Kya Mutual Funds Sahi Hai?
If you want to build your house you have two options one you can do it on your own. For that, you have to do market research about the cost and quality of the material required for construction. Then you have to deal with workers personally and spend much time on the entire process. But the second option is you can hire a professional who will do all your work and you just have to follow his directions. For the second option, you will have to invest more money than the first option but more safety will be provided.
Concept of the mutual fund is the same as the second option mentioned above. A mutual fund is an investment company that pools money from many investors and invest it into stocks, bonds, debt and other securities.
In Mutual fund, you invest your money through a professional person. This professional person is known as ‘Fund Manager’. Fund Manager will analyse the current scenario in the market and he will invest your money in different stocks instead of holding one. He is obligated to work in the best interest of investors.
- Don’t save what is left after spending; spend what is left after saving. – Warren Buffett
- Mutual fund managers want your money in their funds. They get paid based on assets under management. -Barry Ritholtz
STATISTICS – What Numbers have to Say?
- The number of mutual funds in the entire world increased from 83 thousand in 2009 to 123 thousand in 2019.
- With 7 trillion U.S dollars of Asset Under Management (AUM) on 30 September 2020, Black Rock Funds was world’s largest mutual company till December 2020.
- The investment in Unit Trust of India (UTI) swelled from 600 crores in 1984 to 6,700 crores in 1988.
- The entry of the public sector in the Mutual fund industry increased growth of industry up to 44000 crore rupees.
- The assets under management of the Indian mutual fund industry amounted to approximately 24 trillion Indian rupees in March 2019. It was the highest growth since the financial year 2013.
DESCRIPTION – Let’s take a Deep Dive
How do mutual funds work?
- When someone buys a mutual fund unit it represents shares that a person is holding in a particular scheme.
- One can purchase or redeem these units at Net Asset Value (NAV) of that day.
- Fund manager collects all this money and invests it into different securities to generate returns for the portfolio holder.
- Total gain from this transaction is added to Asset Under Management (AUM) of the fund on which NAV depends.
- If the NAV at the time of purchase is higher than at the time of redeeming then the investor is at loss and if it is lower then the investor is at profit.
- All the mutual fund companies are registered in the Security and Exchange Board of India (SEBI) and they are bound to strictly follow all the rules and regulations made by SEBI.
While investing in Mutual Fund one can invest via either lumpsum investment or Systematic Investment Plan (SIP). In lumpsum investment risk is slightly higher and you have to pay all amount in one go. But in SIP you can invest a small amount of money at predefined intervals. Through SIP one can buy more units when the market is low and less unit when the market is high.
History of mutual fund
During 1772-1773 as a response to the financial crisis in Dutch republic, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”). This was the first modern mutual fund.
In 1963, the government of India and the Reserve Bank of India formed Unit Trust of India (UTI) which was the first mutual fund company in India. The objective of this company is to guide small investors who want to buy shares in large companies.
From 1987 many public sector banks attempted to come into this industry. In November 1987 SBI mutual fund was started. It was the first non-UTI mutual fund in India. Until 1993 there were only government companies in this sector but in 1993 private companies entered in Mutual fund sector. Many banks like Canara Bank, Indian Bank, Life Insurance Corporation, General Insurance Corporation, and Punjab National Bank etc. followed the path of SBI. This change encouraged many investors to invest more in Mutual Funds.
During 1991-1996, Indian Government realised the importance of participation of the private sector to liberalize the Indian economy. So the government opened up the mutual fund industry for the private sector also. With this move, the Indian private sector industry and some foreign company entered into this sector. Few of them were HDFC mutual fund, Kotak Mahindra Mutual fund etc.
With the growth in the Mutual fund industry, the Indian government felt the need to laid down some rules and regulations for all stakeholders. So in 1996, the government introduced the SEBI Regulation Act 1996 ( Security and Exchange Board of India). Mutual fund industry also realised the need for self-regulation thus they came up with the Association of Mutual Funds of India (AMFI).
Why one should invest in Mutual Funds?
- Investment through the mutual fund is managed by professional fund managers. They are responsible for wisely taking decisions by studying and analysing market trends and situations. So the risk factor is low.
- Mutual funds allow diversified options for investment. One can invest according to their risk-bearing capacity and interest. So the loss is bearable.
- Mutual Funds relatively high liquidity.
- Some of the mutual fund company provides insurance.
- They are more convenient as one don’t have to keep an eye on the market every time.
- Certain mutual funds are tax-free.
- Face to face interaction with fund manager is easy.
- Investment through mutual fund gives small investors professionally managed, diversified portfolio of stocks, debt and other securities.
What should keep in mind while investing in Mutual Funds
- Fix your financial goal, whether you need a large or small amount of money, for how much time period you can invest your money and invest according to that.
- After choosing the type of mutual fund you want to invest, invest in top-performing mutual fund in that type. For this analyse the performance of the last few years.
- The higher value of the asset under management for fund gives higher chances of substantial return in long run.
- Keep an eye on expense ratio, if they are more than 1.20% then they are considered to be on the higher-cost end.
- There are many companies with no sales charges or least sales charges, try to invest through them.
Disadvantages of Mutual Funds
- Salary of fund manager comes from an investor. This fees changes from company to company.
- Mutual Funds have long term investment period. Withdrawing these funds before the maturing period is expensive.
- Diversification is an attraction of Mutual Funds as it reduces risk but it also reduces overall profit.
So basically investment in the mutual fund is best for those who have money to invest but don’t have enough time to spend on studying market also who don’t want to take the risk. But profit you gain in the mutual fund is sometimes less than that is in share market.
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Author – Vaishnavi Guntoorkar