It is a foggy and chilly winter morning in Punjab, a terrace filled with colourful kites waiting to soar in the sky. Two cousins, Guddu and Gagan, are on the terrace, each holding ‘manjha’ , a spool of kite thread, waiting for the fog to be cleared so that they may enjoy flying kites. At the moment, they are enjoying the ‘Maghi’ (Makar Sankranti) delicacies such as groundnuts, ‘gajak’, ’tilgud’, and popcorn served with hot tea.
While waiting for the clear sky, they get into a conversation like this:
Guddu: (sipping tea) This fog is so stubborn! I was hoping we’d be flying our kites by now.
Gagan: (laughs) Yeah, same here. Makar Sankranti without flying kites doesn’t feel right. But I guess we have to wait. The fog should clear soon.
Guddu: True. In the meantime, remember last week you were asking about mutual funds? Let me explain it to you while we wait. Trust me, kite flying steps will make it easier to understand.
Gagan: (interested) Really? Alright then, I would love to hear it.
Guddu: Okay, think of kite flying as investing in mutual funds. The first step to flying a kite is choosing the right kite and thread, right? Similarly, the first step in mutual fund investing is choosing the right fund based on your financial goals.
Gagan: (nodding) Makes sense. So, I have to pick a kite that suits the wind and a mutual fund that suits my goals. Right?
Guddu: Absolutely, correct!
Gagan: That’s interesting; what’s next?
Guddu: The second step in kite flying is ensuring the thread is strong and the knots are tied properly. In mutual funds, this means understanding the fund’s risk and ensuring your money is invested in a well-managed fund.
Gagan: Oh! Risk, got it. Like you wouldn’t want a weak thread, you don’t want to invest in a poorly managed fund.
Guddu: Exactly! Now, when you start flying a kite, you let it out slowly, balancing the tension between the wind and the thread. In mutual funds, this is like starting small with a SIP (Systematic Investment Plan). You invest small amounts regularly instead of putting in a large sum at once.
Gagan: Oh, so SIP is like feeding out the thread slowly, keeping control while adjusting to the wind or market.
Guddu: Precisely! And just like you guide your kite higher by pulling the thread strategically, you need to monitor your mutual fund investments regularly. You can adjust your investments if needed, depending on how the market performs.
Gagan: What about when the kite goes off-balance or starts descending? How does that fit in?
Guddu: Great question! When the kite descends, you pull back the thread and stabilise it. Similarly, markets can be volatile. Instead of panicking, you should stay patient/invested and make informed decisions to stabilise your portfolio.
Gagan: Hmm, patience and strategy, just like flying a kite.
Guddu: Exactly! And the final part – when the kite reaches its peak, you don’t cut the thread, right? You let it glide steadily and feel content. In mutual funds, this means staying invested for the long term to reap the best rewards.
Gagan: (smiling) I get it now. Kite flying and mutual fund investing both need planning, patience, and strategy.
Guddu: Absolutely. Oh look, the fog is starting to clear. Ready to put your kite and your new knowledge to the test?
Gagan: (laughs) Let’s do it! And maybe after this, I’ll start my SIP too.
Let us now understand what are the key takeaways for us from Guddu and Gagan’s conversation:
1. Clear Goals
Like choosing the right kite and thread, selecting a mutual fund aligned with your financial goals is the prerequisite of investing.
2. Risk
Assess the risk level of the mutual fund, the way you ensure the thread and knots are settled for flying the kite.
3. Investing
Systematic Investment Plans (SIPs) could be an efficient and consistent choice with small investments, much like releasing kite thread slowly and steadily.
4. Monitoring
Keeping the track of your investments and making the required adjustments in terms of amount, frequency etc. could be suitable for the investment, similar to guiding your kite as it faces changes in the wind.
5. Behaviour
As market fluctuations are inevitable, staying calm and invested; like handling a dipping kite, could be appropriate investment behaviour.
6. Benefits
In the manner you let your kite glide steadily at its peak, staying invested in mutual funds for the long term may help you reap better returns with the help of compounding and growth.
Apart from understanding the concept of mutual funds, we must also know the regulatory importance of the same, described as follows:
Mutual Fund Investments have various benefits, some of them are as follows:
1. Diversification
Mutual funds invest in a variety of assets, spreading risk across sectors and instruments. You may choose a scheme as per your financial goal from the various mutual fund scheme categories as defined by SEBI.
2. Professional Management
Fund managers with expertise handle investments, ensuring better decision-making than individual investors might achieve.
3. Flexibility
Options like Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP) and lump-sum investments cater to investors with different financial goals and capacities.
4. Liquidity
Most mutual funds allow easy redemption of units, ensuring access to funds when needed, for example the liquid funds.
5. Tax Efficiency
Certain mutual funds, like ELSS (Equity-Linked Savings Schemes), offer tax benefits under Section 80C of the Old Regime of the Income Tax Act.
6. Wealth Creation
Long-term investments in mutual funds can yield significant returns through compounding and market growth.
Wrapping Up
When investing in mutual funds, like kite flying, choose the right “kite,” meaning the right fund that suits your financial goals, and also select a safe “thread,” meaning the investment type or plan that matches your risk appetite. Expert guidance, just as you guide your kite in changing winds, can help you stay patient during market fluctuations and seek stability for your long-term investments.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch here: Rebalancing for Mutual Fund Investors
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
