A financial product should solve a problem. We should not be buying it because it is being sold or because our fathers used to swear by them. It should work for me and my unique financial problems. A mutual fund is a generic term. It is not a product, but a category of financial products that has many options that do different things for different people. Think of a mutual fund like a buffet meal rather than a set menu. In a set menu you get what the cook has made, but in a buffet, you can choose what suits your taste and diet needs. The first reason to invest in a mutual fund is that there are options that solve many of your money problems and you can customise to your need.
Remember that in our money journey, we will need money at various points in time in the future. I may need money in six months to put my child through college. You may need it in a year for the further study programme you are planning. Your friend may need the money in three years for the downpayment of a house. At the same time, both you and I need to plan for our retirements.
Now, there are various kinds of products that work for various kinds of time periods. The rough rule of thumb is that the closer the goal, the less equity we have. The further away the goal, the more equity there is in the portfolio. A good portfolio should be able to look after most of my financial needs now and also secure my future. I find mutual funds versatile to target many of my financial goals. They allow me to buy bonds and stocks in many combinations. Most other products are rigid and more expensive to enter, exit and can cost more on an ongoing basis.
So mutual funds are about choice and about versatility. They are also about efficiency. What is efficiency? The transaction should be quick, the product should cost very little and the returns should be better than the alternatives. With fintech firms coming into the market, mutual fund transactions are very fast and painless.
There are no front commissions in a mutual fund that encourages agents to push expensive products at you. Even the trail commissions are now better regulated. The only expense you need to look at is the expense ratio. This you can compare across different funds.
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So, what about returns? You need to look at returns in the context of costs as well. Real estate investors forget to count all the costs on the investment. FD investors forget to count the cost of taxation and impact of inflation. Endowment plan investors forget to ask for the rate of return but focus on a lump sum return. Mutual funds do not promise high returns. They are a way to target various financial goals, at a reasonable cost for a reasonable return.