Greetings, First of all ! Welcome to today’s blog on meriSIP.com Today we will learn The Truth behind, Why mutual Funds Industry exist? And Problems they solve ?

Why Mutual Funds Exist ?

First of all, Read our post about What is a Mutual Fund ?

You can skip if you really know, What is a Mutual Fund ?

Today we will cover :-

1. Era Before Mutual Funds & its Problems

2. Starting of Mutual Fund Industry

3. Problems Before Mutual Funds

4. Benefits of Investing into Mutual Funds

5. Conclusion

6. SEBI Disclaimer

1. Era Before Mutual Funds & its Problems

After Independence of India in 1947, Wealth Preservation was the core theme our ancestors/households followed. This is clearly visible by seeing investments done by our ancestors. They usually used to buy Gold, Silver, Land, etc. They mainly focused onto guaranteed returns and near to zero risk. Most of the Elite Investors at that time either used to invest into PPF or into Post Office Savings Scheme (at best). Equities were not considered an option back then. Equities were only limited to a few people who understood businesses and their acquisitions. 

Those who wanted to invest into Equities had to have a lot of money to invest into.

2. Starting of Mutual Funds Industry

The modern style Mutual Funds were first created into USA (United States of America). India after getting Independence wanted to haul its every system that can contribute to the future of country as whole. So was necessary to invest public money into Indian Equities (How Investing into Equities help countries grow? We will keep it for another day.).

Refer to picture shown, it highlights the important turn-arounds in our Mutual Funds Industry. You must read about them.

We will tell some more events after 2000 & beyond here. The following are some most mportant events :-

2009 – Abolition of Entry Loads

2013 –  Introduction of Direct Plans (for DIY-Do It Yourself Investors)

2017 – Categorization of Mutual Funds by SEBI

3. Problems Before Mutual Funds

There exited many problems before Mutual Funds and we will try to cover them. They are :-

1. Capital Requirements – Today you can buy share in top 500 companies with just from Rupees 1000, earlier you had to have lakhs of rupees.
2. Concentration Risk – Diversification was mere a word before mutual funds but it was possible only because of Mutual Funds.
3. Simple Access to Market & its Products – The investments match with our cash-flows whether they are daily/weekly/monthly etc.
4. Inflation Risk – Beating Inflation was quite hard with any other asset class.
5. Liquidity – Even bank FDs have fix terms, unlike mutual funds there are many categories in which one can invest his emergency funds (Money comes to accounts within 1 minute to 3 days at most).

4. Benefits of Investing into Mutual Funds

1. Profesional Portfolio Management that too at such lower rates.
2. Highly suitable for Retail Investors – can start SIP of as low as 250 Rupees per month
3. Strong Regulations by SEBI & Other Regulators – With increase in technology, It is providing regulators an advantage to keep checks on differents alleged scams that can take part in future.
4. High Liquidity – One of the Most Liquid product for illiquid assets lik real estate (by investing through REITs).
5. Goal Based Investing is made simple and accessible.
6. Tax abritrage (very very important) – If you buy and sell a stock you have to pay tax on the gains made onto a stock but mutual funds do not pay taxes because Under Section 10(23D) of the Income Tax Act, 1961, any income generated by a mutual fund registered with the Securities and Exchange Board of India (SEBI) is fully exempt from income tax. This means that when a fund manager sells a stock at a massive profit to rebalance the portfolio, the mutual fund house (AMC) pays zero tax on that transaction.

5. Conclusion

Mutual Funds are a great way of investing into different asset classes without the much hotch-potch of which stocks to buy/sell/hold etc. They are built for all sort of profiles (From Retail to High Net Worth Individuals). 

6. SEBI Disclaimer

SITARAM | ASSOCIATION of MUTUAL FUNDS in INIDIA (AMFI) registered Mutual Funds Distributor | ARN No – 354499

Do your own research before invest any money into mutual funds and if you want to invest through us you can click on the whatsapp icon to get in touch with us.