This document discusses risk management in mutual funds. It begins by introducing mutual funds as professionally managed investment vehicles that provide diversification and lower costs compared to other options. While mutual fund investment has increased in India, the percentage of people using mutual funds remains low. The paper aims to understand the benefits of mutual funds and reasons for their lack of popularity. It finds that mutual funds offer benefits like diversification, professional management, variety, transparency and liquidity. However, some reasons for their unpopularity include ignorance, complexity, ambiguity in returns, market volatility, and poor past performance of some funds. Overall, the document argues that mutual funds can provide good returns when properly understood and invested in for the long run.
A project report on different schemes of mutual funds and their comparative ...
Risk Management and Reasons for Investing in Mutual Funds
1. RISK MANAGEMNT IN MUTUAL FUNDS
ABHAY.G,UG Student,Dept.of Commerce&Management,Amrita Vishwa
Vidyapeetham,Amrithapuri
THEJUS.C.NAIR,UG Student,Dept.of Commerce&Management,Amrita Vishwa
Vidyapeetham,Amrithapuri
SANDEEP MENON,UG Student,Dept.of Commerce&Management,Amrita Vishwa
Vidyapeetham,Amrithapuri
Abstract
Mutual funds are the attractive investment avenue to the public with an
investible surplus.It provides professionally managed,diversified portfolio at a lower
cost with better return compared to other investment choices.Recently the Indian
mutual fund industry has undergone phenomenal changes.Once mutual fund industry
was the lucrative platform,but the unexpected volatility in the return and risk profile
made the investors to revise and reallocate their investments in mutual fund.Though
risks are less in investing in mutual funds,percentage using mutual funds are a lot less
in number.The aim of this paper is to know the benefits of mutual funds and to
analyse the reasons why people distance themselves from mutual funds.The study is
based upon secondary data collected from various sites and books.
Introduction
The Indian mutual fund industry, though still small in comparison to the size of
the Indian economy, offers Indian, and in some cases global investors, both big and
small, an avenue to invest safely and securely, at a reduced cost, in a diverse range of
securities, spread across a wide range of industries and sectors.Mutual fund is a single
large professionally managed investment which pools the savings of many individual
investors with similar investment objectives.It provides professionally managed
diversified portfolio at a lower cost with better return compared to other investment
choices.Mutual funds in India has taken a different scenario.Investment in mutual
funds has increased dut to the unexpectd rate of return and risk profile.Though
investment rate has increased than before the percentage is stil less.This paper aims at
understanding benefits of investing in mutual funds and analyse the reasons why
mutual funds haven’t become much popular.
Objectives
To understand the benefits of investing in mutual funds.
To identify the reasons why people stay away from mutual funds.
Research Methodology
The study is based upon secondary data from various sources and analyzing
them.Resources adopted in this study are:
a) Go through different research websites where project topic is already
available.
b) Go through various pamphlets and brochures of different banks which include
details and features of different mutual funds.
Analysis
2. From the research it is clear that mutual funds are the best ways to invest considering
risk factor is less and returns are more.Reasons to invest in mutual funds are:
a) Mutual Funds Offer Diversification:
The beauty of a mutual fund is that you can buy a mutual fund and obtain
instant access to a hundreds of individual stocks or bonds. Otherwise, in order
to diversify your portfolio, you might have to buy individual securities, which
exposes you to more potential volatility.
b) Mutual Funds are Professionally Managed:
Many investors don’t have the resources or the time to buy individual stocks.
Investing in individual securities, such as stocks, not only takes resources, but
a considerable amount of time. By contrast, mutual fund managers and
analysts wake up each morning dedicating their professional lives to
researching and analyzing current and potential holdings for their mutual fund.
c) Mutual Funds Come in Many Varieties:
A mutual fund comes in many types and styles. There are stock funds, bond
funds, sector funds, target-date mutual funds, money market mutual funds and
balanced funds. Mutual funds allow you to invest in the market whether you
believe in active portfolio management (actively managed funds) or you prefer
to buy a segment of the market with no interference from a manager (passive
funds).
d) Mutual Funds Offer Transparency:
Mutual fund holdings are publicly available (with some delays in reporting),
which ensures that investors are getting what they pay for.
e) Mutual Funds Are Liquid:
If you want to sell your mutual fund, the proceeds from the sale are available
the day after you sell the mutual fund.
f) Mutual Funds Offer Automatic Reinvestment:
An investor can easily and automatically have capital gains and dividends
reinvested into their mutual fund without a sales load or extra fees.
