Mutual Funds of India

The article gives an overview of the Mutual Funds of India as regards the investment objective and why returns from it are higher in the long term compared to other forms of investments. The article elaborates on the various types of mutual funds touching upon the popular mutual fund schemes available in the market.

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Author: Sujit Mukherjee

Introduction: Among the various investment routes available in the market currently, mutual funds identifies more with the average investors, because of the ease, transparency, cost of investment and wealth building capability in the long term. From a humble beginning during the early nineties, the mutual fund industry in India has witnessed phenomenal growth and has become a compelling investment avenue for the retail investors. As of now, the average Assets Under Management (AUM) of all Mutual Funds taken together is set to surpass       Rs. 8,00,000 crores, while it was hovering around Rs. 1,00,000 crore about a decade back. This explains the rising interest in mutual fund investment. Mutual Funds in India are on the threshold of completing two decades in business and the journey so far has been momentous. Initially from a regime of guaranteed returns as an investment drawing measure, to the present situation where returns are subject to the dynamics of stock markets, mutual fund houses have seen it all. When the mutual fund industry was taking baby steps, it had to resort to guaranteed return as a strategic move to attract customers to align with the investing mindset in that particular period. The average person’s investing horizon could not fathom anything beyond the safety net of Bank Fixed Deposits, Post Office and other forms of guaranteed returns products. Therefore Mutual Funds could have never afforded to swim against the tide and offer products declaring that these are subject to market risk. They just took the opportune measure by offering guaranteed returns to get a headstart. Obviously, a lot of mutual fund schemes fared well in the initial years and could generate assured return, but a majority of them suffered heavily due to the infamous stock market scandal of 1992.  This was a watershed year in the history of the mutual fund industry which led to the culmination of the guaranteed return era. Proper investor education and the increased penetration of equity cult among the masses led to the transforming reality that investments in mutual funds are subject to market risks. This risk taking ability has to be managed properly during the entire money life of an individual to get higher return that will not only beat inflation, but help in reaching a lot of financial milestones. For instance higher financial risk can be taken in the initial years of one’s life to choose equity funds and thereafter switch to debt oriented funds in the later years. This mindset transformation gave the required fillip and soon mutual funds evolved as one of the most smart investment opportunity for the average person.  The results are striking example to justify that during the last decade, money invested in the top ranked mutual fund have given substantial returns during the long term.

Types of Mutual Funds in India: The various types of mutual fund can be classified on the basis of structure and investment objective. On the basis of structure, there are broadly two types of mutual funds operating in India viz (i) Open-ended mutual fund (ii) Close-ended mutual fund. (i) Open-ended mutual fund: Most of the mutual fund schemes are open-ended implying that investors are free to invest any time of the year and they do not have any fixed maturity date. Investors can buy units from the mutual fund or the Asset Management Company (AMC) at the NAV (Net Asset Value) based purchase price. Similarly, they can also exit the scheme by redeeming all or some of the units at the prevailing re-purchase price announced from time to time. (ii) Close-ended funds: Close ended mutual fund schemes have a fixed maturity period ranging from two to fifteen years wherein investors are able to buy units during initial issue only after which the scheme closes. After the lock-in period of two to fifteen years the scheme is either terminated or converted into an open-ended scheme from the date of maturity. Accordingly, investors are given the option either to repurchase their holding or shift to the open-ended scheme. On the basis of investment objective, mutual fund can be grouped into (i) Growth Scheme (ii) Equity-Linked Savings Scheme (ELSS) and (iii) Income Scheme

(i) Growth Schemes: Growth Scheme Mutual Fund is by far the largest in their category and they invest in equity and equity-related capital market instruments, generating capital appreciation over the medium to long-term. Equities normally have a high-risk high-return characteristic, nevertheless if one is ready to invest over the long-term, then equities can be very worthwhile and perfect for accumulation of wealth. These are also follows:  Diversified Equity Funds: These mutual fund place their investments in companies spread over various sectors. These funds can be further divided into large-cap funds, mid-cap funds and small cap funds. Large-cap funds are those with a huge capital base like Reliance Group, Larsen Toubro etc whereas Mid-cap companies are those with less capital compared to large-cap companies while small-cap companies have comparatively less capital than mid-cap companies. Some of the Diversified Large-Cap Mutual Fund schemes are Birla Sun Life Frontline Equity, HDFC Equity, HDFC Top 200, DSP Black Rock Top 100 Equity, Fidelity Equity, ICICI Prudential Dynamic, Kotak 30, Tata Pure Equity and UTI Dividend Yield Fund. Similarly Diversified Mid-cap Funds are Birla Sun-Life Mid-cap, DSP Black Rock Equity, ICICI Prudential Discovery, IDFC Premier Equity, Reliance Growth, Sundaram S.M.I.L.E. and Sundaram Select Mid-Cap.

(ii) Equity-Linked Savings Scheme (ELSS): ELSS is nothing but diversified equity funds embedded with a tax advantage feature. These funds have a lock-in period of three year under which investors can avail tax benefits under Section 80C of the Income Tax Rules. Some of the ELSS funds are SBI Magnum Tax Gain, Fidelity Tax Advantage, ICICI Pru Tax Plan, Canara Robecco Equity Tax Saver, Franklin India Tax Shield and Reliance Tax Saver.

(iii) Income Schemes: These schemes deliver steady income through investment in fixed-income securities or debt instruments. Since these are invested in debt instruments, the capital appreciation in case of such scheme will be limited but the added advantage is that the downside risk will also be limited. It is important to note that the risk-return profile in case of these funds is dependent on the average maturity i.e. short, medium, long-term of the instrument that constitute these schemes. Some of the better performing income schemes are Birla Sun Life MIP Savings 5, HDFC MIP and Reliance NIP.

Investment Mode: Investments in Mutual Fund can be made either in bulk amount or in small amounts regularly known as Systematic Investment Plans (SIP). Investment through SIP mode is considered better as it takes advantage of the stock market volatility, thus buying more units when the NAV is low and lesser units when the NAV is more. This aligns with the principle of Rupee Cost Averaging and hence helps in accumulating wealth in the long-term.

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