Yearly Archives: 2024

India’s economy is now the fifth largest in the world, and by 2075, it wants to overtake the United States as the second largest (Source: Goldman Sachs research paper). India need substantial financial help from investors to complete this journey from the fifth to the second rank. This change will also have a significant impact on the mutual fund sector. With a manageable amount of risk, investors can increase their wealth through equity mutual funds. Let’s examine how mutual funds have developed into a prominent investing option for investor portfolios.

Mutual Fund Origin

The first investment trust was founded in London in the 1800s, and mutual funds have a long and rich history since then. But it took six decades for the first mutual fund to be introduced to the public. The Massachusetts Investors Trust (MIT), the nation’s first mutual fund, was established in 1924 and became available to investors in 1928 (Source: Investopedia).

Some funding did come in during the 1950s and 1960s, but growth was sluggish at that time. With rare exceptions, the world enjoyed phenomenal growth in the roaring ’80s and ’90s. The AUM of mutual funds in the USA increased from $5.53 lakh crore in 1998 to $22.11 lakh crore in 2022 once they acquired traction (Source: Statista).

The USA was a significant outlier in 2021, with a ratio of 140% AUM to GDP, compared to the global average of 75% (World Bank, 2021). These days, one of the most common investment options in investor portfolios is mutual funds.

History of Mutual funds in india

The mutual fund sector began in India in 1963 and has expanded rapidly ever since, particularly in the past 20 years. Let’s examine the five stages of mutual fund history.

Phase I: 1964–1987

The mutual fund sector in India began with the government’s establishment of the Unit Trust of India, which operates under the administrative and regulatory jurisdiction of the Reserve Bank of India (RBI). As a result, the Unit Scheme 1964 (US ’64), the first mutual fund scheme ever, was created, launching UTI into the mutual fund sector. Following UTI’s separation from the RBI in 1978, regulatory authority was transferred to the Industrial Development Bank of India (IDBI).

Phase 2: Public Sector MF Ingress (1987–1993)

The introduction of public sector mutual funds in 1987 was a key milestone, driven by the Public Sector banks, Life Insurance Corporation (LIC), and General Insurance Corporation (GIC). The first-ever “Non-UTI” mutual fund was created in the same year, when SBI Mutual Fund was founded. LIC followed suit, establishing its mutual fund in June 1989 and GIC’s fund in December 1990. The mutual fund AUM reached an incredible Rs 47,004 crore by the end of 1993 (Source – AMFI).

Phase 3: Private Sector MF Ingress (1993–2003)

When SEBI was founded in April 1992, the mutual fund sector saw a paradigm change. This was a critical time in protecting investor interests and supervising the expansion and regulation of the securities market. The first year that SEBI regulations were implemented for all mutual funds—UTI excluded—was 1993. A new era of mutual funds, available to a wider range of investors, began with the arrival of private sector funds. Overseas sponsors are now able to establish mutual funds in India in greater numbers. The AUM of mutual funds exceeded Rs 1.22 lakh crore by the end of January 2003 (Source: AMFI).

Phase 4: April 2014 – February 2003

After UTI was revoked in February 2003, it was divided into the UTI Mutual Fund and the Specified Undertaking of UTI (SUUTI). The fourth stage of the mutual fund industry began with the restructuring of UTI and the merging of many private-sector mutual funds. The effects of the housing bubble were also seen during this time. Furthermore, the removal of the entrance load increased the difficulties the mutual fund business faced and forced it to restructure completely over the course of the following two years. As a result, the industry grew slowly between 2010 and 2013 (Source: AMFI).

Phase 5: Present Situation (May 2014–currently)

In September 2012, SEBI implemented progressive restructuring steps in an attempt to restart the industry’s growth after the worldwide catastrophe caused by phase 4. In May 2014, the mutual fund AUM crossed Rs 10 lakh crore, and in August 2017, it crossed Rs 20 lakh crore. The AUM of the mutual fund sector as of January 31, 2024, is Rs 52.74 lakh crore, a six-fold increase over the previous ten years. As of January 31, 2024, there were 16.96 crore folios, having surpassed the 10-crore milestone in May 2021 (Source – AMFI).

This has been made possible in large part by growing public knowledge of mutual funds, the regulatory environment, and mutual fund distributors. A wider audience can now participate in mutual funds through SIP due to its ease of use, low entry hurdles (as low as Rs 100!), and convenience. In April 2016, the number of SIP accounts surpassed one crore, and as of January 31, 2024, there were 7.92 crore SIP accounts. Additionally, in the next ten years, it is anticipated that the mutual fund industry will enroll 10 crore investors and surpass an AUM of Rs 100 lakh crore (Source – AMFI).

