Mutual Fund Investment VS Other Investment Options- What Should You Select?

The number of mutual fund investors and AUM (Asset Under Management) has reached record levels in the past few years in India. The growing financial awareness is one of the primary reasons why investing has gained the status that it rightly deserves.As mutual funds meet the investment needs of every type of investor, they have become a popular starting point for new investors. But apart from mutual funds, you have many different investment options that you can explore. How do these investment options fare against mutual funds?Before comparing different asset classes, it is essential first thoroughly to understand mutual funds. Take a look-

Consider a scenario where you have a friend who has excellent financial knowledge. You ask that friend of yours to take your money and invest according to his expertise. In simple words, this is what mutual funds do.AMCs or Asset Management Companies offer many different types of mutual fund schemes across categories. Each of these schemes has a fund manager. The schemes pool funds from investors like you, which is then invested and managed by the fund manager.Every mutual fund scheme has an objective. The fund manager is required to invest the funds collected from the investors as per the fund objective.

The fund objective is defined by the category under which a particular scheme falls. While there are many different types of mutual funds, let us focus on three of the most popular choices in this post.

1. Equity Funds These funds invest your money in the equity market. They are further divided into small-cap, mid-cap, and large-cap funds. Apart from these, there are also multi-cap funds that invest in stocks across market capitalizations. Even ELSS (Equity-Linked Savings Scheme) is a type of equity fund eligible for tax deduction under Section 80C of the IT Act.The primary objective of most equity mutual funds is long-term capital appreciation. However, they are also known to be the riskiest forms of mutual funds.
2. Debt Funds These mutual fund schemes invest your money in debt-based assets such as bonds, certificates of deposit, etc. The debt funds are further divided into categories like liquid funds, short-term debt funds, GILTs, credit risk funds, fixed maturity plans, and more.Debt fund objectives can range from achieving short-term financial goals to earning steady returns with a low-risk ratio. As compared to equity funds, debt mutual funds are significantly safer.
3. Hybrid Funds Hybrid funds offer a combination of equity and debt investments. For instance, an equity-oriented hybrid fund will make most of the investment in equity markets. The rest will be divided into debt and other asset classes. Such funds are mandatorily required to invest a fixed portion of their AUM in the asset class orientation they select.The objective of hybrid funds can vary as per the orientation of the fund. With regard to risk profile, hybrid funds generally fall between pure equity and debt funds.

To effectively compare mutual funds with other asset classes, you should also know what Systematic Investment Plan or SIP is. You can think of SIP as a mode of investing in any mutual fund scheme of your choice. However, if you don’t want to invest a lump sum amount in mutual funds, you can select SIP to invest smaller amounts at regular intervals.With most schemes, the minimum SIP amount is only Rs. 1,000. SIP is one of the top reasons for the growing popularity of mutual funds as it allows investors to start investing from an early age.
Now that you have a brief understanding of mutual funds, let us have a look at other popular asset classes-

• Equity Equities or stocks have a reputation for being highly rewarding. But investing in equities and earning higher returns are two very different things. It takes a lot of technical knowledge and experience to select stocks that could generate high returns in the future. Equity is one of the most volatile asset classes and can cause significant losses if you don’t understand how the market works.
• Real Estate Real estate has always been a popular investment option in India. But the rising real estate prices across the country makes it an ideal choice only for a tiny portion of investors. Also, a decision about purchasing a property needs to be taken with utmost care. Right from the cost of the property, geographic location to the rental yield, there are several vital considerations. Investing in real estate should only be considered by investors with a long-term investment horizon.
• Gold The yellow metal has also been a traditionally popular investment option in India. You can invest in gold bars, coins, jewellery, or even digital gold. But if you go with physical gold, security will always be a cause of concern. Even with digital gold, you will be responsible for timing your buy and sell.As an asset class, gold is highly volatile. While the price has risen significantly in the last couple of years, there is no saying as to where the prices of gold will be in the future.
• Alternative Assets There are other alternative assets such as private equity, derivatives, structured products, hedge funds, etc., that generally rely on the asset classes listed above. As a result, investing in these assets will also need a good amount of knowledge. Note that some of them come with a high level of risk and shouldn’t be considered if you are new to the financial world.

There is no particular investment option that suits every investor. But there is no denying the fact that mutual funds are the closest to what can be considered an investment for everyone. With so many different types of mutual funds schemes now available, it is very much possible that every investor could find something that perfectly meets their requirements and expectations the best.While you can also consider investing in other assets, ensure that you thoroughly understand the risks associated with every investment to avoid losing your hard-earned money. The guidance of a professional investment advisor is highly recommended if you decide to go ahead with any of these options.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.