Why mutual funds have a long way to go

Express News Service

Mutual Fund investing is still in its infancy in India. There are merely 2.5 crore unique mutual fund investors if one goes by the data on folios. There are over 10 crore folios, but the industry assumes one unique investor for every four folios as a thumb rule.

In a country of 130 crore people, that is a minimal number. A primary reason for mutual funds to take time to evolve in India is your behaviour as an investor. You are not using them, or if you are using them, there is a constant churn that is taking money out of the market and not letting it grow.

The Association of Mutual Funds in India monthly data reveals that equity assets account for about 60% of the total assets under mutual funds management. Most of them are in equity or growth-oriented schemes. According to a section of mutual fund industry insiders, mutual fund unitholders are churning their investments too often. They are not even holding their units for more than a year. From a tax management standpoint, that is meaningless. 

Mutual funds are meant for long-term savings. They are not short-term trading instruments you use to make a fast buck. If you break mutual fund investors among institutional, retail, high-net-worth individuals and others, retail investors account for only 45.7% of the total equity assets under management. In the case of debt mutual funds, barely 2.6% of the total investor accounts belong to the retail investor category.

Institutional and high-net-worth individuals use mutual funds much more than retail investors for whom the product is mainly designed. It also shows poor investor awareness across product categories.


Risk appetite
There are more reasons to invest through mutual funds than not. A natural diversification product, mutual funds are created to help you leave the regular management of money to a professional. Since most of you work outside the world of finance, you need to let experts do the job.

Assets in retirement and children’s fund schemes are barely R32,000 crore. Your investments in such funds are meant to pool long-term savings for wealth creation. If you are worried about the risk in the market, please note that your provident fund and employee provident have started investing in equity assets. Indirectly, you own equity assets already if you are a salaried worker contributing to these monthly savings.

Tax planning
Mutual funds are a great way to plan your taxes. According to AMFI monthly data, tax savings equity schemes manage close to R1.5 lakh crore or 5% of the total MF assets. The equity-linked savings schemes offer a tax saving benefit under section 80C. Besides the deduction, there is a lock-in period of three years. That is an excellent way to put some money away every year and give it adequate time to grow. It will stop you from pressing the ‘redemption’ button whenever you need money and churn.

The other important aspect of investing through tax saving plans is ensuring you do not get caught up in any last-minute decisions towards the end of the financial year. Your tax planning should begin on 1 April of every year and not on 31 March. The last-minute rush makes you take wrong decisions and lock your money in instruments that could offer you returns lower than the inflation rate.

What you can do
If you are new to investing, index or exchange-traded funds are good for you. Presently, the monthly mutual fund data reveals low participation. Investment in exchange-traded funds or index funds is just Rs 1.23 lakh crore. That is way below any potential.

Index funds could be your first step if you plan to search for personal finance knowledge. If you are not getting near the world of personal finance knowledge, that can be your first and last step. A disciplined approach to investing through systematic investment plans of index funds is good enough to offer better than inflation returns over the next 10-15 years.

Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)