Why are investors investing their money in mutual funds?

Nifty was down by around 9% in March 2023 compared to a year back. However, the inflow in the mutual funds rose by 31% in the same month, which indicates towards growing faith of investors in mutual funds as an investment instrument.

As per 31^st March data by AMFI, the total asset under management (AUM) grew to Rs. 39,42,031 crores while the average AUM touched Rs. 40,04,638 crores in FY 2022-23, up from the average of Rs. 37,56,682 in FY 2021-22.

This is quite an interesting scenario when the markets are highly volatile but the mutual fund investments are growing constantly. Chief Executive of AMFI, N S Venkatesh commenting on this scenario, said that investors are routing their money through mutual funds in the equity market rather than directly investing in the equities. The growing inflow into SIPs is another evidence of investors’ growing interest and faith in mutual funds. In FY 2022-23, SIPs attracted over Rs. 20,00,00 crores and the numbers are growing every month for the past 25 months in a row.

Reasons behind the growth of the mutual fund industry in India

The rise in mutual fund investments is not an overnight phenomenon. There are ample reasons behind this shift in the investment space especially when it comes to retail investors. Let’s figure out why investors are putting their money into mutual funds in a volatile market condition –

Growing financial awareness: One of the primary reasons investors shifting to mutual funds, especially SIPs from direct equity investment is the fact that people are becoming conscious about their investment choices. Mutual funds offer less risk compared to direct equity investment. So, retail investors who are not stock market pros or investing for long-term financial goals, find it easy to invest in equities via the mutual fund route. SIPs help the investors average out the buying cost of the assets and also through SIP, the investors do not need to time the market. All these lead to growing interest in mutual fund investments.
Digitalization: The next and one of the major reasons for this unique situation is digitalization. Nowadays, you will find a mobile application for almost all fund houses or mutual fund distributors. This is helping retail investors as they can directly invest in mutual funds now, without the help of any financial advisor. Also there are direct schemes where they can save their cost of investment as well which earlier used to go to the agents. Investment apps provide all the required information about the funds in one place and also there are different charts, performance comparisons and financial tools to help the investors analyze on their own. While this may be a little risky if you do not have any knowledge about the investment space, putting in a little effort can help you gain the required knowledge. Moreover, with the digitalization of the payment process, SIPs now can be automated which also has an impact on the growing investment in SIPs. The investors do not need to track the market daily movement anymore or keep in mind the date when to invest, after automating the SIPs, and linking the investment account with the bank account.
Macroeconomic events: Macroeconomic events such as Russia and Ukraine war, or trade war between China and US and the cold war between China and India can be regarded as another major factor driving people away from the equity markets. In the past year, the nifty almost fell by 4% however, the influx of funds in mutual funds grew by 7% in the same period and these macroeconomic factors got to do a lot with this scenario. In mutual funds, especially when you are investing via the SIP route, you are investing a small amount of money every month. When an investor invests directly in equities, usually it is a lump sum amount. So, when the market is volatile, investing a lump sum amount into equities means putting the entire amount into a risky zone while with mutual funds, the risk gets mitigated as the investment can be spread over a long span. Another thing connected to macroeconomic events affecting the equity market is that retail investors might not have the required resources to investigate or analyse these macroeconomic events’ effect on the equity market and how the markets will turn out, so investing via mutual fund route becomes easier for them to opt for where the funds are managed by professionals.
Inflationary pressure: Last but not least is the inflationary pressure that has clouded the entire global economy and the central bank (RBI in India) was increasing the repo rate continuously to tackle the inflation. An increasing interest rate in an economy means corporate sectors getting affected and a slowdown in business/ production which leads to turbulence in the stock market. Though the interest rate hike has paused now investors are still unsure whether there will be more increase in the interest rates or not which is why the investments have slowed down as well, especially through the direct equity investment route.

How you can be a part of this growth?

Many experts are predicting FY2023-24 to be a year of mutual fund investments. The fintech revolution, growing financial literacy, and pause in interest rate hikes all are indicating a growing market and mutual funds are turning out to be one of the favourites of investors, especially the new-age investors.

If you are looking to invest in mutual funds, then you need to follow a few rules to make your investments grow and earn the desired returns.

First thing first, you need to analyse your investment objective. According to your investment objective, you need to pick the mutual fund scheme and also choose the growth or IDCW option. Suppose, you are in your 20s and you want to invest for your retirement, then you can pick equity or hybrid funds where the returns are higher and also choose the growth option as you want capital appreciation from your investment at present. Similarly, if a person is near the age of retirement, he or she can choose debt funds to preserve the accumulated funds and also may choose the IDCW option to get a regular payout.
The next thing you need to consider is analyzing the fund’s past performance. Long-term performance is always more accurate than performance for a shorter period. Apart from past performance, check the forte of the fund manager.
Evaluate the risk profile of the fund, and try to check whether it is in alignment with your risk tolerance level or not.
Often mutual fund investors ignore the tax aspect which is crucial for analyzing and picking the right funds. Try to anticipate the after-tax returns of the funds as that can provide a more accurate analysis of the funds.
Finally, check the expense ratio and exit load on the funds and figure out how these costs can affect your returns.

So, if you are unsure of investing in equities at present due to the volatile market condition, or for any other reason, such as lower disposable income, or limited knowledge about the market, mutual funds can be your saviour. With mutual funds, you can invest in businesses which are growing without directly investing in their stocks.

Source: ET, Livemint, AMFI