Is it safe to invest in Mutual Fund? Find out here in this informative guest article

“Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.” We hear these lines during ad breaks while watching television or listening to music on our favourite radio stations. But what do they actually mean? What is mutual funds investment? An expert working in Banking, Financial services and Insurance (BFSI) category decodes it for us.

Mutual Fund is a popular investment solution now-a-days. Lots of people are investing in mutual funds now for different financial goals. History of Mutual Fund in our country started with Unit Trust of India, way back in 1963, with the establishment of Unit Trust of India, by an act of parliament under the control of RBI. And the first scheme launched by UTI was Unit Scheme 1964. The SEBI Mutual Fund Regulation Act came on 1996, which is regulating and monitoring mutual funds in India. AMFI (Association of Mutual Funds in India) is an Industry Standard Organisation and is dedicated for developing the Indian MF Industry on professional, healthy and ethical lines with protection of the interest of unit holders.

The structure of Mutual Funds in India are :

1. Sponsor
2. Trustee
3. Asset Management Company.

Mutual funds works as :

Basically cost of investment in mutual funds are very little, as the returns are passed back to the investor, after deduction of expenses incurred for fund management, which is very low.

Mutual Funds provides the opportunity to invest in different asset class, such as “Equity”; Debt”; “Money Market Instrument”; “Gold” Etc. Average Asset Under Management (AAUM) of Mutual Fund Industry in India has crossed 22 Lakh Crore and total number of Folios are around 6.65 Crore as on December 2017 (as per AMFI data), which means that a huge number of investors (and Institutions) have invested in different asset class for their different financial goals.

Mutual fund provides opportunity to all kinds of investors- from a common man to Institutions and Corporates to invest in different asset class. Investment in Mutual fund requires a KYC (Know Your Customer), where the investor has to provide ID and Address Proof; although the KYC requirements of Institutions and Corporates require more documentation.

Why Mutual Fund Industry in India is growing so fast in the last few years?

In last few years, interest rates in fixed income from Bank, Post Office, are continuously coming down, and investors are looking for an investment opportunity for a better return, and this is driving the investor to invest in different asset class, other than secured fixed and recurring income. Under Mutual Fund, pool of money collected from various investors is managed for investment in different asset classes to achieve certain financial goals. Mutual Fund products are distributed by individuals known as “Independent Financial Advisors” or IFA, and Institutions (like bank and other institutions), and easily available to the investors, although investors can invest directly also.

The most popular form of investment is Systematic Investment Plan, or commonly known as SIP, where investor can invest on a regular basis (Weekly, Monthly, Quarterly), with a small amount, such as Rs.500 (per month) – to as much as one is interested to invest. There is auto debit facility, where amount is automatically debited from the registered bank account on the specified date chosen by the investor for a specified period of time. SIP is a very effective way of investment for long term financial goals, and investors are choosing SIP for the accumulation of wealth, for Children Education; purchase of flats; retirement corpus, recovering interest on loans, etc. Investment in equity asset class for a long period of time through SIP is an effective way for better returns in a long term. Each installment of SIP, in Equity Asset Class is invested in different equity shares by the Fund Managers, who efficiently manages the investment for generating better returns. Although, investment in Mutual Funds, comes under “Market Risk” for the ups and downs of the market, investment through SIP helps the investor to get the units at different price for different periods over a long period of time, and helps the investor with benefits of averaging, known as “Rupee Cost Averaging”. Liquidity is also available to the investor for the SIP (and Lumpsum Investment), as investor is free to redeem the units partially or fully in case of urgent requirements, although withdrawal within 1 year attracts exit loads (generally 1 %) in equity funds, except funds with lock in periods, where withdrawal is not possible within a specified period of time.

 

 

Now a days, the AMFI advertisement of “Sahi hai” under Investor awareness and education, is very popular which shows the benefits of investing in mutual funds. Returns of investment from Equity Mutual Funds, comes under “Capital Gain”, within one year, it is known as “short term capital gain”, and for more than one year, “long term capital gain”. Although long term capital gain from equity investment was tax free till now, in the recent budget, a tax of 10% is proposed on long term capital gain (LTCG) for a yearly return of more than 1 lakh. (Short Term Capital gain is taxable @ 15%).

In terms of better investment opportunity, mutual funds offer different options (and liquidity) to the various type of investor. Investor can manage their investment online also through different applications. Mutual Funds are gaining popularity day by day and in coming years it is expected to touch new high, as investment in bank and post offices loosing the attraction due to lower returns and implication of tax.

There are around 41 Asset Management Companies in India, as on December 2017 as per AMFI Data. Top six Asset Management Companies are :

1. ICICI Prudential; 2. HDFC; 3. Reliance; 4. Birla Sunlife; 5. SBI; and 6. UTI

There are a number of funds for investment, and it is difficult for a common person to choose right fund as per their requirement. Generally Equity Funds are categorized as: Large cap (Investing in Equity Shares of large companies); Midcap (Investing in medium size company); and Small cap (Investing in small size company). Normally pure Large Cap funds are more stable than Mid and Small cap in market ups and downs, although, historically, Mid cap funds has provided higher return in long term. For first time investment, it is better to start with a large cap funds, or a balanced fund, which are available with all the AMC, and best way to invest first time, is through SIP (Systematic Investment Plan). In terms of distribution and reach of AMC, in North East, SBI Mutual Fund is having highest reach, as maximum branches of SBI is distributing SBI Mutual Fund Products, although in top cities of North East, like Guwahati, Shillong, Agartala, Silchar, Tinsukia, Dibrugarh, etc, top mutual fund houses office or representative are present.

Now, it is also important to discuss about the “Risk factor”, which is very important. Investment in Equity Mutual Fund bears the risk of market, which is known as “Market Risk”, and that simply means that the valuation of the investment is related to the Market Movement. As the investment is done in equity shares; if market goes up, valuation increases, but if market goes down, valuation also goes down to some extent. So, in a short period, there could be fluctuations in the market. Therefore, it is advisable to stay invested for a long period of time, which eases the market risk. Historically, over a longer period of time, equity, as an asset class, has given highest amount of return, compared to other asset class. So, Mutual Fund Investment requires long-term investment, which should be related with any long-term financial goal, and SIP is one of the best ways of investing in Mutual Fund.

Other than Equity Fund, there are Debt and Liquid (Money Market) funds with much lesser amount of risk, but with lesser return also. There are wide range of Debt funds which invest in bonds, Debentures, Govt Securities, etc, for different needs of the investor, which we will discuss in the next episode.

This is a contributory article written by Arijit Bhattacharjee. He is a senior executive working in the BFSI category. BarakBulletin.com thanks him for his contribution.