The rise and rise of Indian mutual fund industry.

 

The Indian mutual fund industry has made history by hitting the Rs 50 lakh Cr AUM (asset under management) mark. The journey form Rs 20 lakh Cr to Rs 30 Lakh Cr took over 3 years. The subsequent Rs 10 Lakh Cr took 2 years and the last Rs 10 lakh Cr that amassed to Rs 50 Lakh Cr took mere 13 months. That's one hell of a journey. Let me tell you that this Rs 50 lakh Cr belongs to just 14 Cr D-MAT account holders. In the month of February 2021, average monthly contribution to SIPs was Rs 7000 Cr. That same number hovers around Rs 17,000 Cr today. That's 35% yearly compounding. Retailers are driving the bull rally in India that started amidst the Covid 19 pandemic. Taking advantage of this situation, new fund houses and asset management companies are coming up with similar mutual funds with different names. Obviously, they would think about business and would love to wash their hands when the river is flowing. 

Rakesh Jhunjhunwala used to say, "Tezi mai bol bala aur mandi mai sabka mu kala," which translates to. "Everyone is the king in the bull markets," and you get the other half. There is a crazy level of euphoria going on about markets and investments. It's great that the average Indian is getting familiar with these concepts, but one should be careful, especially when you are riding a bull run for so long. Everyone should definitely take advantage of this bull run and the gains to come in the future. But remember, even mutual fund houses are there to make money for themselves and not for retailers. I still believe that one of the best ways for an average Indian to amass wealth is to invest in efficient and profitable funds with a proven track record. Don't stop your SIPs, nor get out of this bull run. But before you invest in a mutual fund, there are a few things that you should be familiar with. 

1. Different risk levels: 

   The first and important point is that the risk of every mutual fund category is different. You cannot say that a particular mutual fund category has a high risk, or a low risk based on a common scale or common parameter. Sure, if you invest in direct equity, then, in its comparison, equity mutual funds have low risk. But the risk associated with every mutual fund category is different. So, before we invest in any Mutual Fund, check the riskometer of that particular mutual fund. Every scheme has a risk assigned to it, and you can see what risks you will be taking. 

2. Direct plans give higher returns: 

   The second important point is that the Expense Ratio of Direct plans is less than regular plans. Because of this, Direct plans generate better returns in comparison to Regular plans. 

Now, some investors are under the impression that direct plans and regular plans of Mutual Fund schemes are different. That’s not true. These are just plans for the same scheme. The only difference is that there is no agent or broker in between in the direct plans, so no commission or brokerage is applied. This means lower costs of the fund house and ultimately lower annual cost you need to pay for your investments.

3. You won't get the same returns every year: 

   Normally when you hear Mutual Fund returns, they are annualized returns. This can give the impression that you will earn the same returns every year. Suppose the annualized returns of a certain Mutual Fund Scheme is 8 %. That doesn’t mean you will earn 8% every year. That’s because the returns of Mutual Funds are not linear. For example, a Mutual Fund Scheme may give you +10% returns in the first year, while it may just give -2% in the second year. There might be periods of no returns too. So, you need to be prepared to see this variability in your annual returns.

4. Consistency of return is hallmark of good funds: 
    
  A particular Mutual Fund Scheme giving a 10% consistent return is better than a Mutual Fund Scheme which has given +17% returns in the first year and -10% returns in the second year. Now, why is this consistency in performance important? So that the losses can be controlled, and you have a higher chance of earning good returns. For instance, a 5% fall in a year means the fund has to generate around 11% returns to cover the loss and give you a 5% return.  For this reason, a consistent fund will generate better returns on an annualized basis on a long-term basis. So, always pick a consistent fund.

5. SIPs help create investing discipline: 

   Automated investing via SIPs not only help teach discipline; they also help you benefit from market volatility. That’s because when the market goes down, you get more units for the same price. This helps you bring down your overall cost of investing. This is called Rupee Cost Averaging, which can help you generate good returns in the long run.

6. Asset allocation and periodic rebalancing are crucial: 

    Never keeping your eggs in one basket is an adage. And this is relevant when it comes to investing as well. Asset allocation is the process of dividing your investments across asset classes to reduce your portfolio risk. So, before you start investing, decide how much you will invest in different asset classes like equities, gold, debt, etc., and then invest. And while asset allocation is crucial, it won’t be as beneficial as it can be with rebalancing. Rebalancing means that whenever an asset class runs up and its percentage in your portfolio goes up, you book profits from it and reinvest that money in other asset classes that are part of your portfolio.

So, these were a few things that I wanted to share regarding mutual fund investments. I know most of you would be familiar with these concepts (thanks to my blogs 😉) but a little heads-up never hurts. India and Indians have got a long way to make money out of this bull run. This run might correct a bit, but it is here to stay. New capital expenditures by private players, rise in employment, cooling inflation, rising profitability, rising tax-GDP ratio, rising per capita income, rising disposable income, credit growth and many more indicators lead to one and only one trajectory, NIFTY @ 1,00,000. 

And if you still can't figure out which fund to invest in, call 8340855678. He would definitely guide you better. Just give him my reference. I doubt he would give a discount on fees though. 

Happy Investing.