even 20%). At the end of one year, my twelve thousand rupees had become twenty thousand (a whopping 66% return). I became curious to know how this mechanism works and started digging deeper. It's been an interesting 21 year journey and I have been investing in mutual funds (of course I made some mistakes of choosing wrong funds or exited early) and gained lot of exposure to the markets.

To keep things simple, Mutual Funds are managed by professional fund managers. These are people who understand markets better and make informed decisions on where to deploy our money. They are employed by companies that manage mutual funds and we call them AMCs (Asset Management Companies). As of today, there are over 40 registered AMCs in India and they operate according to SEBI (Securities Exchange Board of India) guidelines. And another simplest thing is one can invest as small as 100 rupees (some will require 1000 or 5000) and there is no upper limit.

Many people still have lot of misconceptions about mutual funds and stock markets, but what I learned over the last 2 decades is stock market investment will help generate long-term wealth that no other asset class (gold, real estate, etc.,) could do. And investing via mutual funds is less risky compared to investing in stocks directly because of the concept called risk averaging. This means our money is deployed across multiple stocks and not every stock may over or under perform on a given day.

So, the question that many people ask me is, how do we invest? My simple answer is to first open a brokerage account (actually not required because most banks are giving that option through their online banking platforms). I would still recommend opening a brokerage account because it gives flexibility to not only invest in MFs but also in stocks. It costs as little as 200 to 500 rupees. I use Zerodha because I find it intuitive and I can buy direct mutual funds (topic for another day). Once the account is activated, we can jump right in!!

In my next article, I will talk about types of mutual funds and how to pick and choose one.

Happy investing!!