Why MF should become a household product in India?
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund
Despite growing awareness on mutual funds and its long-term wealth creation, investors are still struggling to understand its full potential. The disillusionment with India’s ₹25 trillion mutual fund industry is rooted in a variety of reasons: poor returns; increased consumer wariness following the sudden closure of a slew of debt funds; other investment opportunities in gold and direct stocks.
Mutual Fund industry has existed for more than 25 years in India, but its penetration is very low in Indian households.
Less awareness on perks of investing in MF
A SEBI (Securities and Exchange Board of India) survey says there is a sharp distinction in the awareness levels between savings schemes and investment instruments; cognizance about savings schemes is slightly higher. All the survey participants are staggeringly aware of Bank Deposits (99.9%), Life Insurance (94.7%) and Post Office Savings (89.4%), familiarity with Mutual Funds and Equities is just 28.4% and 26.3%, respectively, adds the survey.
The typical impulse for not investing in securities markets instruments is principally risk aversion, followed by inadequate returns and lack of information. A sustained and widespread mutual fund information dissemination in India has ensured that information availability is not a concern. Respondents seem more anxious regarding mutual funds returns, the survey adds.
“Just like how students are taught various subjects in schools, it is mandatory to inculcate knowledge about money, various options available to invest money, and the impact of inflation on one’s savings. This financial literacy can be a game changer,” says Ashish Goel, Founder and CEO of Vista Wealth Consultants.
Role of homemakers and youngsters
Financial experts stress on the need to educate youngsters and housewives on mutual funds and that it should become a household product. Housewives can comfortably invest in mutual funds. A recent data from CAMS says that 24% of the 1.7 lakh millennial investors in MF in FY18-19 were women, pointing towards increased financial independence and participation of women in money-related decisions.
Homemaker Uma Balachandran says that she first heard about mutual funds only through the advertisement ‘Mutual funds sahi hai’. “It took me sometime to understand what mutual funds are all about. Earlier, I used to open a FD or RD account and at the end of one year, I used to renew the account or close it and buy gold jewellery. But when I came to know the better returns that mutual funds can offer, I immediately decided to take the SIP route. I prefer MFs because I can withdraw the invested sum at any given time and it is the most preferred liquid asset class compared to real estate and gold.”
Financial expert Goel says one important and wonderful aspect of mutual fund is that people can choose the Systematic Investment Plan (SIP) route. “One can even start the SIP with Rs 1,000. By default, people first choose fixed deposits, gold and then if one has a lot of money, they invest in real estate. One has to break the habit, and with proper financial literacy, investors will understand that mutual funds are capable of giving them better returns,” adds Goel.
Huge growth potential for MF
As per Association of Mutual Funds in India (AMFI), Assets Under Management (AUM) of Indian Mutual Fund Industry as on October 31, 2020 stood at Rs 28,22,941 crore.
The AUM has grown from Rs 6.46 lakh crore as on October 31, 2010 to Rs 28.23 lakh crore as on October 31, 2020 about four-fold increase in a span of 10 years.
“In spite of the recent upheavals (sudden crash followed by sharp recovery) in equity markets, mutual funds still remain the best bet for common investors to participate and profit from equity markets. It is true that direct stock picking has its glamour and allows one to generate better than market returns. But it does require some degree of skill, time and constant monitoring. It can be done no doubt. But not everyone is made out to be a DIY direct stock investor. For them, mutual funds are the right choice,” says Dev Ashish, Founder of StableInvestor.
It is always better to start your SIPs early. As soon as one joins the work force, allocating a small amount of money for an SIP is the right choice, say financial experts.
“Equity mutual funds invest in equities that are suitable if one has minimum time horizon of 5+ years. And as per the historical data, the possibility of poor returns reduces substantially if one is able to remain invested for the long-term,” says Ashish.
There are different product categories for different time horizons.
“For instance, if someone wants to invest for just one-year period, we will suggest ultra-short-term bonds as one gets better returns than bank interests. If someone has a goal to save for marriage with four or five years of time horizon, he/she can go for short-term funds. Similarly, if someone’s goal is to fund for children’s education with time period of 10 years, then returns will be too good. So, it all depends on investors’ time horizon and preferences. If someone is risk averse and time horizon is 7 years, then the person can go for a balanced fund or hybrid fund,” Goel explains.
Mutual Funds are tax efficient
Rating agency CRISIL in its recent research said that it is wise to invest in debt mutual funds. It says that MFs are a tax-efficient form of investment for a retail investor. Indexation (for tax purposes) allows the returns generated on the investment to be adjusted for inflation (Real returns). The benefit of indexation is that investors are taxed only on the returns generated from the debt-oriented fund. Also, it is important to diversity across different categories of funds.
There is no good or bad time to start an SIP. One has to set goals and decide whether his/her target is either long-term one or short-term, and fund managers will help them accordingly.