Monday, 6 June 2011

Why One Should Invest in Mutual Fund?

Why one should invest in a mutual fund. Just for the beginner as well as for those already invested.

Step 1. The bank is offering interest between 8 and 10 per cent for the past and it will continue for the future also. I keep wondering about people, who put money in the FD for long term, when the bank is giving two choices at any point of time, like 1. Lend the money to be in terms of Deposit and I will give you some interest based on current interest rate 2. Be a partner to the bank, buying few shares of the company. If you really like the bank and its credibility, why don’t you partner with the bank?

Let us say 3 years before, if you opted for fixed deposit you might have got 10% which means your one lakh of investments would fetch 1.3 lakhs (with TDS). If somebody instead of putting the money in FD if they bought, let us say SBI shares at Rs 900 and now it is 2400, which is more than double of your principle. Just think about it!!!

Step 2. If the bank offers that rate to the depositor, the bank should lend the money for at least 3% more to survive. Who will get the money from the bank is predominantly corporates. If the corporate take money for 12%, how much the corporate should earn, at least 20%.

Step 3. All of us work for some corporate and getting annual hike of 10% minimum, which means all the corporates are making at least 20% to give 10% salary hike year on year to their employees.

Step 4. What is Stock Market? It is nothing but the representation of so many corporates. At present the market might be down by 15% from January 2008 peak, but at the same time if you see the corporate results which were announced on a quarterly basis, they out beat the previous number, which means corporates are doing good and their governance too. Market might not value now and it has to give value eventually.

Step 5. I tell my clients to look for a longer term, roughly about 10 years. As I pointed earlier, when the education demands 21 years of hard work to get a decent job, how come investment alone will deliver a return overnight or short period? Here, you will not actively participate, in spite of that it will give you good return in less than 5 years also at the current level? Is it fair on our part to expect more than that? Yes, it can give some times, but not forever. But in 10 years’ time frame it has to give good returns, in the past if you take any 10 consecutive years, it always delivered more than 15%.

Step 6. Don’t blindly believe whatever I have pointed out and analyze the last 10 years returns of any investment over the trenches of last 3 decades whether it is gold, real estate, arts and crafts or anything for that matter. MF returns stand out the best and beating the near instrument in a big margin.

You have two options, either you just ignore without reading or trying to understand or if you read it then probably you might have understand and make your life more meaningful as far as financial is concerned.

I am just fiddling the last 10 years data and to my surprise the returns are phenomenal. It multiplies somewhere between 8 and 20 times across all the fund houses, after recovering the principle amount which means you have taken back your CAPITAL.

In the last 10 years the market was highly volatile. Moreover, the literacy of mutual fund is less in the last decade than this decade. In the past decade  salaries grown bigger yet MF penetration is less than 5% in India. What I am trying to convey is the market is still virgin and more people understand and start investing so you can see a very big ride for the next 10 years from now. MF investments are for masses not for the middle class and upwards, it is for EVERYONE!