Thursday, February 22, 2024

All your mutual funds related questions answered by mutual fund experts

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Disclaimer: The opinion expressed here is provided for informational purposes only, and is not investment advice. There is risk involved while investing so, you should always do your research before making any decision. Sociobits’ opinions are not necessarily being reflected here and we don’t recommend investing money that you cannot afford to lose.

Looking at the current economic situation, it becomes very difficult to decide whether you should invest or not. And this is just the beginning of a series of questions. A lot of us don’t understand investing but know that investing would definitely give you amazing results.

To answer all your mutual fund investment-related questions, team Sociobits connected with mutual fund experts, Mr. Satish Salvankar and Mr. Rahul Ambre.

Team Sociobits: Could you explain how mutual funds work as an investment tool?

Mr. Rahul Ambre: Basically, a mutual fund is a pool of investors’ money. Let’s say there are ten people in this room who are not aware of where they should invest in the stock market, also they don’t have the time to compare which stock is better and which is not. All in all, people who don’t understand the overall market conditions, for them, mutual funds are a very good option, wherein there is a fund manager, who manages the funds on behalf of those investors. So, if there are ten investors, every investor invests as per their capacity into that particular fund and the fund manager manages. This is how simply a mutual fund works.

Mutual Funds can give you from around 11% returns to 15% returns and there are many schemes in the market in the last 10-15 years that investors can choose from and we can advise them accordingly.

Rahul Ambre, Mutual Fund Expert.

Team Sociobits: Why should people choose to invest in mutual funds?

Rahul Ambre: There are a lot of options available in the market. There are FDs, RDs, and many Indian investors are more interested in these investment tools because they get fixed returns but we also need to understand that fixed returns are only fetching a maximum of 5 or 6%. Right now, the inflation rate in our country is close to 6 or 6 and a half and sometimes it goes below 5% as well but even if you earn the same through FDs, it doesn’t beat inflation all the time. So, to get some extra returns, and to create a good corpus for your future, or for any goal, you have to invest in mutual funds. Mutual Funds can give you from around 11% returns to 15% returns and there are many schemes in the market in the last 10-15 years that investors can choose from and we can advise them accordingly.

Mr. Satish Salvankar: There are also many advantages to investing in mutual funds like the time duration is flexible. In many other investment tools, this is not flexible. Also, you can start investing with as low as Rs. 500 so the amount is flexible. Another advantage is that it is regulated and the major advantage is that there are different types of funds available that can cater to the long-term, medium-term, or short-term goals of every individual.

Team Sociobits: Can you point out any specific strategy that people can follow while investing in mutual funds?

Rahul Ambre: There are different options available if you are looking to invest in mutual funds. One of them is lumpsum, and the minimum amount that an investor can invest in mutual funds is Rs. 5000 so you can begin with that.

Also, there are different ways to do it like a Systematic Investment Plan or a SIP, something that Indian investors started investing in. When I started working in this industry, the SIP book was close to Rs. 3500 crores every month. Now, that same book is Rs. 12500 crores because we have seen the kind of money that is going into SIPs.

In a layman’s language, a SIP is similar to a Recurring Deposit (RD). What you do is, if you want to invest ‘x’ amount in your RD, then every month that amount will be deducted from your account. You can invest in mutual fund schemes in a similar manner.

There are different types of mutual funds but when you are investing in an equity mutual fund, the money is going into an equity market. And we know that there is a lot of volatility in an equity market so one cannot decide when is a good time to invest in a mutual fund. So, for the kind of investors that are confused, they can invest in SIPs as they start on a monthly basis.

When I started working in this industry, the SIP book was close to Rs. 3500 crores every month. Now, that same book is Rs. 12500 crores because we have seen the kind of money that is going into SIPs.

It works very simply. Let’s say, you start investing in SIPs in the month of January and you invest Rs. 1000 in an Rs.10 NAV, at this price you get 100 units. Moving forward, if the market conditions are good, then the NAV becomes Rs. 11 (90.0 units). So, you invest another Rs. 1000 in Rs. 11 NAV, and if the market is not good, then you will invest the same amount in let’s suppose Rs. 9 NAV (111.1 units). This way, rupee cost averaging takes place. The money you are investing gets averaged out and this reduces the risk.

Another ‘not-so-popular’ way is a Systematic Transfer Plan (STP). Unlike the SIP, where your money goes from a bank account into a fund, in STP, your money goes from one fund to another fund.

Satish Salvankar: Another thing is that an investor makes money because of discipline and knowledge, not due to strategy. When you choose any investment strategy, you should be disciplined enough to follow it throughout. So, first, you should plan your goals, then figure out which investment option you want to go with, and last, stick to it. Strategy is important, but discipline is more important.

