Maniram once told me:
I have got five thousand rupees lying in my saving account earning a interest of 3-4%. I have heard that stock market gives better returns. I don't have a demat account. I don't know what stock to invest in. What should I do?
Sounds familiar?
Let us look at Maniram's problem. He wants to invest in stock market. If he decides to buy shares of some company, he will need a demat account and will have to spend about 700 to 1000 Rs for that. With the small amount of money that he has he would be able to buy only a few shares of a company. He will also have to decide which company to invest in, which requires a substantial effort.
Lets innumerate his problems
1) Initial expenses for investment.
2) Time needed to study a company.
3) Too small a investment to buy shares of more than one company.
4) Commission that he will have to pay on each transaction.
This is where a Mutual Fund(MF) can help him. Mutual funds take money from a invester and invests in the equity market on his behalf.
Now let us see how Maniram's problems get solved:
1) Initial expenses for investment: You don't need to open a demat or trading account for buying and selling mutual funds. Thus initial expense is zero.
2) Time needed to study a company: You won't need to study any company as you are not investing directly, but the mutual fund is investing on your behalf. They are financial market professionals and this task is best left to them.
3) Too small a investment to buy shares of more than one company: This problem no longer exists as the fund will have a large cumulative investment from many users and can easily diversify its investments in many companies.
4) Commission that you need to pay for each transaction: Most funds charge some fee as entry load. This charge is higher than commission paid while buying shares, but it get waived off if you purchase the units yourself (i.e. without going through a agent).
My suggestion: If you have money lying idle in your bank account, and if you are a medium to long term investor(three years or more). Go ahead and invest in mutul funds.
A few terms that you must understand about mutual funds
1) AUM - Assets Under Management
It the total worth of assets that are being managed by the fund.
2) NAV - Net Asset Value
NAV is the value of each unit that one holds in the mutual fund. NAV is calculated by dividing AUM by total number of units sold by the fund.
3) AMC - Asset Management Company
AMC is the entity that manages a fund for the investors.
More information about mutual funds can be found at http://www.amfiindia.com/
Latest NAV of all the funds can be found at http://www.amfiindia.com/navreport.asp
