Jama Help Desk

Mutual Funds offer the best way to pool your money, to hire a darn good manager who invests the funds in the right set of stocks and bonds to get you inflation beating returns consistently. Long sentence, but sums it up!

Investing in Direct Plan Mutual Funds is the only way to go. Investing in “Regular Plan” Mutual Funds will only make your broker richer as the yearly commissions geet compounded.

Now the answer in full. But in small chunks:

Small amounts can be invested in Mutual Funds

Retail investors have limited amount of money to invest. For example, if a person earns Rs.10,000 per month, how much will he/ she be able to save? A daily wage earner, a maid servant, a student doing part time job, are all examples of people who can barely save Rs.1000 a month. The amount is so low that the person will simply hold on to the money hoping that, over a period of time, the money will become large enough to be invested. However, Mutual funds allow such people to invest even small amounts to be invested.

That does not mean large amounts of money cannot be invested. Unlike many other investments, there is no upper limit on the amount that can be invested.

Informed Investments can be made in Mutual Funds

Many people privately confess to Manoj (My friend, batchmate and long time fee-based advisor) that they do not understand the investments that they have made. They did it either to save tax or because of some pressure from friends and acquaintances. In such cases, returns on such investment become a matter of chance! Does that mean one needs to be knowledgeable about the various nuances of investment?

While it is always beneficial to be aware of the various aspects of the investments being made, a mutual fund allows us the luxury of investing in complex instruments without understanding them. That is because the mutual fund relies on the knowledge of the fund manager. The fund manager is a skilled and knowledgeable person who understands the complexities of various investment options. The fund manager invests our money on our behalf. We stand to gain from the skill, knowledge and experience of the fund manager.

Benefits of Diversification can be had with Mutual Funds

If we invest in only one security, we are taking a risk as our fortunes are linked to the performance of that security. For example, if we invest all our money in buying the shares of say, Reliance Industries Limited (RIL), and if RIL reports losses, then the share price of RIL will fall and we will see an erosion of our investment. However, if we invest in shares of both RIL and TCS (Tata Consultancy Services), it is less likely that both RIL and TCS will suffer losses at the same time. It is more likely that when performance of RIL is negatively impacted due to certain factors, the performance of TCS could be favourably impacted because of the same factors. Thus, buying shares of two or more companies results in lowering our risk. This is called Diversification. It simply means that we should not put all our eggs in one basket.

A small investor might not have sufficient funds to properly and efficiently diversify his/her portfolio. What diversification can an investor with Rs. 1,000 in

his pocket hope to achieve. The pooling of funds by mutual funds allows such investor to benefit from diversification. If the investor invests Rs.1000 in a diversified equity fund, he/ she will get the benefit of investing in a large basket of equity shares.

Safety can be availed in Mutual Funds

One of the biggest concerns of investors is safety of their capital. There have been many instances of Corporates seeking deposits and of Chit fund companies, who duped investors of their hard-earned money. There have been so many fly by night operators in our country that when we hear an investment scheme that seems too good to be true, our brain immediately warns us not to trust such scheme.

Mutual fund industry is one of the most tightly regulated industries with lot of controls on how the money is managed. Every mutual fund will have trustees who oversee the operations of the fund to ensure that the mutual fund scheme does not violate the investment mandate.

It does not mean you cannot lose money if you invest in a Mutual Fund. Mutual funds DO NOT offer assured returns like a fixed deposit. They are subject to market risks and investors can lose money, particularly if money is invested in equity funds for a short period of time. However, what one can be assured of, is that no one can take the money and disappear overnight.

Transparency is possible with Mutual Funds

There is total transparency in the operations of the fund. NAV is required to be declared on a daily basis. Thus, performance can be technically measured on a daily basis. Portfolio is declared periodically by the fund. This gives confidence to the investor. Lot of websites offer detailed analysis of mutual funds, not only in terms of periodic returns, but also information such as fund manager, time-span since the fund manager is associated with the fund, top holdings, etc. Many websites also have their Ranking system. Thus, a lot of information is readily and freely available on various websites. By investing in a mutual fund, one is not shooting in the dark.

Liquidity is available with Mutual Funds

One of the biggest advantages of investing in a mutual fund is Liquidity. In simple terms, liquidity in this context means the ability of the investor to get back the money invested at a fair price, whenever he/she needs the money.

In case of “Open ended” Mutual Funds, liquidity is assured by the Fund house itself. The units are bought from and sold to the fund. This system ensures that small investors are not exposed to liquidity problems. If, at any time, an investor wishes to redeem his/ her units, all that is required is that a request for redemption is submitted to the office of the mutual fund. Many websites, including Jama, offer this facility online. The mutual funds will repurchase the units from the investors at the applicable NAV (Net Asset Value). Usually, the redemption money is returned back within a maximum of three (3) working days from the submission of redemption request, no questions asked!

In case of Closed ended funds, the units can be sold on the exchange. However, this is dependent on a buyer being available. Thus, Open ended funds are more liquid than close ended funds.

More returns can be attained with Mutual Funds

Mutual funds provide superior returns to investors as they are managed by an experienced portfolio manager and they benefit from economies of scale. For example, if you wish to buy Government Securities or foreign Exchange, the price payable and the operating costs such as brokerage, documentation, courier, etc is much higher than what a Mutual fund manager will have to bear. Investors benefit from superior returns even after accounting for fund manager’s fees.

Tax Benefits are much better with Mutual Funds

Investments in certain mutual funds, called Equity Linked Savings Schemes (ELSS) are eligible for deduction u/s 80C of the Income Tax Act. However, there is more to tax benefits from mutual funds. All investments in Equity Funds and Equity oriented Balanced Funds are exempt from Capital gains if held for a period of more than 1 year. All Debt funds, Debt oriented Balanced funds, Gold Funds and Money market mutual funds get the benefit of indexation in the calculation of capital gains. Dividends from all mutual funds are exempt from tax although Dividend distribution Tax is applicable in case on non equity oriented funds. Tax is payable only on redemption of mutual funds and not on accrual basis as in case of Fixed deposits and other interest bearing investments. Thus,

mutual funds offer superior tax adjusted returns.

Flexibility and Convenience is there in Mutual Funds

Mutual fund investments are free from commitment. There is no minimum investment amount that needs to be invested for a minimum period of time. A small amount of Rs.500 can be invested one time. Investments can be done in a matter of minutes through any number of websites. However, investors must choose websites like Jama, which offer only direct mutual funds. In other words, they should avoid “regular” mutual funds which means a hefty commission is paid to the website. Kindly note that all funds will have both direct plan and regular plan and you do not lose ANYTHING by opting for a direct plan.

Product Innovations happen often in Mutual Funds

There are many mutual fund schemes in the market. They are launched keeping in mind the requirement of investors. The investment objectives of different investors would be different. So, we have Liquid funds (which invest in money markets), Gilt funds (which invest in Government securities), Bond funds (which invest in Government Securities and Corporate Bonds), Gold funds, Equity funds,

Balanced Funds, etc. Capital protection funds, Fixed Maturity plan funds, Contra funds, Specialty funds, etc are some examples of the product innovations within this industry. It is popularly said that there is a fund for each type of investor.

Most mutual funds offer all their schemes under three options of Growth, Dividend Pay-out and Dividend Reinvestment. Similarly, options and features such as Systematic Investment Plans (SIP), Systematic Withdrawal Plan (SWP) and Systematic Transfer Plan(STP) allow investors to manage their portfolio of investments within a mutual fund as per their unique requirements.

Conclusion

The following table illustrates the advantage of Mutual Funds over other investment options available to the small investor.