Team Sociobits: Is it a good time to invest in mutual funds?

Rahul Ambre: There are different indicators in the market that tell you whether it is a good time to invest or not but nobody can time the market. The best fund managers can also not time the market because the market is beyond everybody’s capacity. So, if your question is ‘whether it is a good time to invest right now?’ then yes, because the SENSEX is in the range of 51,000 – 53,000 and NIFTY is in the range of 15,000 – 16,000. At times, the market was around 63,000, especially in November 2021. So, if you look at today’s scenario, we are 20% in the correction mode.

To understand the market better, people look at the P/E Ratio i.e. Price-to-earning ratio. So, the best time to invest would be when the P/E ratio is around 0-12 as the valuation of the stocks gets cheap. This is the best time to invest but during that time, the sentiments and confidence of the investor are very low. People tend to withdraw money at that time but actually, it is the time to invest. When the P/E is 14-24, even this is a good time to invest in stocks or mutual funds. And whenever, P/E goes above 26 or 28 then we say that the market is getting overvalued. One should be a little cautious while investing when the P/E is above 30. SIPs and STPs are something that you can choose to get into at any time.

Satish Salvankar: When we talk to general people, understanding terms like P/E is difficult. Let’s say you wish to buy your normal Kirana shop that is situated where you live. The right time or the profitable time for you to buy the business would be when the shop is not doing well and the owner will sell it in a less amount. So, the scenario is the same in the market. When the market is not performing well, it is the best time to invest.

You will earn money when you take an action or apply what you have learned. This is exactly how investing works. It is difficult to take action at the right time because nobody can time the market

Satish Salvankar, Mutual Fund Expert.

Another suggestion I have for investors is to make investing your habit. If you are investing a fixed amount every month, the market will either go up, sideways or down and no one can predict it. So, if you are investing systematically then you are in a better position to gain money.

When you are investing in a debt fund, it doesn’t make a lot of difference whether the market is going up or down. There are a lot of techniques to invest systematically but the main thing is your habit. It takes some time to develop this habit. Basically, you will not earn based on your knowledge. Suppose you have learned a course but you will not earn money because you have completed the course. You will earn money when you take an action or apply what you have learned. This is exactly how investing works. It is difficult to take action at the right time because nobody can time the market and nobody can predict which stock is going to perform in a manner and for how long. So, it is better to keep investing money in specific time intervals.

Team Sociobits: Do you think that mutual funds are a better investment tool as compared to stocks?

Rahul Ambre: There are very few people who understand stock markets very well and they have enough to understand the stock market. The stock market is not something that can be understood just by looking at it three or four times. Knowing the level of NIFTY, SENSEX and the correction is not enough to invest in the stock market.

When you invest in the stock market, you hold three or four stocks in your portfolio but understanding their business line, fundamentals, profit and loss, and earnings are very important. When you invest without having enough knowledge, you end up making a mistake.

Many investors that we meet come and tell us stories like “Sir, we bought x stock, and it gave 40% returns in one year. We only receive 15-20% returns in mutual funds.” But you should also notice that with that one stock, you may have bought many other stocks. A lot of times, they don’t choose the other stocks correctly, and when it doesn’t perform well, it results in a 25-30% loss. That’s where the calculation gets balanced and sometimes people have to face a loss of more than they are earning in the market.

Basically, to choose the right stock, you need a specialist and in mutual funds, a fund manager’s job is to do exactly that. Their job is to look for good stocks and invest in good stocks that will give returns to people. So, someone who has time and the right knowledge can invest in stocks but people who don’t have time and understanding should choose mutual funds. Generally, there are around 40,50, or even 60 stocks in a portfolio, still, it depends from scheme to scheme.

The advantage here is that you are not taking a huge risk over a single stock and your portfolio too, looks diversified. Because of this diversification, the risk factor gets considerably reduced. Even if a few of your stocks don’t do well, you can still rely on the other maybe 45-50 stocks to help you cover the losses.

Satish Salvankar: I would like to add one point here. Let’s suppose there are two people, one has 10,000 Crore rupees to invest and the other one has 10 Lakh rupees. It’s obvious that the person with 10,000 Crores is in a much better position to allocate resources and gain knowledge. Similarly, when we invest, the maximum we can go to is 5,10 or 15 Lakhs. But the big players are sitting on sums of crores of rupees, so clearly we can’t do better than them.

