Talk of the Town!
Why are Indian Mutual Funds so popular?
Financial advisor for over a decade, N P Sarin explains why.
N P Sarin, March 18, 2017
On November 8, 2016, the Indian government scrapped Rs.500/- and Rs.1000/- denomination currency notes to curb black money and corruption. The message seemed to be ‘begin investing’, urging Indians to shed skepticism, fear or complete ignorance that stopped cautious Indians from entering the formal financial market. High-denomination currency notes that were earlier saved at home, are now being deposited in savings bank accounts with 4% per annum interest. Given this slim 4% return in savings accounts, many investors see mutual funds as a better option since they generate 10% to 12% return at present.
India has the world’s 7th biggest economy. As reported in The Telegraph in March 2017, Avinash Vazirani (Manager, Jupiter India Fund) summed up the Indian economy of $2 trillion “as one with a 30pc-plus savings rate, which equates to $600 billion savings per year.” Government data, he said, links 450 million accounts to the new biometric ID card, assigned to 99% adult Indians - a telling indicator for increased consumer spending in the future. This social security system, political stability, the new goods-and-service tax, high speed internet and the formalization of savings make for the best investment climate the country has seen in the last 22 years.
N P Sarin waits for an investor's decision
An Investment Option
Indian mutual funds (IMFs) attract massive funds.
Documented in the Association of Mutual Funds in India, asset management companies(AMCs), added investments worth Rs.3.71 trillion to their MF portfolios last year - the highest ever in absolute terms. The value of assets held by individual MF investors increased from Rs. 6.14 trillion in November 2015 to Rs. 7.56 trillion in November 2016. The assets held by institutional investors grew 29% from Rs7.28 trillion to Rs9.39 trillion during the same period (Rs.17 trillion in total).
It is all about making deft long-term investment choices to beat the impact of inflation and profit.
The enticing MF Edge
MF transactions can be done digitally, enabling easy record-keeping of portfolios. MFs are managed professionally, pooling investors’ money into a variety of assets: stocks, companies’ shares, government bonds, deposits, cash and so on. An MF portfolio is therefore diversified. An MF’s total asset value is subdivided into small ‘units’. The market price of one MF unit is called its Net Asset Value(NAV).
Maria Fernandes gets an introduction to mutual funds investment in India
Open to all nationalities
Foreign nationals take part in the Indian growth story by investing in dollars in Indian MFs. The Reliance Emergent India Fund, Sundaram India Midcap Fund, TATA Indian Sharia Equity Fund, the SBI Resurgent India Fund, Reliance Luxemburg Fund and SBI India Opportunities Fund are some offshore funds currently offered by Indian AMCs.
The Old Mutual International platform based in the Isle of Man offers mutual fund investment products across the world, including India focused funds.
Credit rating agencies such as CRISIL, ICRA & independent MF research houses like ValueResearch, and Morningstar track, review and rate MF performances. Investors can therefore compare one MF scheme with another. As the trade market (value of shares, bonds, etc.) moves up or down, the NAV of each MF unit moves in tandem with it, indicating the fund’s performance.
Tapping into economic potential
‘Do not put all your eggs in one basket’. Diversify it.
Intelligent investing goes by this principle: lower risks by spreading funds across industries and geographic regions. Rarely do all stocks decline at the same time and in the same proportion. Indian MFs, professionally managed by fund managers and helped by research teams, continuously analyze market performance and company prospects before putting suitable investment portfolios together.
Sector funds, however, focus on a single industry, thus making them less diversified, and therefore, more volatile.
MFs are affordable. Investors can begin with a slim surplus fund of Rs.500 per month, if they use the Systematic Investment Plan (SIP) to accumulate their units on a monthly basis. The large volumes of trade done by fund managers allow even small MF investors to benefit from low trading costs.
‘Rupee-cost averaging’ is a disciplined method of investing instead of making sporadic investments. A specific ‘rupee’ amount is invested at regular intervals every month or quarter, buying more MF units when the price is low and fewer units when the NAV rises. It lowers the average cost per MF unit, over time.
Open-ended MFs rank high in liquidity. A standardised, quick and efficient process, investors can redeem all or part of their open-ended MF units whenever they wish and receive their return in current NAV. In contrast, close ended funds have a ‘lock-in’ period, usually 3 years, within which you cannot withdraw the investment money put into that particular MF, lowering the liquidity advantage.
Regular updates are sent to unit holders with daily NAVs and information on the fund's holdings as well as the fund manager's strategy.
All Indian MFs must register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. SEBI regularly monitors MF operations.
MF are usually classified based on the way the money is invested. Either the whole fund is put into equity, or all of it is in bonds (a debt fund), or a balanced fund divides the funds into equity and bonds. Another MF category invests the whole fund in a single sector.
The profit or loss of Equity MFs fully invested in the stock market depends naturally on the market’s performance. In the long run, it can give better returns over other forms of investment. But, the risk is higher. It may turn either way.
Debt MFs invest fully in government bonds and fixed income investments to give a stabler, lesser risk return compared to equity MFs. Lesser risk might mean lesser returns.
Balanced MFs attempt to combine the best of both worlds. Part of the funds go into equity, another part into debt, guaranteeing a certain percentage of return on the investment over a period of time.
Sector MFs confine investments exclusively to a specific sector - banking perhaps, or real estate, or infrastructure or a specific industry such as solar energy.
Indians can opt for tax-saving funds such as the ELSS or Equity Linked Savings Schemes. An ELSS investment is exempt from income tax under section 80 C of the Income Tax Act of India. These funds have a lock-in period of at-least 3 years.
The absence of entry or exit loads
Earlier, a percentage of the invested amount was charged either at the time of entry into an MF
(‘an entry load’) or while withdrawing the money (‘an exit load’). Now, there is no entry or exit load, UNLESS the investment is withdrawn within one year, in which case an exit load of 1% is charged.
Consumer spending in India is growing rapidly, from US$549 billion to US$1.06 trillion between 2006 and 2011, states the Ministry of Statistics and Programme Implementation, putting India on the path to becoming one of the world’s largest consumer markets by 2025. The Indian economy is internally driven, fueled by domestic consumption and investment. It has well-developed capital markets and a robust banking system. Democracy, demographics, domestic investments, and ease of doing business gives investors a conducive variety of sectors in which to invest.
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