The mutual fund industry in India is one of the fastest-growing sectors. According to the Association of Mutual Funds in India, mutual funds folios accounted for adding approximately ₹3.15 lakh crore to its asset base in 2019. AMFI also noted that the total asset under management (AUM) of the industry increased by 13 percent from ₹3.15 lakh crore to ₹26.77 lakh crore at the end of December 2019. So a pertinent question to ask at this stage – does it make sense to get into the mutual fund business as of on a date. Contrary to what many may think, we would answer the question affirmatively.
We present to you five reasons why mutual fund business still makes sense:
1. Penetration levels are still low
While the popular punchline goes ‘Mutual Funds Sahi Hai’, not everyone has invested in mutual funds. Low levels of financial literacy, less awareness about saving options, inequitable access to investment platforms still continue to be true in India. Most investors prefer to invest only in ‘safe’ options and do not have sufficient awareness about mutual funds. Therefore, a sizeable chunk of the population, especially in Tier 2 and 3 cities remains untapped.
2. Returns are much higher
Mutual funds are considered a safer investment avenue compared to other products available in the market. It also offers significantly higher returns when compared to options such as FDs, savings account, or pension schemes. As per recent data, equity-linked saving schemes gave a return of 23 to 25 percent between March 25 and June 3. Compare this with fixed deposits that provide a maximum of 8% as returns.
3. Rupee cost averaging during a crisis
Currently, the world is facing an unprecedented time due to the Coronavirus crisis. Investments have been badly affected across the board. However, mutual funds offer an advantage in the form of rupee cost averaging. It refers to the averaging of the cost at which mutual fund units are bought. More mutual fund units can be bought by investors when the market is not performing as expected. In the longer run, you will end up benefitting from the returns.
4. Move away from fixed deposits
For many Indians, fixed deposits remain the go-to option for investment. It is preferred by many as it is safe compared to more volatile options. However, the returns offered by fixed deposits pale out in comparison to mutual funds. Even if a newbie investor is afraid of investing in equity mutual funds, they can always shift to debt mutual funds that offer steady returns and are insulated from volatility in the market.
5. Easy way to diversify investments
Mutual funds can help investors to diversify their investments across sectors. As investment money is put in different underlying companies, the exposure is not limited to a particular sector. This is impossible to achieve if investors stick to traditional investment options unless they are willing to invest in equity, debt, and hybrid options simultaneously and monitor the performance.