In the category of market-linked securities, mutual funds are a relatively safe investment. There are risks involved but those can be ascertained by conducting proper due diligence.
While research is essential, it cannot guarantee you return in a market as markets are subject to volatilities that are sometimes caused by factors beyond our control – for instance, a pandemic.
However, you can at least keep at bay from bad investments if you know your financial goals, risk tolerance, and track record and future projections of your preferred mutual funds. For instance, factors such as high expense ratio, diluted returns and hidden front and back-end charges are considered negative.
The mutual fund industry in India has witnessed remarkable growth and evolution over the years, reflecting the changing dynamics of the country’s financial landscape. Starting with the establishment of the Unit Trust of India (UTI) in 1963, India’s mutual fund sector gained momentum in the early 1990s with the introduction of economic reforms. Therefore, in recent years, the mutual fund industry has diversified its product offerings to cater to a wide range of investor preferences, including equity funds, debt funds, hybrid funds, and thematic funds.
As the growth of mutual funds in India continues, the mutual fund industry is expected to play a crucial role in channelling savings into productive investments, contributing to the overall development of the financial markets.
Why Should You Invest in Mutual Funds?
Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers. Mutual funds are a popular investment option that pools money from investors to purchase stocks, bonds, and other securities.
Some of the benefits that investors putting their money in mutual funds :
1. Mutual funds are cost-effective due to their low investment and management fees.
2. Investing in mutual funds provides diversification across multiple sectors/assets, reducing the risk of losses due to poor performance in one area.
3. They are usually managed by experienced professionals and that reduces the risk of losses an investor can incur.
4. Mutual funds are obligated to disclose their portfolio holdings and performance regularly, ensuring transparency.
5. Mutual funds are regulated by SEBI (Securities and Exchange Board of India), adding a layer of safety via implementing mandatory guidelines and safeguarding policies.
History of Growth of Mutual Funds in India
Since its inception in 1963, the Indian Mutual Fund industry has undergone a series of events. Broadly, the span of six decades (1963-2023), the Mutual Fund industry can be divided into five phases, each fostering the culture of saving and investment.
The first phase : lasted for about 23 years and was entirely under the control of UTI, a government entity. In 1963, the Unit Trust of India under government auspices was formed and in 1964, UTI Scheme was introduced.
Second Phase : In 1987, Mutual Funds were initially issued by public sector banks, marking the commencement of the second phase. Over the following six years (1987-1993), the Assets Under Management (AUM) witnessed a Compound Annual Growth Rate (CAGR) of 38.4%, reflecting a rise in investor acceptance and trust.
The third phase : which lasted for 10 years, from 1993 to 2003, emerged as a critical period in the expansion of mutual funds in India. During this phase, the government granted permission for private sector firms to introduce Mutual Funds, leading to a significant surge in both the quantity of Mutual Funds and the Assets Under Management (AUM).
During the fourth phase (2003-2014) : the Mutual Fund industry encountered a setback. In 2014, the duration of a long-term debt mutual fund was extended from 12 months to 36 months. Simultaneously, the exemption limit under Section 80C was increased to Rs 1.5 lakhs.
What is the difference between Long Duration Mutual Funds and Short Duration Mutual Funds?
The basic difference between debt mutual funds and equity mutual funds is the investment destination. Debt mutual funds invest a large proportion (at least 65%) of the total money collected from investors into fixed income securities like Corporate Bonds, Government Bonds, Bonds issued by banks, Treasury Bills, etc. You can read more about the types of debt funds available here.
These funds are better suited to investors who do not want to participate in the market volatility as these instruments are uncorrelated with the stock market performance. Investors in debt oriented funds also seek regular and stable returns or want to achieve some financial goal like buying a house, or paying for their child's education at a certain point of time in the future. Such investments are generally made for short to medium term. Equity mutual funds are more suited to investors who are not risk averse and are looking for medium to long term investments. It enables the investors to benefit out of the volatile nature of market. Unlike debt funds, equity funds do not have a predefined maturity date and can be redeemed upon the request of the investor.
Advantages of Investment through Mutual Funds
The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital and financial markets. The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings in recent years. The concept of mutual funds was introduced in India with the formation of Unit Trust of India in 1963. The first scheme launched by UTI was the now infamous Unit Scheme 64 in 1964. UTI continued to be the sole mutual fund until 1987, when some public sector banks and Life Insurance Corporation of India and General Insurance Corporation of India set up mutual funds. It was only in 1993 that private players were allowed to open shops in the country. Today, 32 mutual funds collectively manage Rs 6713575.19 crore under hundreds of schemes. The industry has steadily grown over the decade. For example, before the public sector mutual funds entry, UTI was managing around Rs 6,700 crore on its own. Public sector mutual funds also helped accelerate the growth of Assets Under Management. UTI and its public sector counterparts were managing around Rs 47,000 crore when Kothari Pioneer, the first private sector mutual fund, set up shop in 1993. Before the US 64 fiasco, there were 33 mutual funds with total assets of Rs 1, 21,805 crore as on January 2003. The UTI was way ahead of other mutual funds with Rs 44,541 crore assets under management. The industry overall has performed well over the years.
How To Invest in Mutual Funds?
Investing in mutual funds today is a fairly simple process that can be completed in a few easy steps.
Step 1: Ensure that you have a brokerage account with sufficient cash on hand and access to mutual fund shares. The account can be opened either online or by visiting your bank or an investment company in person.
Step 2: Identify mutual funds that match your investment goals in terms of risk, returns, fees, and minimum investments. Please note here that many platforms offer fund screening and research tools and this can be a huge help, research-wise.
Step 3: Determine the initial amount you want to invest and submit your trade. You can also set up automatic recurring investments. It’s important to monitor and review the performance of your investments periodically and make adjustments as needed.
Biggest Mutual Fund Scams in India
While emerging as one of the budding investment options in India, the Indian Mutual Fund industry has a fair share of ‘scams’ that were recorded in Indian history of financial markets.
UTI Linked Scam
In the early 2000s, some ULIPs faced criticism for high charges and opaque structures, leading to regulatory intervention and changes in product guidelines. In the span of 24 years during its monopoly, UTI successfully cultivated an extensive investor base and managed assets totaling Rs 67 billion, a milestone achieved by 1988.
Nonetheless, it fell short in establishing a sufficient guarantee. In simpler terms, it lacked the necessary capital to fulfill assured returns to investors in the event of fund withdrawals. Furthermore, it sets the unit price arbitrarily at a price which is more than the value of actual assets. Additionally, this scam shook investor’s confidence and as a result, they withdrew their investors even before the scam came into limelight.
Franklin Templeton
Franklin Templeton, a long-standing Mutual Fund company in India, faced difficulties in April 2020 due to the lockdown. The lockdown caused a shortage of money in the markets as people stayed home, and businesses abruptly stopped.
Because of this lack of money, Franklin Templeton had to shut down six debt mutual fund schemes worth nearly Rs 300 billion. This affected over three lakh investors who, despite choosing low-risk debt schemes, ended up losing their money.
Axis Mutual Fund’s Front-running Fraudulent Scheme
One of the most recent scams in the Mutual Fund industry is the Axis Mutual Fund scam. In May 2022, the seventh-largest Fund house in India dismissed two of its executives over suspicions of engaging in front running.
Front running involves trading stocks based on advance knowledge of transactions that could impact prices. This practice is deemed illegal in India, and SEBI is currently investigating the matter to uncover more details.
