Mutual funds have become a common part of almost everyone’s portfolio. Gone are the days when people believed that mutual fund investments are only for the elite and HNIs (High Net worth Individuals). However, mutual funds in India are a common name in almost every household thanks to the various advertising and marketing campaigns created by AMFI (Association of Mutual Funds India) and SEBI to spread investor awareness and to allow more and more people to invest.
For those who still aren’t aware, a mutual fund is, it is a pool of funds generally sourced from investors sharing a common investment objective and is utilized to invest in stocks, bonds, and other securities. It is an investment vehicle that collectively invests the investor’s money to create wealth over the long term. Every Asset Management Company (AMC) hires a fund manager (sometimes a team of managers) to run the mutual fund to carefully distribute the Asset Under Management (AUM) and build a diversified portfolio. The entire AUM that is managed by the fund manager is referred to as a mutual fund portfolio and every investor holds a small size of it in the form of mutual fund units.
History of mutual funds in India
The first steps of mutual funds fell on Indian soil back in 1963. Unit Trust of India (UTI) was the only mutual fund body to come out with the very first mutual fund scheme. UTI was an initiative with the Government of India and the Reserve Bank of India (RBI) at the forefront of it.
Evolution of mutual funds
- In the year 1963, GOI and RBI set up Unit Trust of India
- In the year 1987, the State Bank of India (SBI) becomes the first non-UTI body to set up a mutual fund in India
- The year 1993 is marked a new era in the Indian mutual fund industry. This was the year when the private sector companies entered the Indian mutual fund industry.
- In 1996, Securities Mutual Funds Regulations came into existence after the Securities and Exchange Board of India (SEBI) Act was passed 4 years earlier in 1992.
- During the boom of the Indian mutual fund industry, the Association of Mutual Funds in India, or AMFI as it is commonly referred to was also brought into existence in 1995. AMFI is a non profit organization.
Why should you invest in mutual fund schemes?
Our grandparents and even our parents have always relied on conventional investment avenues like post office deposit, bank fixed deposit, Public Provident Fund, etc. for long term wealth creation. Although such schemes offer fixed income, the interest rates in India are currently all time low. With such low returns, one can hardly achieve either of their financial goals. On the other hand, mutual funds might not guarantee capital appreciation, but they have the potential to generate better risk adjusted returns. In the past, mutual funds have outperformed every other type of traditional investment product and are known to offer returns anywhere between 12% to 15% depending on how long the investor chooses to hold on to his or her investments.
Through a single mutual fund scheme, you can get exposure to a wide range of securities, some of which are not accessible to the common investor for direct investing. Mutual funds invest in a diversified portfolio of sticks with growth potential, stocks which otherwise would cost thousands of rupees if you had to individually purchase them. Also, since these are managed by professional experts, even if you do not have a deeper understanding of markets, you can still invest and give yourself an opportunity to generate decent returns.