To Invest or Not To Invest: How Naina Demystified Mutual Funds

Naina looked at her father. She had known him to be a cautious man who never indulged in any form of luxury and was particularly risk aversive. The word “stable” appeared to be of utmost importance to him. He was proud of how he managed to keep his family comfortably despite dwindling financial markets. Her father had always settled for traditional form of investments like Fixed Deposits, Provident Fund and post office schemes. He dismissed the non traditional forms of investment as too risky and heavily depended upon equity markets. This often led to disagreements in the household, the classic traditional vs modern debate that has plagued every household at some point of time. Naina did not have much of a say regarding the type of investment her father was making because either she was kept in the dark or her opinions were disregarded as flighty. However, 21 year old Naina knew better. A commerce graduate from one of the leading colleges, she wanted to make her family financially aware. She wished to see her father’s hard earned money compound exponentially. She was aware of ‘the power of compounding’. Now, as a financial analyst in one of the leading MNCs and handling her own earnings, she knew she could convince her father.

The following evening she sat with her parents and had the talk she wanted to have for so long. She explained in detail the concept of mutual funds and the very nature of the funds which caters to investors with varied risk palate. Her father still looked a little skeptical but she had presented a convincing argument.

“This is not possible because I am not going to invest a large sum, which I am sure is what the mutual fund requires. However, this is not the case for recurring deposits and post office schemes. ” said Naina’s extremely skeptical father.

Naina smiled because she had seen this coming. “Baba, you can invest as small a sum as Rs 500 in the ELSS scheme. ELSS also happens to be a tax saving Mutual Fund scheme. The time period before which you can withdraw that sum is three years as compared to your traditional tax saving schemes where your money may be inaccessible for upto 15 years. You can invest small amounts of money in various schemes to test waters like that of Systematic Investment Planning (SIP). In some SIP schemes you can invest as less as Rs 100. Except for close ended mutual funds, you have the option of liquidity any time. So along with not requiring a lumpsome you also get the advantage of liquidity.”

“I will have to find a certified financial advisor and also open a Demat Account. I think it is a lot of hard work for this old man. I will just let my money lie in the savings account” her father was clearly reluctant to get his ideas on investing challenged.

“Baba, you do not need to hunt for a certified financial advisor. You can contact any mutual fund distributor or even invest online. Otherwise, you may go to the various banks or contact any investment consultancy firms. You can invest in mutual funds from any one of these sources. You will need to get a KYC done. A single KYC can be used to invest in all mutual funds. A Demat Account is not necessary for investing in Mutual Funds” said a determined Naina.

“Come then, let us check a few schemes online. I will invest a small amount at first and see what benefits I reap” said Naina’s father who had to give in to her daughter’s determined demonstration of the advantages of Mutual Funds. He reluctantly had to accept that he was getting convinced. Naina and her father peered into the computer scheme going through the various schemes. At the same time Naina was explaining the importance of Net Asset Value (NAV).

“I wish to go for this new scheme with a NAV of Rs 10 plus so I get more units hence, more profits. The other funds are a little more expensive and the rate of return is just 10%” said Naina’s father peering into the computer screen and scrolling back and forth and soaking all the details in.

“Baba, what you said is fairly accurate. However, when you are investing in Mutual Funds, you need to check for the past performance of the funds, the credibility of the Fund Managers and the rate at which they have consistently maintained their rate of returns. If you are investing in a scheme with a NAV of Rs 10 with 10% return rate, your appreciation with be 1 rupee. If you invest in a scheme with a NAV of Rs 200 per unit you get a return of Rs 20. So while investing, one must focus on factors like returns, volatility etc that influence the performance of the funds and not on the NAV” explained Naina to her father.

“Naina I am no expert in Mutual Funds and I am not willing to make a long term investment. I find this a little risky and complicated. Dividends may also be taxable so what if I have to invest a substantial amount for tax saving? It is too heavily dependent upon the equity markets. What if I lose all my money?”

Naina appreciated her father who was wise beyond his years and he was also making an informed investment decisions. So she tried to do away with this last mind barrier. “Baba, there are experts who are called Fund Managers who manage a fund. The fund managers ensure that the money invested in the corpus of the fund are invested in diversified sectors such as telecommunications, banks, pharmaceuticals, manufacturing & construction and so on. The investments are so diversified in nature that the bad performance of a sector is outweighed by the excellent performance of another sector. This ensures that despite losses in one industry the particular investor still gets the desired amount of return. While equity markets are one of the avenues of investment, if you find equity too risky then, invest in a balanced or income funds. Make a small investment and see how the fund is performing. Only if you are happy with the returns continue it or withdraw your money, but we need to be a little patient if we want to get good returns from mutual funds. The dividends of an equity mutual fund is tax free and if the investment is made for more than a year then the long term Capital gain tax is also free. It is really that simple.”

Naina’s father smiled because he realized his daughter has become a wise woman. “I am going to invest in Mutual Funds and see where it takes me. I will get my KYC done and then we both will discuss and finalize a scheme.” Naina felt a surge of momentary happiness and relieved about her parent’s secure future.