Financial Awareness Level
What is a Mutual Fund?
Mutual funds are investment instruments. Each mutual fund instrument (also called as a scheme) is a pool of money managed by professional experts. Investors subscribe to different mutual fund (MF) schemes depending on their investment needs. The schemes invest in various securities, such as stocks, bonds, and other assets, with the goal of generating returns for investors. Mutual fund returns are subject to market risks. But because of market exposure, mutual funds offer wealth-building opportunities for retail investors.
Mutual Fund history
Mutual fund investing has a long history. The first mutual fund was established in Boston, USA in 1924 (check here). The mutual fund industry in India has been growing for over 50 years (check here). Chart 1 below shows that the asset size in Indian mutual funds has grown five-fold in the last 10 years. SIPs (Systematic Investment Plans) are now a popular investment tool in India (check here). Investors in Indian mutual funds include households and large corporates.
Investor needs
As shown in Figure 1, investors invest their savings with Asset Management Companies (AMCs) through MF schemes. AMCs invest the MF scheme money mostly in listed companies and deliver an investment return. There are underlying needs that motivate investors to seek investment returns. Some investors may want to invest to provide for their child’s education. Others may want to plan for their retirement. For some investors, the investing time horizon could be a few months, while some others may look to invest for a 20-year period (see Table 1 for three important investor needs).
There is the risk aspect too–some investors may prefer safer investments while others may have a high-risk tolerance. AMCs survey and assess investor needs and offer mutual fund schemes that service these needs. India’s capital markets regulator – SEBI (Securities and Exchange Board of India) – regulates mutual fund investing activities.
Note: Every mutual fund scheme has a stated purpose or objective, along with guidance on risk. Rightly so, investors are interested in returns. But understanding a scheme's risk-return profile, and objectives, and if these align with investor needs, is important.
Capital market access
Mutual funds make it possible for retail investors to take part in the nation’s economic growth. Investing only in real estate, gold or parking money in a savings account deprives savers of other growth opportunities. Some of the nation’s big corporates, for example, are growing bigger. Retail investors, through mutual funds, can invest and benefit from this growth. By investing in listed corporates through MF schemes, retail investors get to access India’s capital markets.
Investing in mutual funds is easy. If you want to build long-term wealth, consult your financial advisor and the right time to start is now!
Table 1
| Investor Need | Time Horizon | Risk & Return |
|---|---|---|
| Short-term savings/Emergency Funds | A few days to six months or more | Lower risk and lower return compared to products suitable for longer time horizons |
| Fixed income mutual fund investment for a two-year period | Two years | Higher risk (and return) in general, compared to short term savings schemes but lower risk compared to products suitable for longer time duration |
| Long-term wealth creation | Ten years plus | Higher risk (and return possibilities too) compared to products suitable for shorter time horizons |
Source: AMFI, Chart 1
Figure 1
The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
FAQ Section
If fixed deposits give a return, why invest in a mutual fund scheme?
Fixed deposits (FDs) are a banking product. The interest rate return range offered by fixed deposits is different from the range of returns delivered by mutual fund schemes. FD risks are limited compared to the market risk mutual fund schemes face. But the FD return range too is limited.
What is market risk?
Market risk is the possibility of losses in investments because of changes in market conditions. Changes include fluctuations in interest rates, currency exchange rates, geopolitical and other risks that affect all financial instruments in the financial market place.
Are mutual fund returns guaranteed?
Mutual fund returns are not guaranteed. The value of a mutual fund's holdings and the returns it generates fluctuates based on investment performance of the underlying investments. For example, if investee companies cannot grow fast enough, the investment performance for the MF scheme may go down.
Which is the best mutual fund scheme?
Mutual fund schemes cater to a variety of investor needs. What may work for one person may not work for another. For example, liquid schemes offer attractive short-term interest rates with relatively lower risk. For equity-oriented schemes, the risk level is high, but these schemes offer a unique opportunity for long-term wealth building. Within a particular scheme category, finding good schemes is based on multiple criteria. These criteria include a nuanced understanding of fund manager’s investing philosophy, experience, fund house brand image, scheme’s assets under management, past returns, expense charged etc.
How often can I withdraw mutual fund scheme money?
It depends on the mutual fund scheme category. For open ended Schemes, redemption is allowed on a daily basis (subject to applicable lock-in), if any. For close ended Schemes, no redemption is allowed till the maturity of the Scheme. However, close ended Schemes are listed on Stock exchanges, where the units can be traded.
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Disclaimer
An Investor Education And Awareness Initiative Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. if they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.gov.in. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
