What is a mutual fund?

Mutual fund is a professional approach to managing money. It entails “collecting money from investors, both retail and Institutional to invest in a combination of debt and equity for savings and returns”. This is executed by a competent fund manager, who is assisted by an experienced and qualified research analysts. In India, Mutual Funds is a “Trust” Business and these services are offered by various asset management companies.

History of mutual funds in India

Since their debut, when the government of India introduced mutual funds in the year 1963 ( in the form of UTI ) mutual funds have come a long way. In 1987, various government companies introduced their own mutual funds plans. As globalization opened up new doors of liberal business policies, Kothari Pioneer (which has since been taken over by Franklin Templeton ) was the very first private sector Asset Management company to be registered in July of 1993.

The role of mutual funds

  • Structure a scheme and invest to meet the “investment objective” of the scheme.
  • Adhere to various rules and regulations of the market regulator (SEBI).
  • Enable retail investors to create wealth. This, otherwise is not easy for investing public.
  • Benefits government(s) and companies by investing in various Debt and equity paper.
  • Providing companies the most important factor of production i.e., “Capital”

Advantages of mutual funds for investors

  • Investment based on in-depth research, providing liquidity and transparency.
  • Diversified investment portfolio, even a small investment of Rs.1000/- invested monthly in mutual fund scheme may generate wealth.
  • Mutual Funds are highly regulated by Securities and Exchange Board of India. SEBI, gives maximum importance to investor protection and even Investor education/awareness.
  • Equity linked saving scheme (ELSS) enable investors to save tax under sec 80CC of the IT Act.
  • Several risk mitigation tools are at the disposal of the investors. Tools like Systematic investment plan and Systematic transfer plan reduces risk
  • Investors are at ease due to negligible paperwork and all relevant information being readily available.

Future of mutual funds in India

Mutual funds industry has shown a remarkable growth over the years. In the present times, there are more than 46 Management Companies which manage the assets of their clients which is over 15 Lac Crores . The sector has an immense potential for growth. According to Asset Under Management vs Gross Domestic Ratio, India stands at considerable low of 7% while the developed countries like US, UK and Australia are at 91%, 51% and 114% respectively. These figures are for the year 2015. Apart from this, more than 85% of AUM is received from the major 15 cities. Considering various developmental factors, the growth of mutual funds in India is likely to further consolidate and we can expect the Industry to thread bearer of the Financial Services Sector.

Why Retail masses have stayed away from Mutual Funds

  • Mutual Fuds are perceived to be Risky.
  • Retail Investors enter when the markets are significantly high.
  • Investors do not have a longer time horizon and minor fluctuations make them panic and exit.
  • Mutual Fund advisors are not competent enough to suggest products that is consistent with Risk appetite of the Investor.
  • Low levels of Financial literacy.
  • Risk Mitigation tools like SIP and STP are not well advised.

However, the current trends are undergoing a change for the better. Advisors are well trained and started aggressively pushing products like SIP’s. Retail Investors also seem to have embraced SIP and STP. Besides, with a GDP growth of over 7%, stocks are doing much better than the developed world and most of the developing/ emerging economies. Certain regulatory changes have also been instrumental in making Mutual Funds the foremost choice for investment and Tax saving.

Penetration of Mutual Funds in India

Penetration of Mutual Funds