mutual fund

Mutual fund’s ad from AMFI with the tag line “Mutual Fund Sahi Hai” is a great one. It resonates with most of us and is done in a very light-hearted manner. 

While these ads are catchy and quite frequent these days, they do not tell the full story. “Mutual Funds Sahi Hai” is not a fact like the sun rises in the east of India is a democracy. Facts don’t change with time. They remain the same everyone including you and me – completely independent of our situation.

While there are multiple advantages but this fact is not true for Mutual Funds (MFs). The ads just speak half the truth. They don’t tell you these things – when is it good? For whom is it good? Which one is good for you? Is it the right time to invest in MF? You get the gist. 

That being the case, along with general sentiment in the last 5 years has led to a record increase in SIPs of mutual funds. A record of 11.8 Cr new SIPs were registered in FY19-20 compared to 10.96 Cr in the previous FY18-19. 

While AMFI has done a lot of marketing around “Mutual Fund Sahi Hai” combined with India’s economic growth which led to this sudden jump in MF AUM’s in the last few years. 

Assets Under Management (AUM) of Indian Mutual Fund Industry as on 31st March 2020 stood at ₹22,26,203 crore. In the last 10 years, the AUM has increased by more than 362%, and while the increase is more than 200% in the last 5 years alone. 

The total contribution of SIP in FY19-20 stood at ₹1,00,084 Cr as shown on the below graph.  

The SIP contribution has increased by 2.27 times in just 4 years from FY16-17 to FY19-20. 

Source: AMFI

As you can see in the below graph, March month has maximum contribution barring an exception in FY18-19. This is also because of a lot of new SIPs get registered in the month of JFM (Jan-Feb-Mar) to save taxes by investing in ELSS under section 80C of the income tax act 1961. This is the main growth driver for MFs.

Source: AMFI 

Why Mutual Funds Sahi “Nahi” hai?

As we explained earlier, this is not a fact. Then why we get so many calls, emails, and see advertisements about “Mutual Fund Sahi Hai”. There are multiple factors to this why. We will talk about the 2 most important ones.

  1. Protection Foundation Assumptions by Mutual Fund (MF) Houses

One of the assumptions MF houses make in all these ads is that the consumer has already built the protection foundation from any financial shock. The amount thus being invested is a surplus one that will not be needed for any financial crunch. But that is not the case with all the investors investing in MFs. 

For example, Suppose you start a SIP of Rs. 5000 per month and have been doing this for the last 2 years. Markets till last year has been good and your investment has increased to around Rs.1.5 lacs ????

But then suddenly someone in your family falls sick!! and you need around 5-6 lacs. The insurance cover is from your employes is for Rs. 2 lacs and you have savings of around 2 lacs. The natural thing for you to do is to break your SIP and take out money from Mutual Funds. 

God Forbid if the situation of the market is just opposite and if your investment amount has decreased to 1 lac, you might even have to sell mutual funds at losses. So much for the 2-year returns!!

  1. It’s all about money for MF houses

You make money only if your invested mutual fund performs well in the market. Do you know how your MF House makes money? You will be surprised to know that MF Houses charge around 1.5-3.5% of the overall fund’s asset value.

These charges come in various forms like Entry load, Exit Load, Transaction Charges, Total Expense Ratio (TER), etc.  Morningstar published a report in 2018 which claims that India is the most expensive geography when it comes to the expense ratio of equity and allocation funds. 

These charges are independent of the funds market performance. That means MF houses will make money irrespective of market conditions or their funds’ performance. They make more money when people invest more in their funds. There is no correlation between performance and earnings for MF houses. 

So the catchy ads you see about “Mutual Fund Sahi Hai” as a fact is to lure you to invest more of your hard-earned money. Almost no MF houses ask their investors to redeem the MF units in an expensive market. Even if that is the best advice in an expensive market, seems logical. 

MF houses are supposed to look after investor’s interest but sadly redeeming MF units affect their earnings. However, there are few fund managers who inform their investors about it and warn them not to invest. But it’s a very small number. 

That’s why you need to do your own research before investing or you must have a financial advisor guiding you through tough markets.

Lesson

Before starting any investment you need the foundation of protection. This protection is in the form of health insurance, term insurance, and savings of at least 6 times your monthly salary in case of any emergency.

With this foundation, you can start investing in mutual funds to create wealth. However, don’t just blindly fall for ads. Mutual Funds Sahi hain only when you have the foundation in place. Else, they might be perfect traps.

Check on RefreshMint App if you have the protection foundation in place. Once you do that, you will also get an option to unlock best suited mutual funds recommendation for you.

RefreshMint is a financial App, designed to simplify finances for the young Indians. With us, you get full control of your financial life. Get a free financial health check-up with RefreshMint today.

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