Benefit, as the word describes simply, is about gain, profit or to attain an advantage. Mutually defines when things are done in a group together with a common goal or with a common cause of doing it. Hence, when you club these two, in the world of personal finance, it marks the beginning of investing mutually. If I need to define mutual fund as a definition in book terms - A mutual fund is a professionally managed type of investment scheme, a scheme that pools money from many investors and invests them into stocks bonds, short term money market instruments and securities. A mutual fund has a fund manager that trades the pooled money on a regular basis. Being a collective investment scheme, it is investing money with other people and participating in a wider range of investments, with the common objective of investing that money in which ever field of instruments one wishes to and which is feasible for most individual investors with a common purpose.
Therefore, mutual fund is a process driven vehicle which enables investors with a definitive purpose to achieve the common goal. Hence, when I talk about benefiting mutually in the world of investment and to the investing community, I am putting significance upon how mutually together in a group, people can benefit out of their investment. It is nothing more than sharing of risks and returns for investors having a common investment goal and risk appetite. Mutual benefit is more related to the mutual fund industry which now for over a decade, has given a significant importance for the investors on a whole.
Mutual Fund industry has been by and large helping investors with a common goal or a purpose of investments in various fields of equity and debt, liquid and also on other asset like gold and commodities through
ETF (exchanges traded funds). A new convenient way of buying gold without having it in an actual physical form. The industry is also in the phase of introducing the real estate funds and REITS to facilitate investors for investing in real estate asset class. Well, the industry has been present for quite some time now, way back since 1964, but it saw an upward trend after more than 2-3 decades of their existence as an industry in India.
Traditionally, investors used to buy the conventional investment options, like the NSC’s, PPF, KVP or the RBI Relief Bonds and were right enough to do so at that time. The rates then that these instruments offered were highly attractive and were giving quite a good return in long run as well.
At that time, most people were happy keeping investments in safer instruments and were hesitant towards equity. I am talking about the generation of 1960’s and early 70’s, that lived in the era of high administered rates on Post Office Schemes. They were highly attractive and a normal investor need not bother himself by looking beyond these conventional, traditional investment options. Nevertheless, the fact that some of these instruments also offered tax benefits made it a very compelling option for the investing community to go in favor of such investments. So, a father planning for his child’s future financial requirements did not worry much for his timely planning. Rather financial planning and asset allocations were never in his mind and his task was very simple. All he has to do was to set aside some money regularly across this administered rates instruments and wait patiently with the lock-in periods and then collect this redemption money to signify the goals he had in his mind. Also it is worthy to know that in most cases, the gains that were there were all tax-free. In fact, instruments like the KVP actually doubled the money in six years. With a guaranteed return like that, very few had inclination towards the risky asset class namely stocks.
Even the economic situation at that time was not as what we find now. Earlier, in those days the GDP i.e. Gross Domestic Product rate of our nation was growing at an average of 3% and the conventional investment options which I have mentioned were also giving a handsome return of 12%. Very less people had that inclination then towards stocks as an investing option. This situation worked wonderfully well till the time the government had a tight control on business and borrowers lending rate. When India made an entry into the market determined economy in the 1990’s, it marked the first step towards the end of the era of high guaranteed returns. Indian economy was into its growth phase, which raised the demand for credit. Rates came down and also the deposits and investors started looking at other options for better long term growth returns. With this simultaneously, the returns on PPF, NSCs or KVPs also came down, given that the high administered rates on these fixed income like PPF, NSCs, KVPs were a hindrance towards the country’s endeavor to maintain the fiscal discipline and growth.
At present, these conventional instruments are hovering around 8% and the inflation rate is poised to grow at 6%. Therefore, the investor has less choice left in his kitty on the traditional options. In order to increase wealth, investors need to look at other options which grow higher than the inflation rate. With the traditional investment returns drifting down the other asset class, the equity started moving in an upward direction. The benefit of liberalization and healthy growth in the corporate profits of Indian INCs had a direct impact on these stock prices which brought a sea-change in the way investors think and plan their investments. This period finally brought the mutual fund industry into the limelight, inspite of the industry existence since 1964 in India when it had very few participants. The actual boost came in 1994 and onwards and thereafter since then, the oldies or the traditional investors have started looking at the mutual fund industry with a serious note. To achieve their goals, they started looking at various mutual fund investments and with the passage of time, the retail investors have also started opting for the mutual fund route. This trigger in the mutual fund industry gradually took off with more and more liberalization and with the continuous growth of our country’s gross domestic product or the GDP which went up only with the passage of time.
The reason why the Mutual Fund industry appealed to investors across the spectrum is because of the various investment avenues they offered. They offer a lot of variety and flexibility than a normal stock or the NSC’s, PPF and Bonds.
If you are a low risk investor, then you have debt funds and monthly income plans. If you are a high risk investor, then you have equity and balance funds. If you have money that you want to invest for a day, then you have liquid funds. If you have money but not enough to invest in a mutual fund, say Rs.5, 000/- in lump sum, you can still go ahead and start investing. Also if you have small savings per month, then you can move in through an Systematic investment plan (SIP) route. With this investment plan route in mutual funds you can start with as small as Rs.500/- per month.
To get control on all your Personal Finance Matters ask for a planner now.