Mutual Funds: Good or Evil?

There has been a very old debate on mutual funds being good or bad. After this article, you will be better equipped with deciding it for yourself.

Okay, why are mutual funds considered bad?

  1. Mutual funds are risky since they buy company’s stocks and their price can change anytime and your hard-earned money can vanish in a second.
  2. Mutual Funds are very complex and difficult to understand.

These are the most common responses you will get from most of the people. Let us try to understand why people think that way

Mutual Funds are Risky

Are they really risky?

If you just buy any mutual fund based on somebody telling you or intuition, or randomly, then, hell yes they are very risky. In fact, you will be better off buying Fixed Deposits and do great with them

Or if you plan to make quick bucks out of it, and don’t have the patience to hold it for more than 2-3 years. then, yes, they are risky.

More of the reason to not buy right. But if you just spend 20-30 minutes understanding mutual funds and finding the right mutual fund, together with the intention to hold them for 2+ years, mutual funds are great.

Why great? Because they almost give you twice of how much-fixed deposit will give

Bad news – I will not explain and help you choose the right mutual fund in this post.

However, you can refer here: Guide to Picking the Right Mutual Fund

Mutual Funds are very complex and difficult to understand

I will simplify mutual funds for you and you figure out if they are really complex or not.

  1. Companies get money from 2 sources: Loans (called debt) and selling shares (called equity).
  2. From the perspective of a person who is investing, loan (debt) is much safer than shares (equity).
  3. Investing all money in 1 company (concentrated)is very risky than investing in multiple companies(diversified).
  4. Mutual Funds are diversified(multiple companies) funds investing in either equity or debt or both.
  5. Equity Mutal funds mean invested in equity (riskier side), debt mutual funds mean invested in loans (safer side). Others can be hybrid, which is a mix of both.
  6. Returns increase as we go on the riskier side. Debt gives +/- 10-12% returns on average per year and equity gives up to +/-30% or even more/less.

That’s all folks. You now have the answer to both commonly stated facts. I will leave you to decide. In case you have any other questions, please leave comments. I will be happy to help

Be back with more 🙂

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