Apr 26, 2017 3 min read

How Stock Market Affects Mutual Funds in India?

Know how the stock market and mutual funds are connected, and which one should you opt for.
Whenever the stock indices fluctuate, the Indian mutual fund industry faces a great haste by the investors as they feel insecure for their money invested in the funds. Timing the market is one of the major factors in trading, but is it safe in mutual fund investments? Should an investor time the market and keep on trading mutual funds just like individual stocks? This is an important factor which needs to be considered. Do you want to know what should you do when stock market fluctuates and how does it affect your mutual funds? If yes, then read the blog completely.

Stock Market & Mutual Funds -

Are They Relevant? You might be having a query in mind that, are these two different markets related to each other? The answer is yes. The stock market as well as the mutual fund industry are associated with each other in a sense that performance of one affects the performance of other. The stock market is the place where the stocks and shares of the companies are being traded, and mutual funds are the programmes which invest the pooled money of investors in these stocks. Accordingly, both the industries are based on one another. Because of the size of the investment, the mutual fund has a great impact on the stock prices and thus on the stock market.

Impact of Stock Market Movements on the Mutual Funds

When the stock market is crashed, the investors face huge losses due to the falling prices of the shares they have purchased. Mutual fund too invests in the stocks and shares traded in the exchange, and thus the values of the funds are also reduced. But does they affect the investors? The answer to this question can’t be given in a word.

Mutual funds India have investments in several stocks and other instruments due to which the capital of investors invested is diversified. When the market crashes, it may not be necessary that the prices of the stocks in which the fund has investment get reduced. There is a possibility that the prices fall for such stocks in which your mutual funds don’t have investment. Accordingly, believing that with the falling stock market your fund's value declines is a myth.

Timing the market in case of mutual fund investments by stopping and starting SIPs with market fluctuations won’t work for you ever. Mutual funds are planned investments which work on some specific principles and trading cannot work on them. If you time the markets unnecessarily, you may lose the benefits of compounding and rupee-cost averaging.

Stock Market & Mutual Funds- Which is Better?

This is a common question asked by various investors in India. The query can be resolved with the following factors which prove mutual funds are a better option than direct investments in the stock market.

1. Diversification: Mutual Funds invest the pooled capital of the investors in different investment avenues to reduce the risk exposure to one investment. This way, the risk is minimised, and returns are increased as the earnings are gained from several sectors, companies, or instruments.

2. Transparency: The MF industry is managed by the SEBI and AMFI regulations and thus, assure safety and security of the capital. Further, the investors of the mutual funds are given adequate knowledge and regular updates regarding their investments.

3. Economies of Scale: Mutual Funds take the advantage of the buying and selling size and reduce the cost of the transaction for the investors. This way, the investors also gain the economies of scale to earn a good income on their investments.

4. Divisibility: One cannot buy the shares of some major companies whose cost is very high. The mutual fund allows the investors to buy such funds as they invest money as the whole in such companies and investors gain returns as per their share in the investment.

5. Liquidity: The mutual funds allow the investors to redeem or withdraw their funds whenever they require which is credited to their bank accounts automatically. Accordingly, the investors do not get their funds locked until maturity.

6. Professional Management: In the case of the direct investments in the stock, the investors need to gain knowledge of trading or hire a highly paid advisor. But in mutual funds, the fund managers who are professionally trained and experts in managing funds take care of your money and invest them in the best investment opportunities.

Thus, you can conclude here that mutual funds are a better alternative of the stock market, and investing in them will definitely help you in achieving your financial goals with ease.

If you further need assistance for mutual fund investments, MySIPonline provides free financial advisory services. You must get associated with us and start planning now.