If you are not able to manage your time then time will manage you. Similarly, if you are not able to manage your money then money will manage you

This economics of scale is what gets applied in Mutual Funds and one should know that it’ll perform well if you invest in a measured time. Another thing is that, if you buy 10 stocks that are going to last for twenty years, then it will be very difficult for you as an individual to track that. So, it’s better if you just focus on your work and give the money matters into a professional’s hand. I firmly believe that time should be respected and if you are not able to manage your time then time will manage you.

Similarly, if you are not able to manage your money, then money will manage you. So it’s important for you to give that money to someone to manage. This will also help you in gaining confidence in the market, what happens is people tend to sell their stocks when the market is going down. If you work with an advisor they can help you manage this much better.

Rahul Ambre: I think a financial advisor is very crucial to have in these situations. Especially the way the market has been for the last 5-6 months, having an advisor by your side can be beneficial. They will assure you to stick with your scheme and make you understand where your investments are and how they will bear your money. A lot of investors start with zeal but as soon as the market gets a little rattled, people are quick to take out their money. This is where the advisor plays a big role.

Satish Salvankar: To give you an example of our own client, he started a SIP of 10,000 rupees and this was before COVID. When the market went down during Covid, he stopped and withdrew his money with whatever loss he had faced. After some time he came back to us and again invested his money. As of now, his portfolio reads negative 80,000 rupees, a much bigger loss than what he had faced last time.

But because of these small experiences, now he has enough confidence and patience to see this through. He also understood how the market works. Also, as an advisor, we have all the tools ready to help people who join us. As experts, we at Saavi, make people understand how investing in mutual funds works and then leave it up to them as to how they want to move forward. We make sure that we provide trust and knowledge to an investor.

Team Sociobits: When we talk about mutual funds, according to you both, a long-term investment works better or a short-term investment?

Rahul Ambre: Ideally it should be a long-term investment. When you are going for a short-term investment, it’s not possible to perfectly time the market. If the market is falling, no one can say for sure where this freefall is going to stop. There are a lot of things to factor in and you would still not know how the market will respond. For example, during Covid, the market’s Sensex was 25,700. People thought that it will drop further but the opposite happened and Sensex reached up to 35-38 thousand.

If you cannot time the market then it’s better to remain invested in the market. If you see any mutual fund scheme, if the market is doing well for one or two years, the results you get will be good. But if you are invested for let’s say 8-10 years, then the returns you will get on your investments will be worthwhile. It’s better than other ways of investing, like an FD or a recurring deposit.

The other good thing is the regulation of mutual funds. As Satish sir said, the Securities and Exchange Board of India (SEBI) is involved in this. SEBI is a very trustworthy body, that has its full attention on these funds. So all the rules and regulations are followed diligently.

If you cannot time the market then it’s better to remain invested in the market.

If a person still wants to go for a short-term investment, then there are options to hold your money for 20 days or 25 days in debt funds or short-term plans. It depends on your horizon. Whether you want to invest for one month or four months, there will be options that are available for you.

People, when they think about mutual funds, they only think of equity funds. But there are a hundred other options for you like there is an option that gives you the combination of equity as well as debt fund. It ultimately depends on the person, how much they want to invest and how long they want to invest it. These factors help the financial advisors to guide you.

Team Sociobits: Do you think Mutual Funds are less risky as compared to other investment tools?

Satish Salvankar: If you have an investment in a company and in the future for whatsoever reason the company decides to shut down, then your investment will not be lost and will be merged with some other company. Regardless, your investment stays safe.

Rahul Ambre: The money which you have invested in mutual funds can go up and down but if you think that because there is an issue in the company you have invested in and now all your money will be gone, then that’s not true. Some companies will come and merge them or one can even sell their business and continue. SEBI is involved here as well.

None of these decisions are made without SEBI coming into the picture and approving them. So if safety is your major concern, then you should be relieved because SEBI will take care of any failing business.

Team Sociobits: The way the global economy looks right now, do you think it will affect Mutual Funds in any way?

Rahul Ambre: Global Economy has always had an effect on mutual funds. If you have an equity mutual fund where your money is majorly invested in the stock market, then it will suffer due to the economy. Since globalization took place in the 90s if something goes wrong in China or the USA, it will affect various markets. We are aware that even foreign investors have investments in our market, so if something goes wrong, everyone in that chain will face an impact.

I believe this is the perfect time to invest because all the prices are down and they will eventually rise up. When it does, you will reap benefits from it. Right from the 90s till now, just look at the Sensex and how much it has grown. The same SENSEX which used to be at 3 or 4 thousand is today around Rs. 51,000. When you look at a graph of over 20-30 years, you will always see it going up rather than down and therefore it will definitely make you money.

This discussion covers how everyone can invest in mutual funds, whether this would be a good time to invest and a lot. Getting insights from experts like them will encourage people to invest and grow their money.

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