Mutual Funds and the Mutual Funds Agents

There are numerous Mutual Funds currently active in India. With over 40 Asset Management Companies and over 10000 active schemes, the retail investor is left confused as to which the right fund is for him and where to park his money. But let’s focus on the size of the Mutual Fund Industry First. The Asset Under Management (AUM) combined under all the available schemes reported at the end of 2016 stands at 16.93 lakh crore.

That is a sizeable number when analyzed in isolation. But when compared to the number of households that actually invest in Mutual Fund Schemes, we get a clearer picture of the current scenario. The data published in a recent report on Mutual Fund Investments in India by the analytics firm, Boston Analytics has shown that less than 10% of households invest into mutual funds.

The mutual funds market in India, just by plain numbers still seems untapped. This could be so for a variety of reasons. Studies have shown that more than 80% of the investments by Indians are towards Gold and Infrastructure (Housing). Another reason for the small number of participants in the mutual fund segment could be the notion that these investments are risky in nature.

In the same report published by Boston Analytics, participants with a high savings rate were surveyed. Results give us a deeper insight to the real reason behind the untapped market. Of the respondents that have a high savings rate, close to 40% of the respondents who live in Tier I cities considered investments into mutual funds very risky. 33% of the respondents living in Tier II cities sighted the reason for non-participation as not knowing where and how to participate in such assets.

There you go! If one understands the data comprehensively and reads between the lines the real problem is not of risk of the capital invested. It is primarily a problem of relevant information. Can we say that investments into Gold and Infrastructure are risk averse? No, they are not. Gold, very recently has seen a sharp fall and that too within very little time. From July 2016 to December 2016 the price of Gold dropped more than 17%. Previously too, Gold prices have seen such sharp falls in price. From September 2012 to December 2015 we saw a fall in the price of more than 40%. I am not trying to suggest that people should or should not make investments into Gold. All that we are trying to convey is that people in India continue to do so despite the risky nature of this asset.

So the real problem of low number of household participation in Mutual Funds is the view that they have on these funds i.e. very risky. The view has been created due to lack of information about the product. So the real problem is that of lack of information. Yes, these funds are subject to market behavior and risks, but one should note the funds in the capital markets are managed by individuals with one of the highest knowledge and pedigree in the field of finance.

Investing with the smart Mutual Fund Agent

If there is a lack of information about these products, how the Investor can attain more knowledge about the product? Moreover, knowledge is one aspect; the other is the choice of the appropriate product. This is where the investor has to make the choice of a good financial advisor. Today there are over 2000 CFP professionals who help clients make smart investment choices. They work as Mutual Fund agents and have the responsibility of guiding the investors in the right way. Most of the information is available online, but how does one make the smart choice of the product, keeping in mind his/her risk appetite, investment goals and the tenure of investment.

Mutual Fund Agents help investors in bridging the knowledge gap. Wealth Advisors and Certified Financial Planners have the relevant market experience, know all the matters related to the taxation of these products, can provide a comparative analysis of similar investments in other products and best of all they can guide the clients in their investment journey. Making investments is a knowledge driven field where the experience of wealth managers and CFPs adds great value. Let’s look at the different types of products that are on offer for the investor in this segment.

Products are classified into two broad categories of Equity Mutual Funds and Debt Mutual Funds. These are very different products based on the risk appetite and the nature of returns that are expected from these. Taxation of the interest that is earned is different too.  Any fund that deploys more than 65% of the money into equities is known as an Equity Oriented Mutual Fund. As you can see below there are many sub-categories within Equity and Debt Funds that investors can choose from. Therefore we cannot stress enough the value addition that wealth managers bring to the fore. It’s all about managing your money smartly and Equity and Debt Funds give the opportunity to investors to do so.

Benefits of investing with Mutual Fund Agents:

  • Information and Knowledge about the products
  • Constant Review and Monitoring of the Investor’s Portfolio
  • Provide the Demat facility to invest in these funds
  • Provide an online platform to help you enter and exit the markets from the comfort of your work and homes
  • Intimate the investors about New Fund Offers
  • Provide portfolio Advisory Services for existing clients

There are many positives of these funds. But we cannot deny the market risk that they carry. All investors should remember a simple rule that comes in very handy for Investors while understanding risk. The larger the time frame of Investments the smaller will be the risk involved. Risk and tenure of the investment share an inverse relationship. That is why it advisable for people in their 20s and 30s to have equity-oriented portfolio.

Equity Mutual Funds and Debt Mutual Funds are treated differently in taxation as well. Returns from Equity Mutual Funds are tax free (the capital gains from investments) after the 1st year. Before that time period there is a flat tax on the gains at 15% (if one is in the 20% or 30% it is still less compared to traditional saving options that tax gains according to the tax slab).

For Debt mutual funds the taxation is a little different. The difference is in the definition of short term and long term as well as the rate of tax. If an investor redeems his/her investment before 3 years he will be considered a short term investor in Debt Funds. Consequently, he will also be liable to pay short term capital gains tax on the gains from the investment (amount over and above his principal invested) as per his tax slab. This means the gains from the investment will be added to his earnings and then taxed according to the tax slab rate. If the investor holds the investment for over 3 years then he is considered a long term investor and is liable to be taxed as per the Long Term Capital Gains Tax. The long term capital gains from Debt Mutual Funds are taxed at 20% after indexation.

Documents required for investing in a Mutual Fund (through the online channel):

  • Pan Card
  • Address Proof
  • 3 Photographs
  • Necessary Application Forms for the online mode.
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