Source:Report on Mutual Fund Investments in India by Boston Analytics
3. Some of the reasons why people distance themselves from mutual funds are:
a) Ignorance about Mutual Funds:
On most occasions, potential investors stay away from mutual funds due to the
lack of awareness about the product. The conventional methods of bank
deposits, insurance take precedence. Despite the advertisement and
promotional campaigns by various asset management companies, the
hesitation towards newer investment strategies is driven by unawareness and
fear of unknown.
b) Not able to understand the Intricacies of mutual funds:
Mutual fund is no child’s play. It is associated with a lot of procedures and
requires thorough understanding. To suit specific needs, the market has a wide
array of mutual fund schemes from which an investor can choose. Analyzing
the intricacies of these mutual fund schemes before investing is a cumbersome
process for a layman, who would then tend towards traditional investment
options such as post office or bank savings.
c) Ambiguity associated with Mutual Funds in achieving returns:
This is one of the key attributes of mutual funds that wards away people from
it. History gives totally a different idea. For the past 20 years, the returns
achieved through equity is (based on an average of 1 year rolling) about 11%.
If you look at the same data for the past 10 years, it is approximately 17%. No
fixed plan could achieve this much growth in the long term. Be assured,
equities are the best option to invest as they do beat inflation in the long run.
d) Market Volatility impacting Mutual Funds:
Most of the investors have inhibitions about the stock market and its
oscillating tendencies. They believe that mutual funds are primarily equity
oriented funds and its returns fluctuate like the share market. They are
unaware that there also exists debt related or hybrid funds which strike a
balance between return and safety. Also, mutual fund investment involved
investing in gold exchange-traded funds, fixed funds, short term debt funds
and funds that balance your investment. During times of market becoming
unpredictable, your best cushion could be mutual funds, if disciplined
investment plans are chalked out.
e) Poor Performance of previous funds:
On most occasions, investment strategies are finalized based on
recommendations from family/friends. If one of them suffers a loss, potential
investors feel a sense of fear and isolate themselves from mutual funds. We
need to analyze the root cause of such losses to decide the best course of
action. As it is often said, “investment decisions should be made from the
brain rather than the heart”. A possibility of one loss doesn’t mar the
probability of returns of other mutual fund schemes.
4. Source:Report on Mutual Fund Investments in India by Boston Analytics
Conclusion
The system to invest in mutual funds is a bit complex and involves paperwork, etc.By
spending quality time with the investment advisor to understand how mutual funds
work will help gain a huge from your investments. . Likewise, it is important to
understand the intricacies of how mutual funds work and start investing in it.
1. For the first time investors, mutual funds offer short term debt funds to pilot test
your investment model on mutual funds.
2. Understand the intricacies of investing in mutual funds
3. Understand the risk associated with each product and how these products would
react during a volatile times
4. Learn about the benefits mutual funds bring in that include but not limited to
broadening possibilities, periodic liquidity, professionally managed combined
instruments, ability to invest in larger projects, well regulated through SEBI.
As goes the popular saying,“Life is not a bed of roses” and so is mutual fund
investing. There is no one right strategy to invest and depends on the risk tolerance,
age and goals of the individual. The popularity of mutual funds can be seen by the
number of investors opting for mutual fund schemes over several years and it is the
best way for investment.
References
1) International Journal Of Functional Management,Vol-2,April 2014,SSM
Educational And Research
2) Dr.S.Gurusamy,2005,Financial Services,Vijay Nicole Publications
3) Boston Analytics - India Watch". Retrieved 4 September 2013.
4) http://articles.economictimes.indiatimes.com/2005-02-
18/news/27484537_1_sbi-mutual-fund-us-64-uti-bailout
5) Association of Mutual Funds, India. Retrieved 4 September 2013.
6) http://holisticinvestment.in/blog
7) http://www.mutualfundindia.com