Why the rush for mutual funds?

Outperformance of equities, mutual fund campaigns and the shift in investing habits have brought more money into mutual funds. Investors share their experiences

The Indian mutual fund industry has seen unprecedented inflows over the past couple of years. The assets under management (AUM) of equity funds, including ELSS, more than doubled to ₹7.8 lakh crore in the last two years ended February 2018. There has been a significant addition to the folio count in equity funds — around 1.75 crore new investors started fresh investment in equity and ELSS funds during the period.

Outperformance of the equity market, the Mutual Funds Sahi Hai campaigns and the significant shift in investing habits have primarily driven more money into mutual funds.

Equity: An outperforming asset class

ARUMUGAM, Mumbai-based businessman running idli shops

 

 

Over the last few years, equity has been the clear winner — racing ahead of other assets such as real estate and gold.

Arumugam, 35, a Mumbai-based businessman running idli shops believes that returns from equity mutual funds could outperform real-estate returns in the long run. “Real estate was my preferred investment choice earlier to accumulate wealth to secure my future life. But its tepid performance over the last couple of years and its highly illiquid nature made me explore better investment options that deliver good returns over the long run. I think mutual funds offer the solution,” Arumugam says.

Arumugam has a point. The returns on assets such as real estate and gold haven’t been much to write home about over the past few years.

The real estate market in India has been flat over the past few years while gold, the other preferred asset class of most of households, gained only 2 per cent in value in rupee terms over the last two years.

On the other hand, the domestic stock market has scaled many peaks in the last two to three years, despite challenges such as demonetisation and GST implementation. In fact, some disruptors such as demonetisation led to reduced demand for physical assets and enhanced demand for financial assets, that aided inflows into mutual funds.

Arumugam has started investing in open-ended equity-oriented mutual funds through the systematic investment plan (SIP) route from the last year. “Liquidity is also my priority. They (open ended mutual funds) offer me a window to exit anytime I want to,” he adds. Arumugam invested through a distributor and his portfolio has large-cap, mid-cap and multi-cap funds.

Madhavan, 47, a Chennai-based Central government employee recently added equity funds to his portfolio. “Though I am a relatively high-risk profile investor, I stayed away from equity investments due to uncertainty.

But seeing the commendable performance by the equity market over the last four years, I have decided to participate in equities through SIP,” he says.

“My goals are for the long term and I will not be worried by the short-term hiccups,” he adds.

SIP by SIP approach pays off

MADHAVAN, Chennai-based Central government employee

 

 

Madhavan is right in taking the SIP route to participate in the equity market. It is a disciplined way of investing in mutual funds where a person invests a fixed amount regularly.

Equity investments are subject to market risks. They can be quite volatile in the short term but generally tend to appreciate handsomely over the long-run. SIPs help the investor average cost over a period of time, fetching more units when prices are low and fewer units when prices are high.

One should ignore the market noise in the short term and continue SIPs over the long term. The right selection of schemes and stocks can help build the desired corpus and achieve financial goals.

Over the long term, equity has proved to be more effective in generating higher inflation-adjusted returns than other asset classes such as debt, gold and real estate.

Shift in investment behaviour

The reduction in rates on post office small saving schemes and the slash in interest rates on fixed deposits (FD) over the past couple of years have also made more people turn to mutual funds.

Ragavan, 65, a Bangalore-based retiree from a public sector bank, is worried about the fall in FD rates.

“Bank FDs were the most in-demand interest-generating options for conservative investors like me, because of guaranteed returns and the assured safety of capital. The sharp fall in rates makes bank FDs unattractive when we re-invest the proceeds from the matured FDs. So, I have shifted part of my retirement corpus into debt mutual funds,” he explains. “On a post-tax basis, debt mutual funds can deliver relatively higher returns than bank FDs. I understand, though, that debt funds are exposed to credit risk and interest rate risk,” Ragavan adds. He prefers investing in mutual funds through the direct route to avoid distributors commission. The return is higher in direct plans than the distributors’ route, as the commission paid to intermediaries is excluded from the expenses charged under direct plans.

Many debt fund categories, including banking and PSU debt funds, credit opportunities funds and short-term debt funds have delivered relatively higher pre-tax returns than the bank FDs.

Mutual funds ‘sahi hai’

JAGADEESWARAN, Chennai-based contractor

 

 

The campaigns led by AMFI and mutual fund companies over the past few years have generated quite a lot of awareness or at least inquisitiveness about mutual funds among the small, lay investors.

Jagadeeswaran, 43, a Chennai-based contractor in the electrical field, has gained basic knowledge on investing in mutual funds.

“The visuals running on television have taught me some basics on investments in the equity market. I understood that the risk in equity investment will be lower if I stay long,” he said. He started a SIP with ₹500 recently to save for his children’s education.

Jagadeeswaran has taken the right first step but he should consider stepping up his investment, as his incomes increase, to accumulate a reasonably large corpus. This can be done by starting new SIPs or topping up existing ones.

Increasing awareness

AMIRTHAM, Branch post master from Namakkal

 

 

T Amirtham, 56, a branch post master from Namakkal — one of the beyond top 30 (B30) cities in India — appreciates the campaigns on mutual funds by the mutual fund companies.

“There is a significant increase in the number of people I meet who talk about mutual funds in recent times. Interestingly, I have learnt many things about mutual fund investment from them,” she says.

However, Amirtham is an ultra-conservative investor who prefers only post office schemes.

There are different kinds of mutual fund schemes to cater to different investor classes.

Investors with low-risk profile can consider liquid and ultra-short term funds with high-rated safe debt instruments in their portfolio.

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