A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Are safe investments not enough to achieve financial goals?
Keep in mind that regular expenses and the cost for various financial goals increase over the course of a period. If inflation is 6% per year, the cost of a target doubles in about 12 years. However, if inflation is at 7%, the doubling occurs in about ten years.
Now, when inflation is at 7% and you are looking for the total security of the main amount, you would be able to invest in avenues that offer returns very close to inflation. Adjust taxes on investment returns and your post-tax investment returns are lower than inflation.
Let’s take a look at some simple numbers:
If inflation is 7% per year and you can buy something for Rs. 100 now, you would need Rs. 107 to buy the same thing next year. A year later, the same article would cost Rs. 114.49, if inflation remains at the same level.
At the same time, if you saved your money in a totally safe avenue that offered 6% per year after taxes, your Rs. 100 would grow to Rs. 106. This is Re. 1 less than the amount requested above. After two years, the amount would have grown to Rs. 112.36, which is lower than the cost of the item to buy. The table on the left shows an approximate of investment values, target costs and gaps between them over a period of years.
So it is important not only to save but to invest.