According to AMFI and the World Bank, India’s AUM to GDP ratio is only 17%, which shows that the sector is still in its infancy and has a long way to go before reaching maturity and development. Distributors of mutual funds have been a driving force behind industry expansion and will remain crucial to it. The cooperative efforts of regulators, fund houses, and distributors will be crucial in creating a stable and investor-friendly environment as this industry navigates its transformation.

 

The mutual fund sector in India has grown to become the fifth largest economy in the world, and its AUM has reached an incredible Rs 57.26 lakh crore (AMFI, 30 April 2024) and is still growing at an explosive rate. Even with the industry’s rapid expansion, mutual fund investors are still remarkably underrepresented. With 144 crore people living in India, just 4.5 crore people invest in mutual funds, or roughly 3% of the country’s total population (United Nations Population Fund and AMFI, March 2024).

Due to industry-specific language, one of the issues causing the under-penetration is investor ignorance. Furthermore, the abundance of mutual fund varieties on the market may contribute to decision-making uncertainty. We will attempt to deconstruct financial jargon and clarify various funds according to market capitalization in this blog. To begin comprehending these funds, let’s first review market capitalization.

Market capitalization: What is it?

The total value of outstanding shares of stock in a publicly traded corporation is referred to as market capitalization, or market cap. It can be computed by multiplying the price per share by the total number of outstanding shares.

Total outstanding shares multiplied by the share price equals the market capitalization.

The market capitalization gives information on the size and worth of the company. Twice a year, AMFI publishes a list of companies ranked by market capitalization. An organization’s classification as large-cap, mid-cap, or small-cap is based on its market capitalization and the AMFI list.

6 Types of Mutual Funds Based on Market Capitalisation

 

Mutual Fund with a large cap

An equity mutual fund that invests at least 80% of its assets in large-cap stocks is known as a large-cap fund. Large-cap firms are the top 1st to 100th corporations in terms of complete market capitalization, as per SEBI’s circular of October 6, 2017. These businesses frequently have a long history of consistent performance, are widely known, and are well-established.

Large-cap funds’ stock values are typically less volatile than those of smaller corporations because they invest in well-established, elite companies. Furthermore, returns from large-cap funds are usually reliable and constant. In contrast to funds that invest in smaller, fast-growing businesses, they typically have a lesser growth potential because of the low risk and steady returns. 

Mutual Fund for Mid-Capacity

An equity mutual fund that invests at least 65% of its total capital in mid-cap stocks is known as a mid-cap fund. In terms of complete market capitalization, mid-cap companies rank between 101st and 250th, according to a circular issued by SEBI on October 6, 2017. Unlike large-cap corporations, these businesses are typically still in the growth stage and have not yet reached a point of saturation.

Because they have more room to grow, mid-cap companies have a stronger growth potential than large-cap corporations. This suggests that investors’ returns increase in tandem with the value of the underlying securities of a mid-cap fund. Risk is an element that comes with tremendous growth potential. When compared to large-cap corporations, mid-cap enterprises are by nature riskier. But because a mid-cap fund makes investments across a variety of securities, the company-specific risk, or idiosyncratic risk, is diversified. Thus, before making an investment, investors should carefully consider their risk tolerance and financial requirements.

Mutual Fund for small caps

A fund type that invests at least 65% of its capital in small-cap firms is known as a small-cap fund. According to the previously cited SEBI circular, small-cap firms rank 251st through 351 in terms of total market capitalization. These are the new businesses that are just becoming established. These new businesses have the potential for rapid growth since investing in them allows you to seize the early stages of their success story.

Although there is room for tremendous development in small-cap enterprises, there are trade-offs to be aware of. Because they are more vulnerable to economic downturns than large-cap and mid-cap enterprises, small-cap businesses carry a higher amount of risk. Furthermore, higher volatility in small-cap fund returns is a direct result of the volatility in these companies’ stock prices.

Big and mid-sized Mutual Funds

An equity mutual fund that invests at least 35% of its capital in the stock and associated instruments of large-cap firms and 35% of its capital in the stock and similar instruments of mid-cap companies is known as a large-and mid-cap fund.

Because they invest in a variety of large and mid-cap companies, these funds offer the advantage of diversity. These funds also have a low level of risk since they offer the stability of large-cap funds and the growth potential of mid-cap funds.

Mutual Fund with Multiple Caps

A minimum of 75% of the assets in a multi-cap fund are allocated to equities and equity-related products. A September 11, 2020, SEBI circular on the asset allocation of multi-cap funds states that the 75% investment in equities and equity-related securities is divided into the following categories:

a minimum of 25% of the entire amount invested in large-cap firms’ equity and similar securities

25% or more of the entire amount invested in mid-cap firms’ equity and related securities

25% or more of the total amount invested in small-cap firms’ equity and related instruments

Investing in a multi-cap fund exposes investors to a range of companies, which helps reduce risk. Additionally, these funds give investors access to both the stability of large-cap corporations and the development potential of small and mid-cap enterprises.

