Mutual Fund: A Tool To Grow Your Money Through Diversification With Safety & Liquidity
In India, there is a longstanding tradition of favouring gold or real estate as investment options over financial assets due to cultural influences. Despite the Mutual Fund industry's Assets Under Management (AUM) exceeding Rs. 50 lakh crores, its penetration remains relatively low. The average AUM as a percentage of GDP is merely 13.96 per cent, with over 60 per cent of states having AUM as a percentage of State GDP below 10 per cent. Many individuals continue to choose gold or land for their perceived sense of ownership and tangible nature. The other popular option among retail investors is still to opt for FD, RD, or other traditional avenues. If one were to compare all of these options, then investing in mutual funds offers numerous advantages over these conventional choices.
To begin with, let us consider the potential returns or growth. Although land prices may increase over time, investing in land demands a significant upfront investment, which many retail investors might not have. Additionally, maintenance and security of real estate assets can be a continuous responsibility, adding to the complexities of this investment avenue.
When it comes to gold, historical returns of the yellow metal over the past decade was a CAGR of 10.3 per cent. At the same time, the equity market returns have been in excess of 12.5 per cent. While past performance does not guarantee future results, India's ambition to become a developed economy by 2047, coupled with robust GDP growth, suggests further expansion in the equity market.
Maximising Wealth through Mutual Funds
Investing in equity through mutual funds stands out as one of the most effective and convenient modes of investment. While there are various types of funds, such as large caps, midcaps, and small caps, these cater to different investment horizons and risk appetites. Additionally, mutual funds offer flexibility, in the form of lump sum or SIP (Systematic Investment Plan) investment. SIP allows an investor to invest small amounts on a weekly, monthly or quarterly basis. This affordability allows for starting investments with as little as Rs. 500 per month. Moreover, SIPs mitigate overall investment risk through the concept of cost averaging, enabling investors to buy more units when prices are low and fewer units when prices are high, potentially reducing the average cost per unit over time.
Many investors still hold the misconception that mutual fund means equity investments. However, there is more to mutual funds than just one asset class. Investors have the option to invest into debt, commodities and several other asset classes through mutual funds.
Fixed income (debt) mutual funds predominantly allocate investments to bonds, which are debt instruments issued by governments or corporations. These funds offer regular income through interest payments and are deemed safer than equity funds due to their predictable returns and lower volatility. Bonds typically have a fixed maturity date and predetermined interest rate, contributing to the stability of the fund's value. Furthermore, in times of market uncertainties or economic downturns, bonds tend to experience lesser volatility compared to stocks. Therefore, by investing in them, investors can enhance the safety of their portfolio.
Next comes hybrid funds which represent a middle ground between equity and fixed income funds. Their strategy of diversification across multiple asset classes aims to minimise risk and maintain portfolio stability. Such an approach ensures that the effects of equity market volatility is skillfully counterbalanced by the stability offered by debt securities and vice versa, presenting investors with a well-rounded and secure investment avenue.
One of the key considerations when investing is the liquidity of funds. Popular investment avenues like gold, real estate, or fixed deposits often lack liquidity compared to mutual funds. For example, selling real estate usually requires 3 to 6 months, depending on market conditions and the property's location. In Fixed Deposits also, there is a penalty levied if one breaks before maturity. On the other hand, with mutual funds, investors have the flexibility to redeem anytime based on personal financial needs, thereby enhancing their ability to manage investments efficiently. While open-ended mutual funds typically do not come with a lock-in period, except for ELSS Funds (which is a regulatory requirement), certain equity funds may impose a 1 percent exit load if exiting during the initial year of investment. In effect, mutual funds emerge as a significantly more liquid option compared to other asset classes.
To conclude, mutual funds stand out as an optimal tool for wealth growth, utilising diversification to balance risk and safety. They offer the added advantage of liquidity, ensuring easy access to funds as and when needed. By spreading investments across diverse assets, mutual funds mitigate risk while pursuing growth, making them an ideal choice for investors seeking to maximise returns.
