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Savings form an important part of the economy of any nation. With the savings
invested in various options available to the people, the money acts as the driver
for growth of the country. Indian financial scene too presents a plethora of avenues
to the investors. Though certainly not the best or deepest of markets in the world,
it has reasonable options for an ordinary man to invest his savings. Let us examine
several of them:
Considered as the safest of all options, banks have been the roots of the financial
systems in India. Promoted as the means to social development, banks in India have
indeed played an important role in the rural upliftment. For an ordinary person
though, they have acted as the safest investment avenue wherein a person deposits
money and earns interest on it. The two main modes of investment in banks, savings
accounts and Fixed deposits have been effectively used by one and all. However,
today the interest rate structure in the country is headed southwards, keeping in
line with global trends. With the banks offering little above 9 percent in their
fixed deposits for one year, the yields have come down substantially in recent times.
Add to this, the inflationary pressures in economy and you have a position where
the savings are not earning. The inflation is creeping up, to almost 8 percent at
times, and this means that the value of money saved goes down instead of going up.
This effectively mars any chance of gaining from the investments in banks.
Just like banks, post offices in India have a wide network. Spread across the nation,
they offer financial assistance as well as serving the basic requirements of communication.
Among all saving options, Post office schemes have been offering the highest rates.
Added to it is the fact that the investments are safe with the department being
a Government of India entity. So the two basic and most sought for features, those
of return safety and quantum of returns were being handsomely taken care of. Though
certainly not the most efficient systems in terms of service standards and liquidity,
these have still managed to attract the attention of small, retail investors. However,
with the government announcing its intention of reducing the interest rates in small
savings options, this avenue is expected to lose some of the investors. Public Provident
Funds act as options to save for the post retirement period for most people and
have been considered good option largely due to the fact that returns were higher
than most other options and also helped people gain from tax benefits under various
sections. This option too is likely to lose some of its sheen on account of reduction
in the rates offered.
Another oft-used route to invest has been the fixed deposit schemes floated by companies.
Companies have used fixed deposit schemes as a means of mobilizing funds for their
operations and have paid interest on them. The safer a company is rated, the lesser
the return offered has been the thumb rule. However, there are several potential
roadblocks in these. First of all, the danger of financial position of the company
not being understood by the investor lurks. The investors rely on intermediaries
who more often than not, don’t reveal the entire truth. Secondly, liquidity is a
major problem with the amount being received months after the due dates. Premature
redemption is generally not entertained without cuts in the returns offered and
though they present a reasonable option to counter interest rate risk (especially
when the economy is headed for a low interest regime), the safety of principal amount
has been found lacking. Many cases like the Kuber Group and DCM Group fiascoes have
resulted in low confidence in this option.
The options discussed above are essentially for the risk-averse, people who think
of safety and then quantum of return, in that order. For the brave, it is dabbling
in the stock market. Stock markets provide an option to invest in a high risk, high
return game. While the potential return is much more than 10-11 percent any of the
options discussed above can generally generate, the risk is undoubtedly of the highest
order. But then, the general principle of encountering greater risks and uncertainty
when one seeks higher returns holds true. However, as enticing as it might appear,
people generally are clueless as to how the stock market functions and in the process
can endanger the hard-earned money.
For those who are not adept at understanding the stock market, the task of generating
superior returns at similar levels of risk is arduous to say the least. This is
where Mutual Funds come into picture.
Mutual Funds are essentially investment vehicles where people with similar investment
objective come together to pool their money and then invest accordingly. Each unit
of any scheme represents the proportion of pool owned by the unit holder (investor).
Appreciation or reduction in value of investments is reflected in net asset value
(NAV) of the concerned scheme, which is declared by the fund from time to time.
Mutual fund schemes are managed by respective Asset Management Companies (AMC).
Different business groups/ financial institutions/ banks have sponsored these AMCs,
either alone or in collaboration with reputed international firms. Several international
funds like Alliance and Templeton are also operating independently in India. Many
more international Mutual Fund giants are expected to come into Indian markets in
the near future.
The benefits on offer are many with good post-tax returns and reasonable safety
being the hallmark that we normally associate with them. Some of the other major
benefits of investing in them are:
Mutual funds invest according to the underlying investment objective as specified
at the time of launching a scheme. So, we have equity funds, debt funds, gilt funds
and many others that cater to the different needs of the investor. The availability
of these options makes them a good option. While equity funds can be as risky as
the stock markets themselves, debt funds offer the kind of security that is aimed
for at the time of making investments. Money market funds offer the liquidity that
is desired by big investors who wish to park surplus funds for very short-term periods.
