Home Finance 5 Reasons Why Mutual Funds are giving Better Returns still in 2020

5 Reasons Why Mutual Funds are giving Better Returns still in 2020


Have you ever invested in the stock market or mutual funds? some will definitely will say no.

As per data In India, only 2% of the population invests their money in the stock market and mutual funds.

Everyone doesn’t want to learn the stock market but wants to earn higher returns from it.

But in the long run, and it has given 10 to 15% returns annually as per record.

so today we will discuss how you can invest in stocks or equity indirectly i.e by mutual funds.

But it doesn’t mean that mutual fund only invests in stocks

It depends on your risk appetite and it also invests in safe assets also.

What is inside for me.

  1. What are these mutual funds and its working?
  2. Are these mutual funds and asset management companies are same.
  3. Types of mutual funds.
  4. Bonus tip-start investing in Liquid funds.
  5. Why you should look for mutual funds.
  6. Precautions are taken before investing in mutual funds.
  7. Is it really an It’s a good idea to invest in mutual funds
  8. FAQ’s

What are these mutual funds and its working?

Example of mutual funds.

Let us consider an example, one scenario is that You want to go from Delhi to Chandigarh.

Scenario-1: know all the rules and regulations of driving, have a good experience, and know the map also which would help you to reach your destination safely and in less time.

Scenario-2: Another one is that you trust your driver and the only thing you bother about the destination and driver takes to their by any means and you sit to your back seat and enjoy your journey.

explained how mutual funds actually works and gives high returns without the active involvement of investor.

Meaning and its working.

Relate the above example to this, Mutual fund is a type of financial instrument into which a pool of money is created by collecting money from all of their investors.

And they invest your money into stocks, government bonds, debt, and in other classes of assets.

Mutual funds are operated by the fund manager and their team the chances of producing high returns safely are higher like in case of the above example reaching your destination with driver safely.

It allocates your money into financial assets which would give returns as expected in the long run in terms of dividends (some percentage are shared among investors), percentage, or gains(selling price-cost price).

The money which is earned by the company is again distributed among the investors after deducting some management fees known as the expense ratio. and typically this expense ratio is between 1-3%.

And also its very important to know how to save money before start investing.

For instance,

You have invested  ₹100 in a mutual fund as a result the company created a pool of 100 investors who invested the same amount as  ₹100 now total pool created as ₹10k(100*100= ₹10k).

explained the meaning of this investment.

Now it gains 15% returns by investing in any financial asset for the long term now mutual fund company will deduct 2%(let say expense ratio as 2%) of it as management fees and remaining will distribute to their investors.

Also we have complied the list of best mutual funds to invest in 2020.

Are mutual funds and asset management companies(AMC’S) are same?


Now many of investor who is beginner are got confused between the mutual fund and mutual fund company.

Firstly, lets us say you invest in a mutual fund like direct equity fund of Aditya Birla or L&T.

So here the mutual fund that you invested in is direct equity but the asset management company is Aditya Birla.

explained the difference between asset management company and funds.

One thing you should remember while investing is that one AMC can have more than 100 types of mutual funds.

Beside from it these all funds are managed by the same AMC company under different types.

Why mutual funds are giving better returns?

Infographics about the advantages of mutual funds over other investments.

Types of mutual funds

Over the past years, many of these mutual fund companies are introducing new funds overnight.

Due to which it’s very much confusing for the beginner retail investor to find the best type of mutual fund.

So, as a result, the securities and exchange i.e Sebi(authority that protects the interests of investors in securities market) have recategorized these funds and divided it into five types and they are listed below and you can invest in these mutual funds accordingly

And if you want to know the types of mutual funds in detail then read our post of important types of mutual funds.

Equity funds.

These are one of the largest categories of mutual funds and primarily invests in shares of the different companies.

Now, These funds have high volatility rate as it all depends on the buying and selling behavior of investors.

As a result, you will make a profit or loss as share price of these companies will increase or decrease.

These funds have a high risk for a shorter period of time but will give you high return if you invested more than 8-10 years.

So these types of funds are good for those who do not have to keep their eye time to time on the share market.

But you can invest in it for the long term with enhancing your knowledge or with the help of a broker.

Example of equity fund:-Mirae Asset Emerging Bluechip Fund,Axis Bluechip fund etc.

explained equity and debt funds and its differences.

Debt funds

These types of funds ‘borrows’ money from the investors and keep their major proportions of their investment in fixed interest giving securities.

Now these investments includes corporate bonds, government securities, treasury bills, commercial paper, etc.

As debt funds invest in government securities so these are less volatile as compared to equity.

But overall returns still depend on fund managing company and in which you are investing money.

Also, there is chances of the bankruptcy of the company in which your mutual company is investing.

So you need to take care of it and check the portfolio of mutual fund company before investing your money.

For example,

Some of the bankrupted companies as per records in recent times are IL&FS got bankrupted and many investors lose money.

Example of Debt fund:-Nippon India Gilt Securities Fund,SBI Dynamic Bond Fund etc.

Hybrid or balanced funds.

explained the hybrid mutual fund.

As the name itself suggest that it invests both in equity-types and debt types of mutual funds.

So it will give balanced and average returns over a long period of time.

The key objective of these types of funds is that they want to allocate their money to diversify the assets and want an overall constant return.

So if an investor wants to take the exposure of both of the above-mentioned funds in the single fund can opt it and enjoy the overall return.

Example of Hybrid fund:-ICICI Prudential Regular Savings Fund, Axis Equity Saver Fund etc.

Solution-oriented funds.

explained the solution oriented investments schemes.

These are the funds that are designed to achieve a particular goal of the individual according to their age.

