A young man wants to know if mutual funds are better than direct equity, and why should we pay fund management charges or whatever is termed ‘expense ratio’. Well, most of you reading this know the answer.
You pay because you are not an expert in investing, and somebody else is managing money for you, of course, for a fee.
Why not place the money in bank deposits and small savings schemes which do not charge for managing my money?
The rates of return may differ. And it is not wise to put all your eggs in one basket.
But I also need to ensure that the rent I pay to keep eggs safe is not too high.
The trend of thought reflects in the distribution of household savings in India. Cash seems to have bounced back a year after demonetisation. Safe options are preferred.
Covid19 has driven home the importance of financial security and keeping your money safe. It matters all the more when one is planning for retirement. It is a long-term goal, with a lot of uncertainty in between, and one cannot afford to be left high and dry when one quits working.
Zerodha recently revealed its plans to introduce low cost index funds in the Indian market. These are popularly called vanguard funds.
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Vanguard is a company in the USA, which offers mutual funds with the lowest expense ratios.Vanguard has no plans to enter the Indian market as of now, but the term ‘vanguard funds’ has become generic for low-cost funds.
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The young man is not satisfied. He is serious about starting his investment journey in the right way.
How can they keep the costs low for specific funds? What are they compromising on or keeping at a minimum level?
Normally, the fund manager keeps churning the funds to beat the index. However, if you leave the fund value to rise or fall with the index, the cost of administration is low. Hence, these are called index funds.
Why are they considered good for retirement planning?
Mutual funds do not encourage fund managers to take big risks. Overall, your money grows over the long-term with power of compounding, and movement of stock indices. Index funds are considered safe in the long run.
How are index funds different from debt funds?
Debt funds invest only in fixed return instruments which offer fixed returns.
Index funds invest in stocks and bonds and are tied to a chosen index.
Related post : Retirement Plan- What do you include
Which are the best index funds in India?
We do not recommend products, but this article will give you an overview of fund performance.
Update: Vanguard introduces new active funds for advisory clients