Investing in Mutual Funds has several pluses

Part 1 of a two-part series

 

The history of the Indian mutual fund industry can be traced to the formation of UTI in 1963, a joint initiative of the Government of India and RBI.

 

It held monopoly for nearly 30 years. Since 1987, mutual funds promoted by public-sector financial companies like LIC, GIC and several banks made their entry into the Indian Mutual Fund Industry. SBI Mutual fund was the first Public Sector Mutual Fund. However, the year 1993 was a turning point in the Indian Mutual Fund industry with the entry of private sector mutual funds, giving the investors a wider choice for selection. From then on, the number of mutual fund players has been on the rise with many foreign mutual funds also setting up funds in India. The industry has also witnessed several mergers and acquisitions. With the significant volatility being witnessed in various financial instruments, investing via Mutual funds would give a more balanced look of an individual portfolio on account of the diversification over a large number of stocks and sectors.

 

So what is a Mutual Fund?

Mutual funds acts as a vehicle to mobilize moneys from investors, to invest in different markets and securities, in line with the investment objectives agreed upon, between the mutual fund and the investors. Their primary role is to assist investors in earning an income or building their wealth, by participating in the opportunities available in various securities and markets.

 

However, since different investors have different investment preferences, mutual funds mobilize different pools of money. Each such pool of money is called a mutual fund plan. The money collected from investors under various plans are invested in securities like equities, fixed-income securities, bonds and other money market instruments based on the plan's investment objectives. The collective valuation of the portfolio such created is expressed in per unit term as Net Asset Value (NAV) per unit of the plan. The NAV of the plans increases/ decreases with the change in the underlying value of the securities of the Mutual Fund plan. The benefits earned from the investments in the form of interest income, dividend income or value appreciations of the securities are shared by its unit holders in proportion to the number of units owned by them.

 

The advantages of mutual fund:

Professional Management - By pooling the money of thousands of investors, mutual funds are able to provide full-time, high-level professional management that few individual investors can afford to obtain independently. It is then the Fund Manager's job to find the best securities for the fund, given the fund's stated investment objectives, and keep track of investments and changes in market conditions so as to adjust the mix of the portfolio as and when required.

 

Diversification: Mutual Funds plans have stringent norms on exposure to single instrument, sector, company, etc. These criteria's ensure that the portfolios created are diversified in nature. An individual investor may tend to unduly concentrate his holdings in only a few securities, which are not appropriate. Diversification reduces unsystematic risks of individual investments while giving exposure to the concerned markets.

 

Flexibility - Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt plan to an equity plan and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end plans.

 

Affordability - Since Mutual Funds pool investments from various

investors, they allow an investor to buy in to a portfolio, which would otherwise be extremely expensive to create individually. Each unit holder can get an exposure to Mutual Fund portfolios with an investment of as low as Rs.1, 000/-. MFs also allow investors to participate in securities (especially in the fixed income markets), which have a high ticket size.

 

Liquidity - Open-ended mutual funds declare their Net Asset Values on a daily basis. Investors are allowed to exit the funds on the NAV price whenever they so choose. The redemption proceeds are provided to the investor of the fund at prevailing NAV (net asset value), within three to five working days of putting in the request.

 

Low Costs - Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors

 

Regulations - Securities and Exchange Board of India (SEBI), the Capital Markets regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors.

 

DISCLAIMER: The above information has been written for general guidance only. Please consult your own financial advisor before making any financial decision. (sanjay.bhatia@ventura1.com)