Mutual fund investments: Here's what you should be aware of

The visibility of the mutual fund industry increased greatly due to “Mutual Funds Sahi Hai”, campaign launched in 2017. In recent years, a lot of aggregators and fintech platforms have come, widening the reach of mutual funds. Plenty of investor awareness and education programme has been done by the industry in the media on mutual funds. The above campaigns have though resulted in multi-fold growth over the past few years, but the below statistics shows there is still lack of awareness and long way to go.

The growth in PAN numbers was particularly steep in the first quarter of FY22. The mutual fund industry added 12 lakh investors in the quarter, going from 2.27 crore to 2.39 crore. This was higher than the 20 lakh investors added in the whole of FY 2021 when the investor count went from 2.07 to 2.27 crore, according to AMFI. However, this is a small fraction of the 5.8 crores income taxpayers in India, and 44.50 crores PANs issued as of 31 March 2019.

Some of the reasons behind low awareness can be summarised as under:

Lack of awareness

Many Indians are not aware of how mutual funds work. The statutory caveat attached to the advertisement that reads, “Mutual fund investments are subject to market risk, please read offer-related documents carefully before investing” does instil a sense of insecurity in the potential investor coming from a traditional mindset and having witnessed a plethora of financial frauds across the country. The prospective investors shy away from the mutual funds and prefer some safer options like fixed deposits in a nationalised bank, etc.

Bad experience

The industry has been prone to inappropriate guidance which has resulted in lack of trust amongst common people. Not investing in the scheme, which is suitable for their goals and risk profile, many people lost their hard-earned money by investing without proper guidance and now they are hesitant to invest again in mutual funds just like the proverbial “Once bitten twice shy”.

Lack of knowledge

There are thousands of mutual fund schemes available in the market, but people do not have a complete knowledge on which will be the suitable choice for them based on their goals and risk profiles. Sadly, this lack of knowledge pulls back most Indians from investing in mutual funds. Notwithstanding the above, the number of investors is increasing.
To create awareness about mutual funds, and benefits of investing in mutual funds among public, various Asset Management Companies (AMCs) in India have been conducting Investor Awareness Program (IAP) in different cities regularly since May 2010, using a standard presentation / following a uniform structure as recommended by AMFI. All AMCs are required to provide the program schedule for each fortnight in advance, which is displayed on AMFI’s website.

According to AMFI, in the financial year ending March 31, 2021, 27 AMCs have conducted 5,407 programmes covering 2,27,949 participants pan India. In the previous year i.e., 2019-20, 38 AMCs had conducted 9,262 programs covering 5,31,699 participants.

Why Mutual Funds?

Mutual funds provide a lot of benefits which make them important. The importance of mutual funds as listed below.
Ease of Investment: Mutual funds are easy to buy and sell. One can either engage the services of a distributor or agent to transact in funds. The emerging of fintech platforms and aggregators have made investing very easy with a click of button. The investors who want to invest through physical form have the ease of investing in multiple AMC with one form and one cheque offered by aggregator platform.

Variety of choices

Investors have variety of choices when it comes to mutual funds. With the advice of their agents or distributors based on investment objectives and risk profile there are wide range of product to choose.

Convenience

One of the most prominent benefit is that mutual funds provide convenience. By investing in a single fund, they can gain access to a wide range of product in financial market. A diversified equity fund can have money invested across multiple stocks with some portion invested in debt securities as well.

Diversification

A investor can invest in different segment of the market, equity, debt, and cash by investing in mutual funds. If the investor were to invest directly, it would take a lot of effort, cost, and time to create an individual stock portfolio. The situation with investing in debt market is even more difficult if one tries to do it individually rather than taking the mutual funds route.

Professionally managed

This is one of the very important factors and is a key highlight of the of mutual funds. Due to lack of expertise, several investors don’t have the confidence in taking the financial market route to grow their wealth. They feel they have limited or no capability to invest in stocks and bonds on their own and do not have the time to keep tracking their investments even if they manage to invest on their own. This is where the services of a fund manager come in handy for the common man who can comfortably sit back and see his funds and investments being managed professionally by an expert.

Rupee cost averaging

The concept in which the product systematic invest plan works. Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more shares of an investment when prices are low and less when they are high. By investing on a fixed schedule, you avoid the complex or even impossible duty of trying to figure out the exact best time to invest. The rupee cost averaging effect averages out the costs of your units and hence lessens the results of short-term market fluctuation on your investments.

(The writer is Vice President – Head Operations & Business Development – MF Utilities. Views expressed are personal)