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Why you should shift to mutual funds from conventional mode of investment

Mutual funds have been the topic of attraction for years now, credit the varieties of plans and high returns they give. But before you start investing in mutual funds, it is necessary to understand what it is. Many people confuse mutual funds with stocks.

Abhinav Ranjan Abhinav Ranjan @abhinav_1108
New Delhi Updated on: November 01, 2020 11:10 IST
Mutual funds are a mode of investment where you can park a
Image Source : INDIA TV

Mutual funds are a mode of investment where you can park a small amount or a lump sum in a scheme.

Mutual Funds for youth: It can be difficult for youth to save money as they face multiple challenges at the start of their career. But investing a small portion of money from what you earn is a wise decision and highly advisable. Starting investment early has numerous benefits. It gives you time to minimise the risk and generate a corpus to fulfill your dreams. You can enjoy the power of compounding and earn a handsome income in the long term. But can this be possible by parking your money through the conventional mode of investments like FDs, RDs, and others where risks are almost nil but the returns you get are not on par with the cost of living? The answer is clearly, NO. So, where you should invest the money to get a return that could help you spend a lavish lifestyle? One option for young investors is mutual funds.

Mutual Funds For Youth: Selecting Right Scheme

Mutual funds have been the topic of attraction for years now, credit the varieties of plans and high returns they give. But before you start investing in mutual funds, it is necessary to understand what it is. Many people confuse mutual funds with stocks. Mutual funds are a mode of investment where you can park a small amount or a lump sum in a scheme. There are many varieties in mutual funds like equity (investment in stocks), debt (investment in bonds), and hybrid (investment in both stocks and bonds). Besides, gold and sector schemes are among others that are hugely popular.

Mutual Funds: Lump Sum Vs SIP

Now comes the challenge of selecting the right scheme and how to invest. There are two ways you can invest in a mutual fund scheme -- investing a lump sum amount, and a systematic investment plan (SIP).

In lump sum, you invest money all at once rather than in several smaller amounts. But in the SIP, you invest a specific sum of money at regular intervals like weekly, bimonthly, monthly, and quarterly. When you go for a lump sum, you purchase the number of units in one go. But in the SIP, you purchase small units at regular intervals, thus disregarding the timing of the market. In SIP, you can begin with Rs 500. But in lump sum, you need to invest a minimum Rs 5,000.

Rachit Chawla, CEO & Founder, Finway FSC, explains that when we talk about compounding or long-term benefits of investing in mutual funds, it is always the capital protection in the long run that matters the most for wealth creation.

"It is not the high ROI, because the high return on investment can also be very risky. If the odds turn against you, you might end up losing all your capital," he said.

Why Mutual Funds Are Advantageous

"So, the youth has to understand that the corpus that they are building is for the long run and SIPs are the best way to accomplish that. Mutual Funds are another option because, in the long run, the initial investment will start to compound in times to come. So, the profit will actually become their capital and will generate more profit as time goes on. This is precisely the reason that Mutual Funds are advantageous."

About the benefits of investing in mutual funds, he said that it helps youngsters in creating a certain amount of wealth, and in a way, that secures their future. He suggests that youngsters should avoid taking high risks plans initially.

Mutual Funds For Youth: What To Avoid

Suggesting what an ideal portfolio should be, he said, "A lot of the time, you hear the news that a certain stock has gone double, the youth gets excited. They should have a clear mark portfolio wherein 5% of their total capital might be used for investing in stocks directly. But 95% of the capital should be protected and they should not look at generating high returns or indulging themselves in terms of superior returns wherein the capital itself might get wiped off. These commodities or stocks might give them high returns in the short run, but in the long run, they will most likely wipe out the capital."

Rachit said that another thing to avoid is investing in circulative stocks or investing in other people’s recommendations. He said that you should do research by self, and avoid penny stocks because they are quite risky.

SIP Makes It Accessible

Satyen Kothari, Founder & CEO, Cube Wealth, said that youngsters are attracted to mutual funds for two reasons -- low investment and high return in the long run. This, he said, makes it accessible. Also, they get the freedom to invest in one go as a lump sum or via SIPs.

He said that compared to traditional investments like FDs, RDs, gold, mutual funds offer higher growth potential. "Especially since you are buying into the success of great companies," he said.

Kothari said that investing a small amount monthly aids financial planning and also relieves the younger generation of many stresses.

"Whether you are saving for emergencies, travel, education, personal transport or something else, investing in quality assets brings peace of mind," he said.

According to him, lump sum investments are ideal when you have spare cash that you need to park. SIPs, on the other hand, are a recurring and long term commitment. "This ensures consistency and discipline. When you invest via SIPs, you are investing a fixed amount repeatedly. Lump sum investments on the other hand can vary in amounts and there is no recurring commitment," Kothari said.

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