If you’re looking to invest in India, you – as a retail customer – have a few options. There are direct equities, which refers to the stock market. There are also bank fixed deposits, which most people tend to invest in. Commonly, most people just have a savings account where they park their money.
Mutual funds are another option available to people who want to invest their money. A mutual fund is an instrument that puts various investment products into one basket. So when you buy a mutual fund, you are buying a basket of investments. Why is that helpful?
When you buy into a mutual fund, you are giving your money to an industry expert who has built up years of expertise in managing money. An expert would have a more comprehensive understanding of which products work at what times, and even whether you should be buying them. Mutual funds also offer great diversification. Instead of buying into one, two, or even five stocks, a mutual fund allows you to spread your risk across various stocks. As a result, your risk is diversified. If you’re unsure of how to navigate the complex world of finance, you should consider managing your money through experts.
There are institutions that buy into mutual funds. For example, a large company like Tata Motors will not keep all its money in a bank account. They would want to gain returns on their money instead, so they would invest in mutual funds. When a corporate company buys into mutual funds, it’s called institutional money.
There are two categories of mutual funds: equity mutual funds and debt mutual funds. When you invest into an equity mutual fund, you’re putting money into a basket of stocks.
A debt mutual fund, on the other hand, invests in fixed income products such as bonds. As a result, you know how much you will earn on your investment, and at what frequency. Your money goes into government bonds or corporate bonds.
There’s a third category of mutual funds: the hybrid. A hybrid mutual fund, as the name suggests, has a mixture of equity as well as debt, based on how the market is moving. If the market is overvalued, the experts will move your money towards debt because the stock markets won’t do well. However, if the market has fallen enough, they will park a chunk of your money into stocks. The experts can continually move your money around based on how the market fluctuates.
In India, mutual funds are also segmented based on how someone buys them. A regular mutual fund is purchased through an agent who deducts a commission from the amount you invest. As a result, your actual investment is slightly lesser. A direct mutual fund doesn’t involve an agent, and therefore your investment remains intact.
There are various ways to buy mutual funds in India. You could buy them through banks, distributors, or even through online platforms such as Zerodha, Paytm Money, Groww, or Kuvera. You should keep in mind that buying mutual funds online doesn’t mean that you’re automatically purchasing direct mutual funds. Online platforms can sell either type of mutual fund. If they want to earn a commission, the platform will choose to sell regular mutual funds. If not, they will choose to sell direct mutual funds.
Why would an online platform choose to sell direct mutual funds, you may wonder. These platforms simply want to acquire customers. Once they have the customers, they can start charging for the investment advice they give, or even selling them other types of investment products.
If you have some experience with mutual fund investments, you should be buying direct mutual funds, as your investment amount is intact. However, if you’re a first-time customer, you should consider buying regular mutual funds. With an agent’s involvement, you will be able to seek their guidance on any questions you may have about the process.
To view the full content, sign up for a free account and unlock 3 free podcasts, power reads or videos every month.
Former Head of Investment Products