Balance Funds acter to the investors having an appetite for risk greater than the
debt funds but less than the equity funds. The only pertinent factor here is that
the fund has to be selected keeping the risk profile of the investor in mind because
the products listed above have different risks associated with them. So, while equity
funds are a good bet for a long term, they may not find favour with corporates or
High Networth Individuals (HNIs) who have short-term needs.
Investments are spread across a wide cross-section of industries and sectors and
so the risk is reduced. Diversification reduces the risk because all stocks don’t
move in the same direction at the same time. One can achieve this diversification
through a Mutual Fund with far less money than one can on his own.
Mutual Funds employ the services of skilled professionals who have years of experience
to back them up. They use intensive research techniques to analyze each investment
option for the potential of returns along with their risk levels to come up with
the figures for performance that determine the suitability of any potential investment.
Returns in the mutual funds are generally better than any other option in any other
avenue over a reasonable period of time. People can pick their investment horizon
and stay put in the chosen fund for the duration. Equity funds can outperform most
other investments over long periods by placing long-term calls on fundamentally
good stocks. The debt funds too will outperform other options such as banks. Though
they are affected by the interest rate risk in general, the returns generated are
more as they pick securities with different duration that have different yields
and so are able to increase the overall returns from the portfolio.
Fixed deposits with companies or in banks are usually not withdrawn premature because
there is a penal clause attached to it. The investors can withdraw or redeem money
at the Net Asset Value related prices in the open-end schemes. In closed-end schemes,
the units can be transacted at the prevailing market price on a stock exchange.
Mutual funds also provide the facility of direct repurchase at NAV related prices.
The market prices of these schemes are dependent on the NAVs of funds and may trade
at more than NAV (known as Premium) or less than NAV (known as Discount) depending
on the expected future trend of NAV which in turn is linked to general market conditions.
Bullish market may result in schemes trading at Premium while in bearish markets
the funds usually trade at Discount. This means that the money can be withdrawn
anytime, without much reduction in yield. Some mutual funds however, charge exit
loads for withdrawal within a period linked to
Besides these important features, mutual funds also offer several other key
traits. Important among them are:
Unlike the company fixed deposits, where there is little control with the investment
being considered as unsecured debt from the legal point of view, the Mutual Fund
industry is very well regulated. All investments have to be accounted for, decisions
judiciously taken. SEBI acts as a true watchdog in this case and can impose penalties
on the AMCs at fault. The regulations, designed to protect the investors’ interests
are also implemented effectively.
Being under a regulatory framework, mutual funds have to disclose their holdings,
investment pattern and all the information that can be considered as material, before
all investors. This means that the investment strategy, outlooks of the market and
scheme related details are disclosed with reasonable frequency to ensure that transparency
exists in the system. This is unlike any other investment option in India where
the investor knows nothing as nothing is disclosed.
Mutual Funds offer a relatively less expensive way to invest when compared to other
avenues such as capital market operations. The fee in terms of brokerages, custodial
fees and other management fees are substantially lower than other options and are
directly linked to the performance of the scheme. Investment in mutual funds also
offers a lot of flexibility with features such as regular investment plans, regular
withdrawal plans and dividend reinvestment plans enabling systematic investment
or withdrawal of funds. Even the investors, who could otherwise not enter stock
markets with low investible funds, can benefit from a portfolio comprising of high-priced
stocks because they are purchased from pooled funds.
As has been discussed, mutual funds offer several benefits that are unmatched
by other investment options. Post liberalization, the industry has been growing
at a rapid pace and has crossed Rs. 100000 crore size in terms of its assets under
management. However, due to the low key investor awareness, the inflow under the
industry is yet to overtake the inflows in banks. Rising inflation, falling interest
rates and a volatile equity market make a deadly cocktail for the investor for whom
mutual funds offer a route out of the impasse. The investments in mutual funds are
not without risks because the same forces such as regulatory frameworks, government
policies, interest rate structures, performance of companies etc. that rattle the
equity and debt markets, act on mutual funds too. But it is the skill of the managing
risks that investment managers seek to implement in order to strive and generate
superior returns than otherwise possible that makes them a better option than many
others.
The above description is aimed at lay investors, people who wish to invest
in mutual funds but do not understand the mechanics of their funcioning.
The site has been designed to help investors like you to invest in mutual funds
in India. There is ample scope of generating decent return by some thoughtful investments,
which will require little bit of extra effort on your part in understanding the
fund of your choice. You can visit various sections of the site and familiarize
yourself with the contents and features. As you go on navigating the site, you will
feel more comfortable about the mutual funds and will gradually turn into a savvy
mutual fund investor.
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