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BW Businessworld

The Right Choice

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The best way to accumulate wealth over the long term is to invest systematically using a systematic investment plan (SIP) in diversified equity mutual funds” — this is probably among the most repeated piece of financial advice in India. If one person were to start an SIP every time somebody uttered this sentence, then we’d likely have a situation where every Indian has an SIP!

However, we all know how far we are from such a situation. Penetration of mutual funds in India is in low single-digit percentages and is a fraction of other financial instruments competing for investor interest. For example, the mutual fund industry’s assets under management (AUM) have barely reached Rs 12 lakh crore even as fixed deposits have almost six times as much, at Rs 70 lakh crore.

This despite the significant advantages mutual funds have over these alternative avenues. Higher return potential, appropriate risk, higher liquidity and transparency, and favorable tax treatment should make mutual funds, at least on paper, the go-to investment destination for retail investors. But they are not, yet. Is this situation set to change? Are retail investors in India ready to embrace mutual  funds as their preferred long-term investment vehicle? Two things indicate that the answer to this question is in the affirmative.

First, data — both industry data and anecdotal data from mutual fund distribution businesses indicate an ascendant pattern in investor interest. The industry AUM is reaching new historic highs every month, and the rate of new folio additions (2 million in the first nine months of this financial year) has not been seen since the heydays of 2007. Distributors (including us) are reporting four-fold year-on-year growth in new SIP set-up and new investor addition.

To an extent, these can be attributed to the rise in market levels and the predicted structural bull run over the years to come. But there are other environmental factors too that are playing a part in this return of interest. And these factors might just make this growth more sustainable and long- lasting.

For one, the days of high interest from the government appear to be on the wane. A steady decline in the rates for provident funds and post office schemes is projected over the next few years. Second, there is an increasing realisation that the government is not interested in providing people, certainly the middle-class, with retirement or social security cover, meaning the individual will have to fend for himself in his golden years. Third, traditional insurance and fixed-income products have shown themselves to be either high-cost, or low-return, or both. And finally, the regulators are clamping down on unregulated products such as chit funds and deposit schemes to protect investors from such “local” investment options.

This leaves mutual funds as a well regulated, reasonably priced, convenient and flexible product that have the potential to provide high returns over the long term. Hence, at long last, it does appear that the time has come for mutual funds to take centre stage as the preferred retail product for long-term investing. 

The author is Co-founder & chief operating officer, FundsIndia.com

(This story was published in BW | Businessworld Issue Dated 20-03-2015)