How do Mutual Funds earn you Money

                               
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We
are both excited and nervous to share the fact that many of our readers have come
back to us asking about Equity Investment through Mutual funds. Excited
because our readers are getting involved and being informed about this
wonderful instrument of saving. Nervous if we will be able to deliver the
knowledge in best digestible way.  We are
going to educate how the Mutual Funds (MFs) work in terms of returns they earn.
Because there are linked to markets, the returns that MFs give is not a
straight line like below –

But like an graph below, where the returns go up and down
all the time. More like this –

                                  If you see both the charts
end at 150 but one is simple-straight line while the other is with
ups and downs, this up and down is what is perceived as “Risk”. More on
that later! Now we hope you will understand that your monies will not keep
going up all the time but there will periods that will have no returns or
Negative returns too but eventually MFs turn out to be winners in the end!

                                     Enough of fiction, Let us now take a real example of a
Mutual Fund and see how it performs, I have taken Sundaram Select Midcap Fund for
this purpose. Why this fund? Because it comes from the reputed TVS family,
which has companies like TVS Motors, Sundaram Fasteners, TVS Tyres, Sundaram finance and many more under its
belt, all of which have created huge wealth for its investors. Therefore, it is
prudent we give our money to such businesspersons who have pedigree of performance and quality.

Sundaram Select Midcap fund was launched in 2002 and has
given returns of 29% since then. Well, let us first understand what a 29%
return would do to your money. Below is the comparison of Rs 1,00,000 deposited
in FD at launch of this fund and deposit of Rs 1,00,000 in this fund.

If you are smart, you will understand that you would have
earned an excess return of Rs 41,94,000 by simply choosing the right instrument
of saving!

However, the returns earned were not smooth and investor
would have gone through a lot of “ups and downs”, volatility in other words. For want of data, we can only project the returns of this fund
since 2007. From 2007 until today only two major “BAD”events happened that affected
the market returns

Below graph shows the Yearly returns that this fund gave –

You would notice that this fund