By Naliniprava Tripathy and Tushar Gera
Mutual funds are popular among Indian investors because of the various benefits they offer. They pool money from investors and invest in equity, debt, gold and foreign currency. Mutual funds have a long history of returns higher than those offered by most asset classes. An investor has the option of making as a lump sum investment or through systematic investment plans (SIPs). Mutual funds help investors create diversified investment portfolios with investments as low as Rs 500. The investors’ confidence is high because mutual funds are regulated by capital markets regulator Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI).
The merger of celebrated private sector fund houses and growing awareness among investors led to a consistent growth of the mutual funds in India. Even in the time of unusually volatile capital markets, mutual funds are the most attractive investment destination because of four attributes — professional management, diversification, convenience, and marketability. There are two management strategies — active and passive — which have a significant impact on the expectations for mutual fund investors. Actively managed mutual funds are traded in and out of securities, usually based on the directions of the fund manager. Passive funds buy and hold a specific collection of securities traditionally based on an index. The superiority of active versus passive investment strategies is still being debated by the mutual fund industry.
The funds raised from investors are handled by mutual fund managers who invest in different assets as per their discretion to maximise returns. Diversification of mutual funds is an informed decision based on in-depth market analysis, extensive research, and a deep understanding of the financial currents. There is no bidding on dark horses or guesswork. All investment decisions are based on data analysis and knowledge of risks and returns. The companies in which the managers invest benefit from the capital received that improves their performance, prompting investors to pump in more funds. The economy experiences financial stability and market liquidity, benefiting both the companies and the shareholders.
The mutual fund industry in India has been growing at a healthy rate in the past decade. Mutual funds allow the subscribers to invest in a large number of diverse securities without burning a hole in the pocket, thus reducing the dependence on a specific source of income. This unique advantage makes mutual funds a lucrative investment option.
The assets under management of mutual funds are dwindling due to the economic impact of COVID-19 and the subsequent lockdown that took down the AUM to ₹23.53 trillion by April 2020, but there has been an uptick since then. The AUM has recovered to ₹26.07 trillion. Despite the pandemic denting the prospects of a broad set of industries, Indian mutual funds have witnessed robust participation of investors. With volatility and correction in the broader markets providing an excellent investment opportunity, January to June 2020 has seen a net investment of more than Rs 39,000 crore, with more than Rs 30,000 crore invested in March alone. The amount invested in the first half of 2020 was more than four times the amount infused in the first half of 2019.
The SIPs have become the backbone of the mutual fund industry today. SIP inflows increased Rs 3,122 crore to Rs 8,055 crore between April 2016 to March 2019. Indian markets have displayed signs of maturity with investors seeing the fall as an opportunity rather than a threat. Monthly SIP inflows hovering around the Rs 8,000 crore mark with consistent inflows into equity funds gave mutual fund managers a healthy stream of funds to continue buying quality stocks even when the markets experienced considerable measure. Attractive valuations and a good flow of capital have enabled the mutual funds to capitalise on this investment opportunity, giving this market segment a positive push. Equity mutual funds, aggressive hybrid funds, and dynamic asset allocation funds bought significantly into equities, rebalancing their portfolios to bring up the equity allocations.
In the current pandemic situation, investment through a systematic investment route (SIP) will balance investments and benefit from rupee-cost-averaging. The healthcare sector performs exceptionally well and telecom space is a good opportunity. Since everyone is working from home, there is a great demand for the internet and voice calls. The sectors which are least affected include FMCG and real estate. Investors can wisely use these opportunities in combination with actively managed funds to build a solid long-term portfolio by leveraging mutual fund investments.
The bleak economic scenario, a large number of mutual fund advisors are advising their clients to stick to large-cap mutual fund schemes with an investment horizon of five years. It has been observed that in times of turmoil and market correction, large-cap stocks mostly fare better than mid-cap and small-cap stocks. Since large-cap mutual fund schemes are required to invest at least 80% of the fund in top companies, investment in these stocks helps to create wealth without taking too much risk.
The higher the risk, the higher the returns. Long-term schemes are relatively less risky, but they offer small returns. Expecting exorbitant returns while taking a low risk is not the right way to move forward in this market. It is essential to have realistic expectations. Mutual fund investing will undoubtedly play a significant role in shaping the economy.
(Prof Naliniprava Tripathy teaches finance at IIM Shillong. Tushar Gera is a PGP student at IIM Shillong.)