Mutual Funds now a popular choice

Mutual Funds now a popular choice

03 Dec 2018

Mutual Funds are increasingly becoming an extremely preferred avenue for investment, which, though carry market-related risks also provide investors with a good probability of earning higher inflation-beating returns over a substantial or relatively longer period of time. However, there are certain distinct differences between Mutual Funds & Fixed Deposits that make one form of investment more attractive than the other and vice versa.

Both mutual funds as well as fixed deposits have long been considered to be attractive bets when it comes to investing one’s money. Similarly recurring deposits can be compared with Systematic Investment Plans (SIP) of mutual funds. Even tax saving fixed deposits are compared with ELSS Mutual Funds.

Investing in mutual funds needs some form of identification of need and choosing the right mutual fund to get the best returns.

  • Returns - Investing in mutual funds could potentially earn much higher returns in comparison to fixed deposits.
  • Risk - Fixed deposits are essentially zero-risk investments. Mutual funds, on the other hand, are fairly susceptible to changes or volatility in the market, even though the amount of risk involved is spread over a range of stocks within the fund.
  • Costs – Mutual funds have a higher expense ratio while fixed deposit doesn’t have any additional cost other than the costs of premature withdrawal.
  • Premature Withdrawal -Individuals who wish to make a premature withdrawal on their fixed deposits will, in all probability, be required to pay a penalty but in the case of mutual funds, premature withdrawals are permitted with an exit load charge of 1% of the fund amount if a withdrawal takes place before the expiration of the holding period.
  • Taxation –Short term capital gains tax and long-term capital gains tax are applicable on mutual fund but in the case of fixed deposits, any interest an individual earns on his or her investment is taxable depending on the particular tax slab that the individual comes under.
  • SIP vs RD -The returns from a SIP for mutual funds is dependent on debt and equity markets and is also based on the fund scheme chosen by the investor. Recurring Deposit is liquid but premature withdrawal or closure will attract penalty charges. In terms of liquidity, a SIP is better when compared to a RD.
  • ELSS vs Tax saver Fixed deposit -Equity Linked Saving Scheme (ELSS) and Tax Saving FD’s are both tax-saving instruments and are eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. One can continue investing in ELSS till anytime as per his or her choice. The minimum tenure is 5 years and the maximum tenure is 10 years.

SIPs are similar to a recurring deposit where you deposit a small or fixed amount every month. In the past three-four years, there has been surge in SIP’s as equity markets have touched new highs. In the financial year, 2016-17, the total SIP contribution in the industry was Rs. 43,921 crore, and this has increased to Rs 67,190 crore in the financial year 2017-18, as per the data obtained from the Association of Mutual Funds in India (AMFI)

Despite uncertainty in the equity markets globally, inflows into equity funds have remained strong. However lately we have seen new SIPs (Systematic Investment Plans) slowing down as markets went down in the months of September and October. The number of new SIPs registered in October stood at 9.35 lakh, which was the slowest addition in six months. Between May and September, 10 lakh new SIP’s were added every month, contributing to the assets of mutual funds. However, in October, the numbers have dipped slightly. In terms of value, the contribution of SIPs, however, continues to increase. Data from AMFI shows that the total SIP contribution between April and October is at Rs 52,472 crore.

The contribution through Systematic Investment Plans (SIPs) rose up by 42% compared to the same month last year. Despite a sharp correction in the markets in October, equity mutual funds schemes continued to see strong inflows from investors. Some recovery was also observed in liquid schemes. This category saw inflows of Rs. 500 billion in October after seeing an outflow of Rs. 2.1 trillion in September. Equity schemes continue to scale new highs despite the volatility in the equity market.

As per the Association of Mutual Funds in India (AMFI), October was the best month for equity schemes because inflows into equity schemes in October stood at Rs. 126 billion. It has been the best month since March if arbitrage schemes are taken into account. The popularity and growth of Systematic Investment Plans has provided a steady stream of inflows into equity schemes. It is observed that SIP flows towards equity schemes are on the higher side.

The large quantum of pullback came as a surprise while the mutual fund industry was anticipating meaningful outflows in September for advance tax payments. RBI was intervening in the forex market by selling dollars and buying the rupee, thus liquidity had also dried up. The cash circulating in the system had gone up due to the festive season.

Income Schemes continue to remain weak. This category of schemes should also see some recovery once fear of rising interest rates and the scheme’s credit exposure subsides. Overall, the industry’s AUM rose marginally from Rs. 22 trillion in September to Rs. 22.23 trillion in October.

To conclude, SIP’s of mutual funds continue to be popular among common investors who consider it is as an appropriate instrument for long-term wealth creation

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