There are two major reasons why most people around the globe are afraid to take investment decisions on their own. One of them is the lack of time to study the pros and cons of different investment opportunities and the other being lack of financial know-how. Apart from that, some financial markets have a steep entry barrier, which prevents a small ticket investor from participating in the growth of that sector. Investment needs across different category of investors are also not common. While some may settle for safety of capital, others may chase returns. There may be others who would want their capital to grow at a steady pace, while some may want to save for retirement or child’s education. The need and objective of the investors are truly diverse and one financial product can’t fulfill all of them. The emergence of mutual funds in the past decade as a popular investment vehicle is due to the fact (6) that it serves broadly all categories of investors through the plethora of schemes that it offers. The benefits provided by mutual funds far outweigh its shortcomings, and has thus gained wide-spread acceptance.
• Professional Management: Mutual funds provide the benefit of professional management as people’s money is managed by experienced fund managers. Investors, who do not have time, inclination and the know-how to manage their investments, can look towards mutual funds as an alternative. It is inexpensive and is ideal for a small ticket investor.
• Economies of scale: The way mutual funds are structured gives it a natural advantage. The “pooled” money from a number of investors ensures that mutual funds enjoy economies of scale; it is cheaper compared to investing directly in the capital markets which involves higher charges. This also allows retail investors access to high entry level markets like real estate, and also there is a greater control over costs.
Diversification: Mutual funds provide investors with the benefit of diversification across different companies and sectors. Diversification in simple terms means to spread your portfolio across different instruments, sectors, industries, companies and countries so that the overall portfolio is relatively safeguarded from downturns in one or more sectors, companies or countries. Since small investors do not have enough money to make meaningful investments across different assets, a mutual fund does the job for them.
• Liquidity: Open ended mutual funds provide easy liquidity and investors can buy or sell units anytime, at the prevailing NAV based prices. Close-ended schemes are listed on a stock exchange where investors can redeem their units at the prevailing market price. Interval funds which are a cross between a close-ended and an open ended structure also provide periodic liquidity option to its investors.
• Flexibility: There are a lot of features in a regular mutual fund scheme, which imparts flexibility to the scheme. An investor can opt for a Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP)etc. to plan his cash flow requirements as per his convenience. The wide range of schemes being launched in India by different mutual funds also provides an added flexibility to the investor to build his portfolio accordingly
• Convenience: Mutual fund companies offer convenient routes to investing in their schemes. Investors can invest through the internet or mobile phone in addition to the conventional option of physically filling up an application form and submitting it. Further, as bank details are required to be submitted at the time of investment, redemptions become very convenient as an investor directly receives the proceeds in the bank account.
Transparency: The mutual fund industry in India works on a very transparent basis, and various kind of information is available to their investors through fact sheets, offer documents, annual reports etc.
Well Regulated: Indian Mutual Fund industry is well regulated by the Securities and Exchange Board of India (SEBI). This helps to instill confidence and provides comfort to the investors. The (7) regulatory environment in India is quite healthy, and ensures transparency in the processes and transactions.
The best practices adopted by the industry in India have helped them win investors’ confidence over the years. The ease and convenience which mutual funds offer and the different variety of schemes made available to the investors creates popularity for mutual funds, which cuts across investor classes and creates a favourable appeal.