As a man was walking past the elephants, he suddenly stopped, confused by the fact that these huge creatures were being held by only a small rope tied to their
front leg. No chains, no cages. It was obvious that the elephants could, at anytime, break away from their bonds but for some reason, they did not.
He saw a trainer nearby and asked why these animals just stood there and made no attempt to get away. “Well,” trainer said, “when they are very young and much
smaller we use the same size rope to tie them and, at that age, it’s enough to hold them. As they grow up, they get conditioned to believe they cannot break away.
They believe the rope can still hold them, so they never try to break free.”
Moral of the story:
Like the elephants, how many of us go through life hanging onto a belief that we cannot do something, simply because we failed at it once
before? Failure is part of learning; we should never give up the struggle in life.
Investing in a mutual fund is like an investment made by a collective. An individual as a single investor is likely to have lesser amount of money at disposal than say, a
group of friends put together. Now, let's assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to
make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investors' money on their
behalf into various assets towards a common investment objective.
Mutual Fund is a vehicle that enables a collective group of individuals to:
Pool their investible surplus funds and collectively invest in instruments / assets for a common investment objective.
Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
Benefit from the economies of scale which size enables and is not available on an individual basis
Benefits of investing in mutual funds as under :
Professional Management : Mutual funds business is managed by highly skilled professionals whose job and responsibility is manage money. Thus they tend to do a
better job as compared to most individuals.
Diversification : One particular scheme of a mutual fund invests in fairly diversified set of assets, like a debt mutual fund will usually invest in 15-20 varied
instruments, so would a equity fund do in 50-60 stocks. Thus the risk is widely spread.
Informed decisions : Since the money is managed by a team of skilled professionals, these people meet the managements, competitors, understand the financial
statements in great details, talk to various market participants, and thus they are better positioned to take well informed decisions.
Failure is a Part of Learning