Tuesday, August 22, 2017

What and Why of Mutual Funds

For those who wonder what Mutual Funds are, after watching the "Sahi hai" TV ads

Learn the What and Why of Mutual Funds
Free of jargon or arithmetic
Welcome to the Investment Farm

With this harvest,
You will find it easier to
move on to the
The How of Mutual Funds
So let’s begin…

Imagine a large plantation company
Bumper Harvest Ltd.
Let’s call it BUMPER.

And compare it with a Mutual Fund
Super Mutual Fund
Let’s call it SUPER.

Now BUMPER has an interesting business model
It allows people to become farmers
Without having to work on the fields
As they may not have the time or
Knowledge to take on professional farming
Cool, ain’t it?

SUPER also has an
Awesome business model
It pools in money
From different people who wish to
Invest in the stock market
But may not have adequate time,
Funds or knowledge
To venture out on their own
Is it any less Cool? Surely not!

BUMPER sells plots to its investors
And does farming on their behalf
For a fee of course

SUPER sells units to its investors
And does investing on their behalf
Again, for a fee

BUMPER has a farm manager
Employing best-of-breed farming techniques
Taking care of end-to-end farming,
Highs and lows of weather,
Nitty gritty of the soil

SUPER has a fund manager
Handling the end-to-end intricacies of investment
Studying the highs and lows of economy,
Intricacies of the market
Based on thorough research &
Established principles and practices of investing

The BUMPER team takes care of everything –
From Land procurement, Ploughing, Weeding
To Seeding, Watering, Pest Control
Fertilizing and Harvesting

The SUPER team handles everything –
Fundamental and technical analysis
Studying published data on stocks,
Interaction with company managements,
And corporate site visits.

Both BUMPER and SUPER help investors
Save on costs big time

In BUMPER’s case,
Expenditure on Farm equipment, fertilizers,
Irrigation systems and like
Is shared between investors
Individually, this cost burden would have proved astronomical

In SUPER’s case,
The mega corpus built by
Pooling money from several investors,
Ensures that crucial cost components like
Research, office infrastructure and overheads are
Shared between investors
And thanks to large fund transactions
Happening on a day-to-day basis,
SUPER avails of mandatory services
Like banking and broking at very subsidized rates.

BUMPER offers investors a wide choice of
Various plantation schemes
Depending on the
Kind of farm yield one is looking for

SUPER offers investors a wide choice of
Various investment schemes
Depending on the
Kind of market returns one is looking for

In both cases, the investor has to decide:
How much risk is He/she willing to bear?
How long does he/she wish to let the
Money stay invested?

So, if the investor is looking for a
Regular and steady income with
Limited growth in his capital invested,

BUMPER gives you options of short term crops
Like Paddy, Green Veggies, Cereals and Millets

While SUPER offers fixed income schemes for
Investment in Debt securities like government bonds,
Corporate bonds, debentures and commercial paper.

If investors are looking for healthy capital growth
Over medium to long term
And don’t mind short-term ups and downs

BUMPER offers many options like
Like Sugarcane, Banana, Bamboo
For the medium term
And Papaya, Mango, Coconut or Teak
For the long term

While SUPER offers medium to
Long term growth plans
In equity shares of companies
From different sectors like
Manufacturing, Service & Technology

If one wishes to make the best of both worlds,
There are balanced schemes that provide
Both growth and income in different proportions

For this, BUMPER provides hybrid farming options
Short-term and long term crops
Even fodder crops for animal feed
All grown on the same plot

Mutual Funds also offer balanced schemes
With different permutations and combinations
Of debt and equity instruments in one scheme

What’s more!
Both BUMPER and SUPER offer
Special schemes too

If BUMPER has Horticultural plantations and
Innovative investment options like
Poultry and dairy farms

SUPER offers diverse alternative options
Like Gold Funds, Fund of Funds and International Funds

But the best results invariably happen when investors
Strike a blend between short term and long term

Having invested in different crops
However small the plots may be
BUMPER investors can make steady gains as
On the whole, the yield is maximized
To the extent possible
In the given soil and weather conditions
Similarly, For SUPER investors,
The investment amount,
However small it may be,
When invested in a range of securities
Across different sectors

Ensures that one is not exposed
To the risks of a single sector
While profiting from the gains
Of as many possible
In the given economic and market conditions

Both BUMPER and SUPER help you
Build a smart portfolio
Of investments in different avenues
If you had heard of diversification
Only as a Buzz word before – now you know what it means!

So, let’s recap the similarities
Between BUMPER and SUPER

For BUMPER investors, the objective is to
Maximize farm produce and minimize risk
Based on BUMPER’s
Expertise in best-of-breed farming

For SUPER investors, the objective is to
Maximize returns and minimize risk
Through investments
In different avenues
Backed by SUPER’s
Expertise in investments

And now, let’s talk about two facts
Exclusive to SUPER

ONE: Your SUPER investment
Is subject to market risk but is
100 per cent transparent and safe
Because it is
Governed by the
Securities & Exchange Board of India,
Legally bound to follow
Stipulated Rules and
Disclose financial statements and
Fund performance details

And TWO:

Stocks represent the extent of equity ownership in a company
Units represent the extent of ownership in a Mutual Fund like SUPER

When SUPER invests in a stock, a SUPER INVESTOR
Doesn’t own that stock,
He/she own units of SUPER which has
Invested in that stock.