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.
Do different types
of mutual fund schemes offer different types of returns?
“Why should you invest in mutual funds? We keep hearing about the poor performance of many mutual funds. And mutual funds offer no guarantees. Given these limitations, is there any reason why anyone should consider investing in mutual funds? Do they perform at all?”
Well, often there are versions of this question, asked by existing and potential investors of mutual funds.
While the question
might be similar in many cases, the origin of the question, why such a question arose could be very different between different individuals.
In one of the cases, the investor thought that the scheme in which he had invested was not providing investment returns as much as he expected. However, when it was probed, it turned out that the investor was comparing two completely different patterns. This is how to compare apples with oranges, it is not the right approach.
In another case, the investor had invested in a scheme, where the general market was going through unrest. When someone is stuck in a traffic jam, no matter how big a driver is or how big a car is, there’s no way to accelerate. Exactly the same thing happens when the overall market is not good. In such a case, as in the case of a traffic jam, you have to wait for things to clear up.
In most situations, mutual funds are perceived as not working well when the way of looking may be wrong.