Mutual Funds Investment Reality for Beginners in India - YouTube

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Hello, my name is Mukul

And you are very welcome to the Asset Yogi

Friends, this video is going to be a special one

As we were requested for a long time

To make a series on mutual funds

Just like our master investor series is going on

If you have a keen interest in the stock market

How to analyze the stock and select them?

Then do watch our master investor series

Which is free of cost

We talk about fundamental analysis and long term investment there

On the other hand, if you want to invest in mutual funds

If you have an interest, then you can follow our mutual funds series

I have already done some videos on mutual funds

I'll do their numbering, you can also follow them in this series

In this particular video, we are going to discuss the limitations of mutual funds

Specifically about two limitations

See when we talk about mutual funds

Then you must have heard about the ad on TV and radio

One line is spoken in it

"Mutual Funds are subjected to market risk. Please read the offer documents carefully before investing"

Now this line is spoken so loudly

And with that, we are habitual of listening to that

So we simply ignore that

People understand market risk often

That is the stock market, some money is being invested

So we have a little bit of risk

But you can surely make money in the long term

But there are some limitations, that we don't understand upfront

I will talk about two weaknesses just like this in this video

So if you want to understand mutual funds carefully

Then it is important to understand these two things

Please watch this video till the end

Let's start!

Other than this, we have a very common query

that if we want to invest or trade in shares,

then for that where should we open our demat or trading account

Then I recommend you to open it with some discount broker

where brokerage charges are minimal

and delivery charges are zero

Latest offers, recommendations, and links

Where to open your Demat account

You'll find them in the description

So let's talk about the first limitation of mutual funds

As I have already said in the introduction

that it is important to carefully read the offer document

So in offer documents, one thing is mentioned that

on average, how much cash position does a mutual fund will maintain?

And how much money it will invest in the market?

So why is this cash position is maintained?

Because assume some investors like you and me

We may require that money after 2 or 3 years

And we want to withdraw the money

So for these types of investors and the redemption, that money is kept

And it is kept 2 to 5% on average

Rest 95% of your money will stay invested in the markets

But sometimes if the fund manager wants, then he can increase the amount

Because he thinks that there could be some buying opportunities in the stock market

This means if he has doubts about falling prices of some stocks

Then he can keep some more money as cash

But you will see mostly that it goes 5 to 10% approx

No mutual fund keeps more than 10% as cash

But there can be some exceptions also

Like in a liquid fund, for example, it is necessary to keep 20% cash

Because people invest for a short time in that

That's what liquid funds mean that investment is being made in the short term securities

In general equity funds, 5 to 10% of the money is kept in cash

Now it has advantages and disadvantages too

The benefit is that if the market rises, and all the money is invested

Then mutual funds will get good returns

But if the market falls, then the buying opportunity

that comes to mutual funds, almost ends

So understand this weakness carefully

From where does a mutual fund get money

It comes from people like us

When do we people invest?

When the market rises, and many ads goes around

When many people get interested in mutual funds, then more money starts to come in

When more money comes in, then the market is up anyway

If the fund doesn't want to keep money in cash

Then they will invest all the money in the stock market

If they invest in the stock market, and because the market is high

Then they will purchase stocks high

This means that when its price rises

Then by design, they would have to purchase a high amount

Second, when do the mutual funds have to withdraw more money from the stock market?

When people withdraw more money from the mutual funds

So if the economy is down

and many people start to withdraw the money from mutual funds

Then obviously mutual funds have to withdraw the money from the stock market

So because the market is down and the prices of the stock market are down

Then mutual funds have to withdraw the money at that time too

So in a way, you can understand that mutual funds have a limitation

That when the stock market starts to get up to speed

Then also they have to keep investing money

As a retail investor, you and I have the advantage

That we can hold the cash

And we can hold the cash as long as we want

But mutual funds have a mandate that they have to keep the money invested

So this was the first limitation of mutual funds

Now we will talk about the second limitation

That is the problem of big money

Now the mutual funds have a lot of money to manage and invest

That it becomes a problem for them

In fact when a mutual fund gets very bigger then it is shut down

But what is this problem?

You may know about Berkshire Hathaway

which is a company of Warren Buffet

It invests in a big company

So Berkshire Hathaway has this problem too

And Warren Buffet acknowledges this himself

In 1999, in an annual shareholder meeting, which is quite a sort after event

Someone asked a question to Warren Buffet

That you may have quoted this somewhere

that a small investor can earn more than 50% returns

So the answer of Warren Buffet was that

He knows more than half a dozen people who can earn more than 50% returns

If they invest their time and intelligence in that

If they are managing only 1 million dollar

If they are managing 100 million dollars or 1 billion dollars

Then it will be very difficult for them too

And why will this happen, let's understand

See when a mutual fund has to invest 1000 crores, 2000 crores or 10 thousand crores

And if it finds a small company that can grow

See if the base is small, the company is small then it has a wide scope of growth

Then mutual funds let's say if they have to invest 1000 crores in a company

And the total valuation of the company is 200 crores

Then they can not do it

And let's say if the valuation of the company is 200 crore

And they will invest 100 crores in that

Then they will have a 50% stakes

So any mutual fund doesn't want to be the majority shareholder in any company

And let's assume that mutual fund invested a small amount of 10 or 15 crores

in that company and let's say the returns are 50%

So overall, the asset under management of mutual funds is 10000 crore

Then what has the effect of this on mutual funds?

Maybe it will only affect 0.2%

So by design mutual funds cannot invest more money in a small company

And by design, they cannot earn many returns

A retail investor doesn't have this limitation

Investors like you and I can analyze their stocks themselves

The purpose of starting the master investor series was this only

That we can empower people so that they will understand the market

Analyze the stocks

So you can follow our series

The purpose behind making this video is not to discourage you

From investing in mutual funds

But every product has its benefits and limitations

We need to know them

Similarly, what are the limitations of mutual funds

We need to know them

So that we can decide when to enter and when to exit

So I will keep bringing informative videos like this in this series

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Tell your friends and family members about this series

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Let's meet in the next informative video

Till then keep learning and keep earning

And be happy as always