Everyone wishes to achieve financial goals, which arise at different intervals of life–such as buying a car, purchase of house, children’s education, their marriage, retirement planning and to be financially secured throughout life.
The various investment avenues available to retail investors range from instruments such as national savings certificate, public provident fund, insurance plans, post office schemes, bank fixed deposits, recurring deposits, unit linked insurance plans, shares, bonds and debentures and mutual funds.
These instruments have different objectives such as tax saving, moderate returns, safety of capital and diversifying the risk.
The investment in various instruments would depend upon the individual investors’ need, funds available and risk taking capacity. If the amount available is small, risk-taking capacity is moderate. If the objective is good return and growth, then the best solution available is mutual funds and that too diversified equity growth fund.
This does not mean that wealthy investors should not invest in mutual funds schemes. They should invest to increase their wealth through a variety of funds such as equity funds, debt funds, balanced funds, sector funds, index funds, small and mid cap funds, ELSS, pension plans, exchange traded funds, etc.
Indian investors who are known to prefer safe and secure investments are gradually developing risk appetite. According to the Reserve Bank of India’s latest annual report, the share of mutual funds in household savings has shot up to 4%.
Bank deposits now command a share of 46% (increase). Share of insurance has come down from 15% to 13%. The share of small saving schemes of the government has fallen to 12% as against 20% the previous year. Contribution to pension and provident funds has also come down from 13% to 10%.
According to the RBI annual report, net household investment in mutual funds stood at Rs 1500 crore in 2004-05 and jumped to Rs 21,000 crore in 2005-06.
In India, the mutual funds industry started with the setting up of Unit Trust of India in 1964. Public sector banks and financial institutions were allowed to establish mutual funds in 1987. Since 1993, private sector and foreign institutions were permitted to set up mutual funds.
At the end of March 2006, there were 29 mutual funds, which managed assets of around Rs 2,40,000 crore under more than 550 schemes. The number of mutual funds houses has gone up close to 40.
The country’s economy has shown a sizable and consistent growth in the recent past. The bull-run in the economy has led mutual funds to give stupendous returns to the investors. There are several reasons that helped mutual fund industry to grow faster.
Some of these are:
1) The buoyant stock market
2) Professional management of money
3) Launch of innovative products by various MFs
4) Tax benefits available to equity schemes
5) Growing awareness among the people
6) Different schemes available to cater to investors’ needs based on their age, financial position, risk appetite and expected returns
Introduction of financial planners who can provide need-based advice has made it easy for the common man to understand the concept of mutual funds and channelise his savings through mutual funds, which earlier were invested in some other avenues.
The key is to invest regularly through systematic investment plans, start early, select the best fund manager i.e. the schemes which have a good track record of returns, check out the consistency in performance, decide the investment horizon and do the proper risk return trade off.
Mutual funds are and will remain one of the major instruments of wealth creation in the years to come.
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