What no one tells you about Mutual Funds!!

Hi everybody,

We all know that mutual fund investment is one of the most revolutionary concepts in the world of finance. In just 2021 itself the assets under management with the mutual funds in India has gone up by 41% to about 31.43 lakh crore rupees. This clearly states that Indians are getting super enthusiastic about making strategic investments , but you know what very few people know that merely due to an unawareness about a basic principle in spite of investing properly there is one way by which you and i have been losing out on a large chunk of our investment returns. Let's try to quickly understand how do mutual funds work in the first place. 

A mutual find is basically a pool of money that is strategically invested by an asset management company.

Just so that it can give out the best returns possible to small scale investors. Now back in the day there were certain very big problems prevailing in the market :

1) There were a lot of people like you and me who had little sums of money that they wanted to invest but they did not have any knowledge as to where to invest that money in order to get the best possible returns.

2) They were amazing companies with amazing business propositions. They have the best product in the market and they had the service that could generate million dollar profits. However, they did not have enough capital to keep their cash flow going ,eventually to accelerate their growth.

3) There were people who had the perfect knowledge about which companies to invest in and which companies would give out amazing returns. But they did not have capital themselves to invest into all of those companies.

This is where the concept of mutual funds came in, wherein the money is accumulated from all the small investors by the financial and business experts. Then these business experts use their knowledge to carefully invest that money into amazing companies . Eventually the amazing companies get capital, they generate cash flow and they scale their growth to deliver great profits. So this creates a win-win-win situation wherein the company makes money, the experts get paid for their knowledge and the investors like you and me get paid for our capital. This is the fundamental concept of mutual funds. Now just to put this in technical terms the investors are people like you and me, the business and financial experts are what we call as asset management companies and the money that they make is what we call as commission and the kind of investment they make is what gives us the different types of mutual funds. 

Now, depending on where your money is invested we've got five main categories of mutual funds:

1) Equity funds

2) Debt funds

3) Hybrid funds

4) Solution oriented funds

5) Other schemes

If you're in your 20's and you have a high risk appetite then a standard recommendation is that you must invest into the first type that is equity funds. This is where a major chunk of your money gets invested into stocks of different companies across the market. In equity, typically you will see that 65% of the assets get invested into equity and equity related instruments. But if you are someone wants to play safe and take less risk, that's where the second type of mutual funds comes into play. This is where a significant portion of your money gets invested into fixed income securities, like government securities, debentures, corporate bonds etc. And then we've got the third type. As the name implies here's where your money gets divided into different proportions, both into equity and fixed income securities. Apart from that you've got solution oriented funds which is usually meant for retirement funds or children funds and then you got other schemes, like index funds etc. Most people know about types of mutual funds and how mutual funds works. But you know what! There is one basic thing that most people either don't know about or they simply underestimate and that is the significant difference between direct mutual fund investment and regular mutual fund investment. There are two ways in which you can invest into mutual funds:

1) The first method is the regular method and here's where you go to a mutual fund distributor or advisor. Then this distributor facilitates your money into an AMC and then the AMC invests the money into financial instruments. Over here you have to pay commissions to two entities, the AMC and the distributor.

2) The second method is the direct method. In this method, instead of going to a distributor you directly facilitate your money to an AMC which further gets invested into financial instruments. Over here, you have to pay commission only to the AMC and you can save up on the distributor's commission and like I said before the (x) factor that most people either neglect or underestimate is the huge difference, this little distributor commission can make to your investment.

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