In recent times we have seen the news of Indian stock markets conquering new highs. The hope that the increase in interest rates in the United States will not be as much as previously thought has fueled the market’s advance. The market believes that the interest rate hike in India will not be drastic anymore. For those who don’t have much knowledge about the market and time to analyze stocks, ‘Mutual Fund’ provides an investment option. Today, nearly 3 crore users have invested a total of Rs 39 lakh crore in mutual funds.
What is a mutual fund? to whom?
Mutual funds are trusts under the supervision of the Securities and Exchange Board of India (SEBI), an autonomous body owned by the central government. These operate under the Indian Trusts Act. Individuals and institutions can invest in these funds. These funds work to maximize returns to the investors by investing the amount invested mainly in shares/debentures/other investment instruments in the market subject to SEBI regulations.
This is done through various schemes. Individuals can join the schemes run by these funds by paying very small amounts. Investments in the Funds will be made by individuals who have better understanding, knowledge and experience of the market than we do. Investors get a proportionate share of the profits, minus their salaries, bonuses and other expenses. SEBI has come up with rules to bring transparency to this entire process.
Remember, market deposits are not the same as bank deposits. There is no guarantee of capital or profit. On a daily basis, investors can see the value of their investment through ‘Net Asset Value’ (NAV) on the funds’ website. NAV is the profit or loss per investment unit of a project minus its liabilities. Investor participation is considered as units. (Eg Rs 1000 means 100 units of Rs 10).
What types of schemes are the funds?
There are equity funds that invest only in stocks, debt funds that invest only in bonds, and hybrid funds that invest in both. Equity schemes that invest only in shares usually offer the highest returns, but here the ‘risk’ is also high. Today all fund companies have various schemes including the above. Children’s education and retirement assets are available through lacaki purpose schemes.
We can decide which fund to choose by ourselves by browsing and reading the websites of the funds. Or agents working with SEBI registration will be there to help us, as representatives of the funds.
Mutual funds have given good returns to investors if they invest their money for long term and have time and patience to earn profits. There are no loss-making companies in between. See the results of the funds as a reflection of the country’s overall economic growth. So, if India grows as expected for the next 10/25 years, these funds will also give profits to the investors. For those who start saving now after getting a job and invest in funds before age 40/45, various fund schemes can offer fairly good risk/return over a period of 10/15/20 years. But as the funds themselves advertise, past performance may not necessarily hold in the future. Therefore, common investors keep only a part of their savings in such funds. Plans are popular because they can be done monthly, periodically or all at once.
If it is not as safe as a bank deposit then what is the benefit?
In the long run, the Indian stock market and corporate bonds have given investors more benefits than the interest earned on bank deposits.
31 years ago Sensex was at 1000 level. Today it is close to 63000. This means that an individual investing in stocks of the 30 companies comprising the Sensex that day would have made an annual gain of around 14.5% over the period if he had continued to invest without taking into account the inter-market fluctuations. The maximum average annual return on bank interest rates over the same period may be only 7%–8%. The central government also provides tax breaks to encourage mutual fund investments.
For individuals in the 20–30% tax bracket, profits on fund investments are generally taxed less than the rate on bank interest (capital gains tax).