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While you might have done your research and reading about investing in mutual fund, but I am sure you still do not
have 100% clear idea about what does it mean to invest in a mutual fund. In this article my attempt is to make you
understand what exactly you should be expecting out of your investments in equity mutual funds.
A lot of investors are approached by advisors and agents who sell equity mutual funds to them in the name of high
returns. But investors are not informed about the risks associated with it. Because of this most of the investors
redeem their investments if markets fall or if the returns are not that great after a year or so and hence lose out on
getting the bene ts of mutual funds over a long term.
This happens because in investors mind a mutual fund is all about getting high returns.
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So its very important to clear all the wrong notions about equity mutual funds and set a clear understanding about
them in your mind so that you get the best out of your mutual funds investments.
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FINANCIAL
What HELP?
are Equity Mutual Funds?
This article is all about Equity Mutual Funds and not any kind of mutual fund. One of the biggest myths is that
Mutual Funds Financial
= StockPlanning
Market
NO !
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There are various kind of mutual funds, ranging from super safe mutual funds (like liquid mutual funds or debt
mutual funds) to
Buyhigh risky
Health funds (like mid cap funds and equity mutual funds). Below is a
Insurance
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So in this article, I am listing various important points you should know if you are investing in an equity mutual funds
or planning to do same.
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Equity Mutual funds are a way to invest in a number of stocks using one single investment and get it managed by an
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experienced and well quali ed fund manager.
For example, Birla Sun life Frontline Equity had 80 stocks in its portfolio as on 30th Dec 2016, as per money control
website. Which means that if you are investing in this mutual funds, you are actually investing in 80 companies.
Financial Planning
You own 80 businesses
Below is a partial
Buylist of companies
Health Insurance in the fund.
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Now when you know that you are actually invested in a 80 different companies, its important to know that returns
from your mutual funds actually comes from the returns from these companies stocks performance over time, its
the average of these companies.
Below is a very good video, where its explained how business create wealth over long term in Indian context
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Financial Planning
#2
You are investing for long term
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No business earns
Goalexceptional
Based Planningreturns over a short term. Now as you know that you are actually investing in a
business when you are investing in a equity mutual funds, that too in multiple companies, the great returns will come
over a long term.
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Some companies will not do great, some of them will do average and some of them will grow exceptionally. And
when you do the average, you will get very good returns.
The best part is that the chances of great returns are much higher because you are diversi ed across various
sectors, companies, management and size.
Lets talk about a Franklin India Bluechip Fund which started in 1993. Its been 23 yrs now since inception.
Over the rst 20 yrs (from 1993 to 2014) the fund has given 76 times return. It turns out to be 24% CAGR return
and by any standard its mind boggling returns, especially because its for 20 yrs compounded.
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If this same 10 lacs was invested in a Fixed Deposits, then in 20 yrs it would have grown to 67 lacs.
Sadly, this 76 times returns do not re ect in most of the investors portfolio because investors dont think long term
and think short term. If for some years, the fund does not perform well, they want to move to something else which
gives them awesome return.
Businesses go through various cycles (success and failure, good and bad). So you need to wait for a very long term to
see some amazing returns.
If you are right now invested in a equity mutual funds, its very important to understand that you will not get great
returns over short term (2-5 yrs) . Trust your mutual funds and keep investing and over time you will reap the
bene ts.
There are various mutual funds which are 10+ yrs old and most of them have created big wealth for their dedicated
and committed investors.
You will hear this line often in the mutual funds advertisements on TV. A lot of rst time investors who do not
understand equity investments think that Market Risk here means that their money is at risk and they can lose all
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Mutual Funds are Volatile
and then downBuy
oneLife
day, and then again down another day and again down 2nd day and then boooom UP on the
Insurance
third day and then again down and again up and up and up
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But you need to understand a very important thing. Volatility is an inherent part of mutual funds investments as its
invests in stocks, but its more of a short term phenomena. You need to sit tight and look at the long term trend and
how it moves.
HDFC top 200 is one of the most well known equity mutual fund which has created great wealth for its investors. Its
NAV rose from Rs 10 to Rs 372 in 20 yrs.
Its a great return over long term, but the journey was not simple. Its NAV went up rst, then came down and then
again up and down. See the ups and downs in the below chart for 20 yrs
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Did you notice how tough it would be for someone to not exit and stay invested?
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If deep down the fund value is growing. This can be measured by check how the moving average is trending. If you do
the average of 2 months NAV and then 3 months and 5 months and keep increasing it, you will see the trend is up
YES
and thats what - Imost
is the WANT HELP
important take for an investor.
Lets see how the moving average trend looks like for this same fund over 20 yrs period
Dont look at the fund performance and NAV movement every day or month
The volatility in the stock market will keep hitting your emotions and tell you Hey, its better to sell your funds
and be safe. The biggest problem with mutual funds is that its NAV is available on the daily basis.
What would happen if you were allowed to see your mutual funds NAV and its performance only after a period of 5
yrs? What if an investor who had invested in HDFC top 200 long back in 1996 was able to nd out how its fund had
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Below I have plotted the NAV data for the month of Oct for 1996, 2001,2006,2011 and 2016. See how it looks like
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So stop looking at your mutual funds performance in short term like 3 months or even a year! .
Post tax returns on mutual funds are better As of now the long term capital gains in equity is tax free, which
means that after 1 yr of investments, any pro ts are not taxable. So this is another advantage of investing in
equity funds
You can change your investments any time Other than tax saving mutual funds, almost all the mutual funds
can be switched to other mutual funds if you want. So if your fund does not perform well, you can switch it
anytime to other fund
I hope you got some great insights about your equity mutual funds investments and how you should behave as a
mutual funds investors. Its very different from investing in Fixed Deposits or PPF or any other kind of investors and
your expectations should be very different.
Let me know if you have any more points to discuss or ask in comments section.
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