EXECUTIVE SUMMARY: We as Indians loves to save money, however, when it comes to investing many restrict themselves with the fixed income securities or with insurance policies. People ignore mutual funds due to the volatility and risk associated with it. However, if one understands that this product offers Diversification, Liquidity, Low management costs, etc. then there is no reason why anybody would not invest in it.
Research shows that despite being available in the market from a very long period, less than 10% of Indian households invest in mutual funds. Most of the investors in India hold back their investments in mutual funds due to perceived high risk and a lack of information of how mutual funds work. And those who know about this product are happy with their investment. The kind of features this product has, there is no particular reason why an investor would not choose mutual fund as an option for investment.
Among people having high savings rate, more than 40% of those who live in the cities consider these investment risky and close to 33% did not know how to invest in such assets. Choosing mutual funds requires a conscious choice and comfort in dealing with the opportunities and risks in the securities market.
- Channel one's savings into productive investments: In case of a bank deposit wherein a depositor lends money to the bank and then the bank lends it to the borrowers based on which they decide an interest rate for the depositor. This transactional arrangement though pre-defined becomes rigid at one point of time, whereas, when money is invested in mutual funds, the returns fetched by the underlying security like stocks or bonds, gives flexibility to investments and to the returns. Thus the rigidity of transactional arrangement gets defeated by the market arrangement.
- Expert advice will cost a fee but not at the sake of severe loss: How difficult it is to call up a broker and directly invest into securities market? Why one can’t just trade or buy shares and bonds directly using electric platforms? In other words, does it add value to the investment of an investor if he directly gets access to the market? Mutual funds only become useful when accepted with the psychology of long term investment through a formal process. Getting expert advice may require a particular amount of cost, but with the right guidance investors may get saved from incurring heavy losses. Their experience and investing strategies play a very important role in marking the returns and saving from heavy losses. Selecting the right securities, decision of how much amount to be invested in each of them, when to invest and how to invest, when is the right time to sell or purchase shares, which company is suitable enough to be invested in so that one's goals are met within a specified period of time, all these factors require quite a lot of efforts to be put into and an entire portfolio is made, for which a nominal amount of fee is charged.
- Liquidity: - This feature has made mutual fund very attractive. Leaving apart few close ended schemes, an investor can anytime invest or redeem money out of mutual funds. The money is available to an investor in a very short period into bank account. However, one should also look out for the exit load charges if any.
- Diversification: For small investors diversification with a small amount is not possible. In a mutual fund scheme, fund manager invests the money into different asset class or in different category of stocks, thus giving benefit of diversification to an investor. This feature also ensures stability in the portfolio in long term.
- Rates are not pre-specified: The main advantage of investing in mutual funds is that the rates of returns are not pre-specified. For example when invested into stocks of a particular company and if the performance exceeds the expectations of the investor, then this appreciated value is available to the investor. This is applicable even in the case of debt funds where the returns are fluctuating.