Aamir Ayoub Mir
The emergence of mutual funds in the past decade as a popular investment vehicle is due to the fact that these serve broadly all categories of investors through the plethora of schemes that these offer. The benefits provided by mutual funds far outweigh shortcomings, and have thus gained wide-spread acceptance.
It must be clear now that Mutual Funds are tailor-made according to the purpose they serve and the exposure to risk the investor wants to concede as well as the objective they serve. It is very important to identify whether an investment in mutual funds is a long term one or somewhat a short one, but statistics and practical evidences have suggested that “possibility of higher returns and stability of any Mutual Fund” is more and more proportional to the time period for which the investment in that fund is made. So in order to achieve some goal with an air of authenticity, the most important thing is to be patient and a minimum of 5 years is required for a given fund to perform according to the investors’ interests!
The most important aspect that makes mutual funds so attractive is the power of “compounding” that is the biggest driving force for increasing the returns in case of investment products and mutual funds are the most important indicators that complement compounding and its power to augment the growth of common investments. This again calls for investing for longer periods in order to grow your investments into using them for fulfilling various types of goals.
A basic definition of compounding is”
“Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time.”
This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods.
Compounding, therefore, differs from linear growth, where only the principal earns interest each period. The earlier you start investing, the greater will be the power of compounding. So the most common mistake any investor could make is being lazy and reluctant to invest in such a good financial product and thereby deprive himself or herself of the returns.
Mutual funds are a modern financial tool that promise to be so attractive even for the smallest of the investments and people need to be made aware about the prospects and growth potential in the modern financial context so that they don’t remain behind in this dynamic yet so powerful financial world dominated by inflation and ever increasing living standards.
There are two major reasons why most people around the globe are afraid to take investment decisions on their own. One of them is the lack of time to study the pros and cons of different investment opportunities and the other being lack of financial know-how. Apart from that, some financial markets have a steep entry barrier, which prevents a small ticket investor from participating in the growth of that sector.
Investment needs across different category of investors are also not common. While some may settle for safety of capital, others may chase returns. There may be others who would want their capital to grow at a steady pace, while some may want to save for retirement or child’s education. The need and objective of the investors are truly diverse and one financial product can’t fulfill all of them.
The solution lies in mutual fund investments which compile a simple yet diverse topic, but moreover something that most people residing in rural places are not aware of and as such are still stuck with conventional and age old saving practices and thus losing the opportunity to earn the best out of their money and as such make the economy strong as a whole!
—To be Continued..
(Caveat Emptor: Mutual Fund investments are subject to market risks, read all scheme related documents carefully)
—The author is pursuing a PhD In Financial Management from the Department of Management Studies, Kashmir University. He can be reached at: firstname.lastname@example.org