A particular goal like child education planning and his marriage planning, retirement planning, etc.

Most often these mutual funds have the basic lock-in period for some 3-5 years.

So check the portfolio of these funds before investing in it.

Also these mutual funds are safe because they are not linked with the stock market. and give consistent returns.

Examples of Solution-oriented funds:-Tata Retirement Savings Fund, ICICI Prudential Child Care Plan Gift Plan, etc.

Other mutual funds.

This category involves a mix of funds and you can opt it according to your need like For example:-

Index funds.

These types of funds are getting popular in the past few years in those countries where the scope of growth is less and it is difficult to beat the market consistently.

As a result, index funds buy the stock in a market index such as the S&P 500, Nifty 50, etc.

index funds invests in stocks market explained.

As investing in these funds would require less research and analysis so the expense ratio is very less in these funds.

Examples of index funds:-Nippon India Index Sensex,Tata Index Nifty Fund etc.

Money market funds.

Money market funds invest in safe money market instruments like debt funds such as government bonds, treasury bills, etc.

So the investors who want to play safe can park their money under these safe funds and enjoy consistently returns.

Bonus tip-Start investing in Liquid funds.

explained the benefits of liquid funds and why it is important.

What are these liquid funds?

Liquid funds invest in government bonds, safe money market instruments maturity up to 91 days. but it does not mean that you can invest in it only for 91 days it means after this period asset management company will reallocate its money to some other asset.

Why do you need to invest in these liquid funds?

You need to invest in these mutual funds because it provides better returns than saving account as nearly about 7% and also you can keep money in these funds as generally, it does not have any exit load but check the portfolio of the mutual fund that you are investing.
For example -You get a gain of Rs 10000 from any of your investments and want to keep the money for some time due to reasons like not having time to see in which asset you reallocate this money, the market is down, etc. and you can revert back your money without any exit load.

After how much time can I withdraw my money from liquid funds?

Generally, You can withdraw your money immediately and there are no deduction charges involved in these kinds of funds but check its portfolio before investing

Why you should look for mutual funds:-

No need to track the market continuously.

As your money is being managed by the fund manager and their professional team.

So, you do not need to track the market continuously and search for the good stocks to invest in.

Easy asset allocation in different assets.

A mutual fund provides the diversification of your fund as it invests your money in different asset classes.

Due to which it provides you a good return for a long period of time.

Investments based on goals.

There are certain types of funds that fulfill your goals as per your need like funds for child education, his marriage, and also do investment in retirement based products also.

Liquidity of funds.

As all of us know that unlike gold, real estate, etc it does not block your money into one asset.

Because of which it also provides the option of easy withdrawal and investment.

Safe and secure.

Many of the investments that we make we were always having the fear of losing it and we concern about its safety but in mutual funds its secure because it is regulated by the government of India also we do not need to store it anymore like gold.

Precautions are taken before making your investment in mutual funds:-

Exit load and expense ratio.

Whenever we do the investments in these mutual funds with our investment objectives we should read the portfolio and holdings of it and also check its exit and expense ratio as per the type of fund.

Lock-in period.

Despite earning high returns in equity mutual funds it consists of minimum 3 years lock-in period and you cannot withdraw your money before that also can withdraw by paying high exit load.

Read the objective document.

Before diving into the mutual fund by just seeing its shiner side as returns you should also look to its investment objective document to get a clear image of their holdings.

Uneven redemption’s:-

uneven redemption's lead to lower returns in fund.

When the market is low many of the investors make redemptions and it leads to pressure on the fund manager and affects your returns as they do not have money to invest more in good stocks in the low time which would give better returns in the long run.

Is it really a good idea to invest in mutual funds

As per data, average returns in mutual funds are more than 10% and its good to invest in mutual funds but only for the long term.

The answer to this question lies within you because you have to do your risk vs reward analysis and find out which are the mutual funds are best for you and also keep on the track that fund holdings and investments so that you can relate your returns and be able to generate the good returns.

And you should also know the best investment option available around you for better growth.

FAQ’s

1.What are the charges in mutual funds?

A-A-The charges involved in mutual funds are exit load and expense ratio.
Exit load:-charge a mutual fund company charges when you suddenly exits from the same mutual fund in a very short time.
Expense ratio:-fees that asset management company charges from the investor for managing the funds and operating expenses or sales charges.

2.Should I invest in infrastructure funds?

A-Sector based funds such as infrastructure,pharma etc are not diversified funds and prone to high risk.
Also equity funds invests in these infrastructure funds or any another if it has the potential to grow more.
So it gives the opportunity of diversification of funds and also have lower risk compare to sector based funds.so why should you invest in such a high risk fund.

3.Why should I invest in liquid fund?

A-Liquid funds have better returns of 7% than any other short term investment such as saving account.
Also there is no exit load on redemption and money easily can be withdrawn.

4.What is diversification in mutual funds?

A-Diversification of funds means that AMC’s are investing their investments in multiple securities such as government bonds, shares market, sector funds, etc.

The benefit of this is it protects the investor from losing money if one sector is down or up which provides stable and consistent returns.

5.How much returns can I expect in ELSS mutual fund?

A-One of the good way to expect the returns is based on past record and many funds have given more than 15-18% returns in past history.
Also ELSS funds have same investment style like multi-cap funds and performance is usually similar.
If you’re investing in ELSS fund than you should be invested in this fund for minimum 5-8 years for better returns.

This is Randeep pursuing mechanical engineering and passionate about learning new things in life every day who is looking forward to enhancing skills that would help me in building my own empire.

Randeep kumar paswan
This is Randeep pursuing mechanical engineering and passionate about learning new things in life every day who is looking forward to enhancing skills that would help me in building my own empire.
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