We hear a lot about Mutual fund investment now a days. Government also promoting it as an asset class under the campaign mutual fund sahi hain.  There are only 26 countries in the world where investment in mutual fund is more than 30% of GDP. In India it is just 17% of GDP. The world average is 74%. Therefore, there is a long way for India to increase its share of investment in mutual fund.

But why government wants people to invest more in mutual fund. The answer is here,

Reason #1

Government needs money for various welfare activities which are of national interest. These funds come from revenue collected by Government, aids from international agencies and borrowing from RBI. Similarly, private enterprises can investment when they have access to more fund either by way of profit generated, low cost loans or public investment in equity.

When people keep most of their saving in cash with them, neither government nor private enterprise get access to these money. If it is kept in banks either in saving account or in fixed deposits, government cannot allow entire of these money for lending by banks. These kind of deposits are payable on demand. Therefore only a portion is allowed for lending.

If people invest in mutual fund, the entire invested money is available for government or private enterprise to access for its need.

Reason #2

If the people keep money in saving account or fixed deposits, banks have to pay interest on them, which is a cost. Further, when inflation is more than bank interest, the depositors capital get eroded.

If people invest in mutual fund, there is no interest payment.  The market forces will decide the return and value of the invested amount.

These are the two primary reason why government wants its public to invest in mutual fund rather than in bank deposits.

Then why should individuals invest in mutual funds. Following are the reasons,

• Capital appreciation

  Investment in mutual fund help the investor to grow its invested money or capital as per market force. In case of bank deposits the net return is minimal or negative due to taxation and effect of inflation.

• Simplicity/ease

  It is easy to invest in mutual fund. One can invest by contacting nearest bank branch, asset management company (AMC) office or mutual fund distributor. Now a days many financial technology (Fintech) platform or apps are available. By following the steps or guidance given in these one can invest in mutual fund. The document required is also very minimum – address proof, identity proof and bank details.

• Variety/diversification

  Through mutual fund one can invest in verities of options. It could be only equities or only debt or mix. There could be choices for growth, capital protection, income, etc. Investor as per his or her need can choose the available schemes. However, different choices carry different risk level. The investor need to know his her risk appetite before investing in any particular scheme.

• Flexibility

  In case of fixed deposit, the money is locked for a particular period. It may be one year, two year or five year. During this period if the investor need money he or she can withdraw by forgoing a portion of interest. In case of mutual fund, the invested fund can be withdrawn at any time as per the value in the market. Tax implication is by way of capital gain tax depending upon the period of holding.

• Professionalism

  Mutual fund corpus is managed by professional, who watch the performance of the fund round the clock. Professional decisions are taken to safeguard the interest of the investors and give optimal returns as per the scheme.

• Easy exit & entry

  In mutual fund, investment can be made at anytime and withdraw at anytime through online platforms. Though there is a cut off time for giving effect to the transaction.

• Any amount

  Mutual fund investment can be started with as low as ₹100 per month. This amount will be deducted every month on a fixed date from the assigned Bank account. This is called systematic investment plan or commonly SIP. Apart from this one can do lump sum or onetime investment as well with different schemes. There is no upper limit for SIP as well as lump sum investment.

• Daily updates

  The value of investment made in mutual fund schemes is reflected or updated everyday. It is calculated by dividing the value of the fund invested by number of units of the scheme. The value is called NAV or net asset value. It either goes up or down as per the value of underlying shares or instruments where the money has been invested. There may be ups and downs on daily basis. However, over long term i.e. 3 years and beyond, there will be a gradual increasing trend.

• Well regulated

  Mutual fund industry is well regulated by SEBI (Securities Exchange Board of India) to protect the interest of the investors. Therefore chances of misleading by AMC is less.

• Tax benefits

  There are many tax benefits for investment in mutual funds. Only tax applicable is short term and long term capital gain tax as per during of holding the investment.

All good things have its own drawback as well. In mutual fund drawbacks are,

• It does not offer fixed or guaranteed return. The value of investment in mutual fund fluctuates almost on daily basis. A probable return can be predicted at the end of a certain period, but not ensured.
• The fund manager manages a range of schemes. He or she is supported by a team of analyst. Decision are taken as per understanding of the team. Investor has no say on these decisions.
• Diversification entails additional operating cost and require greater due diligence.
• The investor need to be savvy in financial knowledge and evaluate for themselves the suitability of a scheme.
• The performance details furnished by fund house are based on past data. It may continue in same trend in future or it may not. The performance of a mutual fund scheme depends many factors of the economy.
• There is a cost involved towards operation and managing a fund, which is borne by investors.
• Return on fund is shown based on CAGR (compounded annualised growth rate). However, it is not absolute. It is just indicative. In actual it may be less than that.
• The performance of a fund is highly skewed towards fund manager. They are targeted by different fund house for their performance. So they keep changing AMC, whereas investor cannot keep switching funds. It involves cost.

As we can see from above, mutual fund sahi hain despite its drawbacks. It must be one of the asset class in your financial planning.