Investing in mutual funds is a smart and organized approach to managing money. Anyone and everyone interested in Personal Finance needs to know about Mutual Funds. A Mutual Fund essentially collects money from retail & institutional investors to invest in a combination of debt and/or equity paper. The Mutual fund is managed by a fund manager. A Fund manager is professionally qualified who strives to generate the best possible "risk adjusted return ". A fund manager is assisted by a team of experienced & well-qualified research analysts. A fund manager may manage several schemes at a time. The entity employing the Fund manager is called the Asset Management Company (AMC) or the Fund house. In India, the AMC has to be a trust.
History of Mutual Funds
Mutual Funds was first Introduced in the year 1963, in the form of UTI, by an act of parliament called the UTI Act. Today, Mutual Funds have come a long way. It was in the year 1994-95 that private sector Mutual Funds, with the same tax benefits, were allowed. SEBI (Securities and Exchange Board of India) was established in the year 1992 and came out with the first set of regulations (for Mutual Funds) in the year 1996. Today we have 41 Asset management companies and combined assets under management of over 20 lac Crore.
Role of Mutual Funds
- To provide safe and decent real returns to the investing community.
- To assist in capital Formation in the economy.
- Investing in various Debt and equity paper of Government and quasi-government (PSU) body corporates and Banks.
- Assists large scale corporates to deploy large sums of money for a very short period of time, from a few days to few weeks.
- To provide alternate route of investments to retail, HNI's and corporates.
Future of Mutual Funds
The Mutual fund industry has an immense potential for growth. Currently 41 AMC's manage over 20 lac crore of investors wealth. Assets under management (AUM) as a %age of GDP at 7%, is extremely low in India. In Developed countries, this ratio is very high. It is 91 %( US), 51 %( UK) and 114 %( Australia). Similarly, household penetration of Mutual Funds in India is abysmally low at 5%. Whereas this is over 55% in countries like the US. We at Ideas 2Invest expect a high double digit incremental growth of Mutual Funds in India for at least another 15-20 years.
Advantages of mutual funds
- Highly regulated sector. SEBI guidelines and regulations provide transparency and liquidity.
- Small investments of just Rs. 500 every month in mutual funds can generate wealth amazing wealth.
- Investor protection and education of retail investors are overseen by Securities and Exchange Board of India (SEBI)
- Under sec 80CC of IT, Act ELSS (certain tax saving Mutual Funds) enable investors to save tax.
- Several risk mitigation tools like STP, SIP, SWP, Balanced Funds etc are at the disposal of investors.
- Availability of relevant information and negligible paperwork makes investors at ease.
Why Retail masses, have stayed away from Mutual Funds?
- Mutual funds are considered to be risky.
- Retail investors enter equity Mutual Funds when the investment cycle has peaked. Losing a lot of hard earned money in the following correction or downturn.
- Risk averse investors Panic with minor fluctuations & exit in a hurry.
- Incompetent mutual fund advisors not able to judge the risk appetite of the investors.
- Incomplete or no financial literacy.
- SIP and STP are not adequately advised as risk mitigation tools.