What is Mutual Fund and other Investment Alternatives

Image Source: pexels.com

 

What is Mutual Fund?

What is SIP in Mutual Fund?

What is the Commodity & bond market? 

How to select your investment option?

Different investment alternatives are now available from offline to online. It all depends on your intention and risk-taking capacity.

Ask these questions to yourself before planing an investment –

• Am I ready to take the risk for a better return?
• What is the goal of my investment?
• What return(s) I am expecting?
• How much time I can give to my investment?

If you’re clear about the above-mentioned points then you can plan your investment according to the answers to the above points.
So, let us discuss different available alternatives  – 




1. Equity (share/stock) investment: This is a high-risk investment option. By opening a trading account and a Demat account you can invest in the stock market. There are many stockbrokers in India; you can go with any good service provider. Direct investment in the equity share market needs good knowledge and time to track your investment. Share market is highly volatile and high risk is always there. If you are focused on long term investment then you should diversify your portfolio with some good company’s shares. If you have no time to track and have no knowledge of the stock market then you should go with the Mutual Fund. Equity Mutual Funds also invest your money in the share market but there your risk minimizes. I have discussed it in the next point.

2. Mutual Fund: What is Mutual Fund? According to Wikipedia – ‘A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature. Mutual funds have advantages and disadvantages compared to direct investing in individual securities.’
     There are several types of mutual funds available. Equity Funds mainly invest your money in stock markets. There are other types of funds like – Debt Fund, Hybrid Funds, and Money Market Funds, etc.
     Mutual Fund investment is also subject to market risk. Your invested capital can increase or decrease. It all depends on market conditions, the portfolio of the selected fund, and the wisdom of the fund manager.
     According to risk level, mutual funds can be categorized as – low-risk fund, medium risk fund, and high-risk fund.
     The beauty of  Mutual Funds is- your money is not invested in a single company’s Shares. Funds are pooled from many retail and institutional investors and are invested in various top-growing company's shares. Experienced fund managers who have depth knowledge of markets decide when to buy and when to sell. In sectorial fund type, collected money is invested in a particular sector while in a hybrid type of fund collected money is invested in many sectors and government bonds, etc.
In my opinion, the best thing in Mutual Fund is the SIP (Systematic Investment Plan). It is something like RD (Recurring Deposit). You select a particular date of the month and the installment amount then your money is invested every month at various prices. This way you get the power of averaging. Whether the market is up or down you have not to worry about that. But remember one thing in mind, averaging always works well in the long term, which means from 5 to 20 years of time. Investing through SIP with long-term views can generate a decent return up to 15-35% per annum. For better knowledge of Mutual Fund and various type of funds, I will write a detailed article in another post.




3. Commodity Market: It is one of the more risky asset classes. The commodity market is very volatile and highly risky. Your total investment can sink. Here, I would like to clarify that I am talking about electronically traded commodities on MCX and NCDEX or any other exchange in the world.
     Since these are future and option contracts that have a predefined expiry date and these require only partial money to buy/sell contract, so your risk increase with the volatility of price and can’t be held for a long time without rolling over to the next contract.

4. Currency Market: currencies are traded in pairs, for example- USD/INR. Here, the first two characters are used for country and the third character for its currency. These are traded as future and options contracts and not suitable for investment purposes.

5. Government’s Bond & Securities: A government security is a bond issued by a government authority with a promise of repayment upon maturity. Government securities such as savings bonds, treasury bills, and notes also promise periodic coupon or interest payments. These securities are considered low-risk since they are backed by the taxing power of the government. Government securities are exempt from state and local taxes, making government bonds advantageous for investors in high tax brackets. The bonds are very liquid, but have low rates of return. The securities rarely protect against inflation and have little or no capital gains opportunity.
     Many investors hold government securities through mutual funds. The funds offer diversification among all types and maturities of bonds, which is difficult for retail investors to achieve without investing more cash than mutual funds require. However, fund-management fees lower investors’ overall returns.
     Although government securities carry little risk of default, they carry interest rate risk. When interest rates rise or fall, bond prices react inversely. Fortunately, when interest rates rise, T-Note prices typically fall less than with other bonds. With their steady income streams, government securities are a conservative choice in a fluctuating market. (sourced from investopedia.com)

6. Fixed Deposit (FD) and RD: These are well-known investment options for common investors. Since investments are mostly safe and returns can be calculated in advance, so these types of investment can’t give you high return percentage-wise from above all other mentioned options. Also, in most cases, you can’t withdraw before maturity or if withdraw then the return on investment may lose.

     Apart from the above-mentioned options of investment, there are several others like property, gold/silver, life insurance policy, crypto-currency, and many more which are out of the scope of this article.




Summary of this article:

• If you have knowledge of the stock market and you are ready to take the high risk then you can invest in good quality company’s share and can generate good returns
• If you are thinking to take the low or moderate risk and want to get a decent return, go for Mutual Fund. You can choose to SIP to lower your risk.
• If you want a better return than bank FD with minimum risk or no-risk, go for public/private bonds and securities with the high rating given by a trusted rating agency.
• If you don’t want to take the risk and want a calculated return, go for bank FD.

I have deliberately left commodity market investment because, in my opinion, it is not for the common investor who has no idea of commodity market trading, buying/selling, and rolling a futures contract on a trading terminal. This also needs some time and care to track your investment.

Write your comment below to help me know your choice.