Are Mutual Funds the best solution to India’s Saving Problem?
You must have come across advertisements that assert “Mutual Funds Sahi Hai” (interpreted closely as Mutual Funds are good). But have you ever wondered why mutual funds are promoted with such enthusiasm in India? Why are institutions working towards demystifying myths and educating people about the infallibility of mutual funds?
Indians have always been good savers. But saving alone neither yields any substantial benefit nor provides an incentive to save more in turn. Therefore, savers need to aim higher and invest in options that yield benefits and lead to growth in their savings. But alternatives like fixed deposits- hardly anything is earned after accounting for inflation or the stock market- the add-on risk is just too much, render saving and investing non-lucrative.
Low saving is a recent phenomenon in India and this saving problem is definitely going to hurt India’s economy. Humans, especially savers, are prone to irrational actions and therefore, need to be “nudged” in the right direction and these “nudges” can do wonders. Mutual Funds are one such “positive nudge” that offer an escape route and provide a solution to India’s saving problem.
Mutual Funds involve pooling resources from multiple investors to invest in safer securities like stocks, bonds and other assets. Operated by professionals, mutual funds are aimed at producing income and capital gains for investors. They are designed to suit different investment tenures and provide high liquidity. No matter what your income is, you can always find a mutual fund that matches your financial goals and risk appetite.
One doesn’t need a very large amount. Invest as much as you want as per your convenience. And the best part is that you can even decide the amount of each instalment! Mutual Funds let savers begin their investments with as low as Rs. 500. Some of them even allow starting with just Rs. 100. Therefore, every penny you save counts. Often, an over-ambitious saving target falls flat on the face.
Mutual Funds promote a disciplined approach that helps in remaining committed to save and invest on a regular basis. Also, achievable targets provide an incentive to slash unnecessary expenditure and help in increasing one’s saving potential. On top of that, liquidity of mutual funds lets you retrieve money quickly in case of a rainy day.
Furthermore, mutual funds provide an option of investing monthly via Systematic Investment Plan (SIP). This allows savers to make additions to their savings regularly and helps them tide over market anxieties by investing at times favourable to them. Invest if the market is exuberant. Withhold your money if the state of the market is pessimistic. Also, SIPs entice them to treat windfall incomes as salaries, a nudge to save and invest.
In case of mutual funds, the cumbersome task of taking on research on where to invest and constantly understand investing is outsourced to a professional expert, thus, ensuring your savings are in the right place. Given India’s low financial literacy, access to professionally managed portfolios is a boon for small and individual investors. Also, regulation by SEBI and the colour coding system, indicating investment’s risk level turns mutual funds into a safe and transparent destination for saving.
Though good at saving, country’s extremely risk-averse savers don’t fare well in the investing domain. This, in turn, fails to stimulate saving. Mutual Funds are vehicles to put down your savings in equity markets. If one is too cautious and worries about the ups and downs of the market, he can go for hybrid funds instead of pure equity ones.
This lets you diversify and to diversify is to reduce risk. For instance, a person investing only in one company stands to lose a great deal of value because all his money is tied to just one company. But the division of stocks in multiple firms reduces risk and economic strain as one firm is just a small part of your portfolio. Diversification and risk-sharing in mutual funds ensure that landing is smoother even if the markets crash. This helps tackle loss aversion bit by bit.
In India, mutual funds have played an important role in channelling retail savings in capital markets in a big way and have made a significant contribution to the development of Indian economy. At present too, most of the funds from employer-sponsored retirement plans go towards mutual funds. Therefore, it is necessary to enhance India’s saving potential by striving towards enabling people to understand that mutual funds are an ideal route and a perfect solution for India’s saving problem.
Written By- Simran Saini