Of late Mutual Funds have been promoted a lot in the media and I have seen people often suffer from the misconception that investment in Mutual Funds are typically 'Safer' than investing in shares and that investments in Mutual Funds 'guarantee' good returns for the investor.
In this regard I would like to say that no Mutual Fund comes with the guarantee of good returns.
But, before I proceed to say any further in this regard, let me just brief you about the types of Mutual Fund schemes that you would typically find on offer.
Mutual Fund schemes vary depending on the type of securities they invest in. A Debt fund will invest in a portfolio of debt securities while an equity-oriented fund will invest in equities. While a debt fund will more or less earn you a fixed return over time, an equity-oriented fund will see fluctuations in value depending upon the performance of the securities that the fund has invested in.
Thus, in case of an equity oriented Mutual Fund, the returns you earn is directly related to the performance of the stocks in which the fund invests in and there is no guarantee to this.
Timing is important when it comes to investment in Mutual Funds.
When it comes to investment in Mutual Funds, specially for equity oriented schemes, timing is of great importance.
Timing relates to when you are purchasing a Mutual Fund scheme.
We know that the equity markets alternate between the bullish and bearish phases. During the bullish phase or buying phase, the market sentiment is upbeat and more people are seen entering the markets on the hope of prices rising further. On the other hand, during the bearish phase the market sentiment is down and more and more people tend to exit the markets on the fear of the markets falling further.
During a bullish phase, typically during the later part of it, most stocks trade above their intrinsic value. If you happen to be an investor who has invested in a equity-oriented Mutual Fund scheme during such a phase, the value of your investment could suffer some serious depreciation as a correction phase hits the market.
On the other hand, if you enter into such a scheme at a time when market sentiments are down and most of the stocks are trading below their intrinsic value, you investments could see some serious appreciation by the time the markets recover.
An investment in a equity oriented scheme does not guarantee you capital appreciation. You must choose 'when' to invest in such a scheme diligently to get the maximum benefits out of such schemes. As I said 'timing' of your investments is important.