“All Mutual Funds are subject to market risks, and read all schemes related to documents carefully.” Undoubtedly, every individual reading this article must have seen or heard this disclaimer before. A quite obvious line as nothing comes at free of cost. But a careful and systematic planning can make something out of nothing. Before we proceed further, we must understand that what do we mean of Mutual Funds and how is it mobilising the funds within the capital market?
Mutual fund is a professionally managed collective investment vehicle that pulls money from many investors to buy securities and it’s small like an avenue that lets you diversify investments across different asset classes. Within an asset class the investors don’t have to break their heads over it or all on your own because it is these professional money management that are sitting at mutual fund desks that manage those funds. The primary advantages of mutual funds are that they provide economies of scale, a higher level of diversification, they provide liquidity, and they are managed by professional investors.
Introduced in 1963 when Government of India has launched Unit Trust of India under the act of Parliament. The first mutual fund scheme was introduced in India by UTI was Unit Scheme in the year 1964. It was then in 1987 that PSU such as State Bank of India, Punjab National Bank, Canara Bank etc. and other non-UTI segments such as General Insurance Corporation of India (GIC) and LIC entered the market and established public sector mutual funds. Started with almost 6700 crores worth asset under management, it has grown and established an integral part for the economy by recording almost 23.96 trillion worth assets under management by 2018.
A mutual fund house is both an investment as well as an actual company. This dual nature seems to be strange but it is no different. When an investor buys a unit from it, it is actually buying the ownership of the mutual fund company and its assets. Investors, generally, earn returns in the form of dividend on stocks and interest on bonds as well as in the form of capital gain.
Statistically, as per the report by Association of Mutual funds of India (AMFI), India’s mutual fund industry has grown 12.5% annually on average, outperforming the growth clocked by the world and developed regions by more than double in last past 10 years. In fact, a rising equity market, low rates on traditional investment products like deposits, a high decibel investor awareness campaign from AMFI and a fine job from the retail distribution community in bringing investors through the SIP route, all of which have contributed towards the growth of the industry. Even if we draw the careful and comparative analysis of the schemes being provided by the Mutual funds and its potential alternative investment instruments, we can certainly say that the Mutual Funds have performed satisfactory. Say for example, the return on saving accounts has never gone beyond 4% while the returns on liquid funds have never go below 4.75% on an annual basis. As a result, people have started realising the potential gradually and shows their inclination towards this. Or even if compare the fixed deposit with that of mutual funds scheme, interestingly, mutual funds is proved to be better in terms of its annual returns it has provided with much more liquidity elements which remains an issue in fixed deposit.
Despite of this, it is still at the early stage of growth and still need to harness the power and abilities of this financial intermediary in Tier II and Tier III cities. But this can only be possible if government would focus more on penetration of financial literacy among individuals especially in those areas that lie outside metro political cities. Further, tendency of the individuals to still rely upon savings accounts than to any other means of investment is still a major problem.
But nevertheless, a consistent effort to induce financial inclusion and to create awareness about SIP (Systematic Investment Planning) are constantly creating a buzz and has been successful in achieving so.
(Written by Ayush Bansal for The Connectere)
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A commerce undergrad at SRCC, an avid reader who loves to express his critics on geopolitical and financial episodes. Believes in passion and always strives to achieve more than what he’s capable of.