Mutual funds have come a long way in India. From being a single player industry for almost 23 years, it has 32 players today. Investors have a wide variety of schemes as well as fund houses to choose from.
In fact, it will not be wrong to say that mutual funds are fast emerging as an ideal investment option for investors with different risk profile, investment objectives and time horizon. The only thing an investor needs to do is to pick a few funds of the shelf and achieve his investment objectives, both short-term as well as long-term.
Today, mutual fund industry manages assets worth Rs 3,50,00 crore (Rs 3500 billion). If one were to compare it with the bank deposits, the industry has a long way to go. At the same time this gap signifies the potential that this investment vehicle has to grow going forward.
As making money grow at a healthy real rate of returns i.e. returns minus inflation becoming increasing difficult through traditional instruments, more and more investors are likely to adopt the mutual fund route for investing in various asset classes.
Though mutual funds have proved their worth the world over, there are certain perceptions that have stopped investors from investing through this wonderful investment vehicle.
Let us analyze some of the reasons due to which investors have failed to entrust their hard earned money to mutual funds and also discuss as to how these common mental hurdles can be overcome:
I don't have the capacity to take risk of investing in mutual funds
Though over the years mutual funds have expanded their product line to suit just about any and every type of investors' needs, a section of investing public still feels that mutual funds invest only in equities and hence are a risky proposition.
The fact, however, is that mutual funds offer many options for conservative investors too. There are income funds, liquid funds, floating rate funds, capital protection funds, derivative funds and Fixed Maturity Plans.
While some of these are excellent options for parking short-term funds, others can be an important tool to practice asset allocation. Then, there are Monthly Income Plans for those who do not mind some exposure to equities to improve overall returns.
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Therefore, it is wrong to think that mutual funds are meant only for those who can take risk. Besides, the tax efficiency of mutual funds makes them even more attractive option.
Why should I invest in equity funds when I can earn better returns by investing directly in the stocks?
Yes, it is true that if one has the capability to select the right stocks and the ability to monitor and analyze the impact of various events on the growth of the companies in the portfolio, the returns can be better compared to a diversified vehicle like an equity fund.
However, it is also true that if the stock selection is not good, one gets exposed to much higher risk compared to an equity fund.
It is a known fact that investing in equities requires skills both in terms of stock selection as well as monitoring the progress of the companies included in the portfolio. The stock prices move to anticipate events as well as reflect current events. Therefore, considerable research is carried out trying to forecast the performance of the economy, an industry and a particular company. For someone who is not familiar, it can be quite overwhelming to manage a portfolio of stocks.
That's why a fund manager, who has access to in-depth research, is able to make rational decisions about which stock to include in the portfolio and which to sell. Besides, investing in a mutual fund rather than directly in stocks has many other advantages. Apart from being an easy method of investing, it is much easier to track performance as one has to track only one price i.e. NAV instead of several stock prices.
Besides, mutual funds offer a wide variety of equity funds ranging from diversified to specialty funds enabling investors with different risk profiles to choose the right ones and achieve their investment objectives.
Even for aggressive and knowledgeable investors, there are plenty of options like sector funds, thematic funds, contrarian funds and exchange-traded funds. Therefore, mutual funds can play an important role even for hard-core equity investors as they allow them to balance risk and reward while designing their portfolios.
I don't want to lose my peace of mind by moving money from the bank and /or bonds to mutual funds.
Investors often feel that it is much safer to invest in banks, insurance or bonds than in mutual funds. The fact, however, is that mutual fund industry is a very well regulated one and that should be a big comfort for investors. The regulations governing the industry are well defined and also Securities and Exchange Board of India is doing a great job of monitoring and ensuring that schemes are managed on a day-to-day basis in the interest of investors.
Besides, there are trustees who have the responsibility of safeguarding mutual fund assets on behalf of the unit holders. Their other main duty is to ensure that the trust is managed within the terms of the trust deed. Some of the other responsibilities of the trustees are appointment of an asset management company approved by the board, to float schemes for the MF and manage funds mobilized under the schemes. The trust deed clearly spells out the duties and the responsibilities of the trustees.
One of the major benefits of investing in mutual funds is the wealth of information that they provide to existing as well as prospective investors. Taken together, the various reports provide investors with vital information regarding the financial status and the manner in which the fund is managed.
In fact, MF prospectus, annual reports and performance statistics are key sources of information most investors can use for selection and monitoring process. To a new investor, all this information may seem overwhelming.
However, regulations governing the industry have standardized the reports. Once one knows where to look for information, the location will hold true for all the funds.
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Remember, banks and insurance companies can go bankrupt, but by definition, mutual funds cannot.
I am not familiar with mutual funds
No doubt, most investors who have been investing in traditional instruments over the years are not very sure as to how a mutual fund functions. Mutual funds provide a simple way to access different asset classes in a very simple and easy manner. In fact, mutual funds are investor friendly as they provide the best in terms of variety, flexibility, diversification, liquidity as well as tax benefits.
Besides, through MFs investors can gain access to investment opportunities that would otherwise be unavailable to them due to limited knowledge and resources. Another important point is that MFs themselves are accessible to investors of varying income levels.
One can begin an investment programme with as little as Rs.50 or Rs. 100 in certain cases. However, a successful mutual fund investing requires time commitment. A serious investor needs an option that will last longer than a week, a month or a year.
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All those investors who have stayed away from investing in this wonderful investment option called mutual funds; there is a need to reconsider their decision. Today, mutual funds have the potential to fit into everybody's portfolio. So, go ahead and experience the world of mutual funds. If you select the right options, all your dreams can become a reality.
The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hemant.rustagi@moneycontrol.com
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