Mutual Fund Sahi Hai ?

Association of Mutual Funds in India (AMFI) launched "Mutual Fund Sahi Hai" campaign for mutual fund awareness but, it turned out to be a commercial ad for the most investor. I have met many curious investors interested to invest in mutual funds without even knowing WHAT it actually means?

What is Mutual Fund?

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. Wikipedia

In simple words, imagine you and your friends pool money to buy a pack of Pizza. 

WOW, Delicious !!! But, now its time to distribute it based on contribution. 

In the same lines, the mutual fund buys shares on behalf of all investors and distribute units based on their contribution.

Should You Invest in Mutual Fund?

Should I invest in Mutual fund ? in your mind. Ask yourself below simple questions. 

1. Why I'm investing in Mutual Fund ? - For return or because someone suggested you. 
2. If returns - Whats your tenor of investment? - Tenor here means time for which you will surely not require this amount. Let say like investing in PF or PPF. 
3. If your tenor is less than 5 years - You need to go for Debt funds. 
4. If more than 5 years - You can go for Equity funds. 

If you plan to invest in Debt fund only go for Liquid funds. The rest can be to complex without basic knowledge of the product. 

If you plan to invest in Equity, start with Large caps and gradually move to Mid Cap. Best is a combination of both.

Basic Risk / Loss of Mutual Fund

1. Total Expense Ratio (TER) - It is a measure of the total costs associated with managing and operating an investment fund / mutual fund. Lesser the better ! It plays a critical role in a Debt fund, as without correct knowledge of TER you might end up making lower returns. 
2. Fund Managers - Every fund is managed by a fund manager and most returns are depended on his Alpha generation than the choice of product. You might have seen the ranking of Funds on many websites but, there are ranking for fund managers too.
3. Tax Complications - Where there is Money - there is Tax. So be sure you know taxes applicable on the fund returns. Many investors lost most of their profits in taxes. Prefer EEE (exempt- exempt- exempt status on the income earned) products over mutual funds. 
4. Load - Most funds have locking period, exit before locking period is chargeable. So think twice before investing. 
5. Asset Allocation - Fund creates different produces, if not selected wisely you might end up without appropriate asset allocation. 
6. Constant review: You might have seen advisors advising to invest for the long term and then asking you to constantly review your investment after certain year gaps. Imagine yourself jumping from funds to funds for the next 25 - 30 years. Will your money really compound?
7. Power of Compounding: Watch what Expert says: http://destyy.com/wNuDBa

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