Over last year or year and half, every body is talking about investments in mutual fund, “Mutual Fund Sahi Hai”, we all must have seen this Ad. But this ad does not amplify whether we should invest in equity or debt mutual fund or combination of these two (Hybrid). Before we proceed further, it would be prudent to understand the basic difference between debt and equity.
When we invest in debt instrument, we lend our money to the borrower for a fixed interval of time and the borrower gives interest on that money as per prevailing market rate (cost of borrowing money) during the period of investment. This interest may be fixed or variable as per the mutually agreed terms of reference ( e.g Government securities offer fixed rate of interest whereas Provident Fund gets variable rate of interest). Thereby meaning, our principal amount is not growing, and we are getting only the interest on it as per prevailing market rate.
When we invest our money in equity (buying a stock directly or through mutual fund), we are actually buying stakes in the business of that company. If the company grows, our money grows with it. A lot of companies have created wealth for their investors in the past. But on flip side if the business does not do well, we loose out on our investments. That’s why selecting the right business and diversification are the main key factors. We as investor may not be able to do justice while investing directly through the stock market and in that context , investments through mutual fund will be a better option.
Despite risk associated with investments in equity, this asset class has been outperforming over all other asset classes over a longer period of time.
A comparison chart prepared by HDFC Mutual Fund showing how an amount of Rs 10,000 invested on 31st Mar 1995 (once) in different investment avenues would have performed on 31st July 17 is enclosed. Over a period of 22 years, Tax Saver Mutual fund (One of the scheme of HDFC MF which invests in equity) has given annualised return of 24.73% as against 8.84% in PPF. Even Nifty 500 bench mark index has given 12.19% annualised return. Undoubtedly, investments in equity through mutual fund will create a lot of wealth for you over a longer period of time.