Mutual Fund with Flexicap

A minimum of 65% of the assets in a flexi-cap fund are allocated to equities and equity-related products. A flexi-cap fund, which was first introduced by SEBI in a circular dated November 6, 2020, is an open-ended dynamic equity program that makes investments in small-, mid-, and large-cap enterprises.

As the name implies, the fund manager in a flexi-cap fund is free to decide how much of his assets are allocated to large, mid, and small-cap companies. In addition, the fund manager has the ability to dynamically modify the portfolio in response to changes in the market. Because the fund manager makes active calls, a Flexi-cap fund may generally be more volatile. 

In summary, mutual funds provide a range of products that fall into several categories and have varying degrees of risk. Comprehending the notion of market capitalization and the distinctions among funds falling under this classification can aid you in making well-informed investing choices. It can be difficult to select the best mutual fund for you based on your risk tolerance and financial needs. Furthermore, even though we discussed the many kinds of funds according to market capitalization in this blog, there are still a lot of mutual fund categories, including sector funds, thematic funds, and debt funds, which adds even more complexity. As a result, the investment you choose should be based on your financial situation, risk tolerance, and needs.

On occasion, it can be simple to get started yet difficult to finish. This is especially true in the financial realm, where buying mutual funds is a wise choice, but many people find it difficult to navigate their intricacies. In this context, a committed mutual fund distributor can offer significant benefits. Let’s say you intend to make your own investments in mutual funds. If so, you’ll need to do a lot of research to expand on your knowledge of choosing the appropriate asset class, calculating the appropriate investment amount, knowing when to enter or exit the market, and other related topics. This is where having a mutual fund distributor’s advice will make all the difference for you.

Acting as a middleman, a mutual fund distributor assists investors in meeting their financial objectives and making well-informed decisions. Reaching your financial goals depends on you realizing the benefits of collaborating with a committed mutual fund distributor, regardless of your level of experience with investing.

Advantages of Using a Mutual Fund Distributor for Investments

Let’s examine the areas where a qualified mutual fund distributor’s participation will be crucial:

Identification of Needs

Each investor has unique goals and motivations for making investments. When making an investment, it’s critical to take your goals and appetite into account. Mutual fund distributors have the necessary skills and understanding to guide you through the complex world of mutual fund investing. They will assist you in determining which demands to prioritise and how much money will need to be invested in order to meet those needs. Distributors of mutual funds can help you select the product or investment tool that best fits your needs. They may offer you individualised investment advice and assist you in understanding the most recent market trends and fund performance, regardless of your preference for SIP, SWP, or STP.

Evaluation of Risk Tolerance

Determine the level of danger you are willing to take before you begin. Your level of comfort with the chance of loss is determined by your level of risk tolerance. While some care only about the biggest return on investment, others place a premium on being safe. You can choose the mutual funds that best suit your investment needs and assess the appropriate amount of risk by evaluating your risk tolerance. You may determine this ability to eliminate risk and choose what is best for your portfolio with the help of a mutual fund distributor.

Choosing the appropriate distribution of assets

Choosing the appropriate asset allocation comes next, after determining the investor’s needs and risk tolerance. The portfolio is made more diversified by the asset allocation. Another benefit of investing through a mutual fund distributor is diversification, which is a crucial tactic in risk management. Mutual fund distributors can assist in lowering concentrated risk in your portfolio by suggesting a variety of funds from different asset classes. This implies that the impact on your entire portfolio is minimised, even in the event that one investment underperforms. Distributors of mutual funds also employ investment managers who monitor and tweak the portfolio on a regular basis to keep it in line with your investing and financial objectives. Taking advantage of opportunities and managing market fluctuations are made easier by this proactive management.

Managing in an erratic marketplace

The erratic nature of the financial markets causes abrupt swings. Geopolitical tensions and economic crises are two elements that affect the variations. Investors are motivated by feelings of greed, anxiety, and hope during these periods of market volatility. In a bull run, they invest more, and in a down market, they invest less. These feelings frequently impair investors’ judgement, leading them to act impulsively in the near term. This makes it difficult for them to stay on a steady path toward meeting their financial needs. Here is where a Mutual Fund Distributor may help them by providing sound advice and keeping them on pace to meet their financial goals and accumulate wealth.

Evaluation and Rebalancing of the Portfolio

Distributors of mutual funds periodically evaluate the portfolio, which is an analysis of your current portfolio to ascertain its level of risk and performance. They could suggest portfolio modifications, including adding or eliminating funds, in light of the assessment in order to preserve a diverse and well-balanced investment mix. Distributors of mutual funds also offer rebalancing services, which involve helping you modify the allocation of the portfolio to better suit your needs for money and risk tolerance. These services guarantee that throughout time, your portfolio will continue to be optimised to satisfy all of your financial needs.

Updates on market regulations

SEBI is in charge of regulating mutual funds in India. SEBI periodically introduces new laws in an effort to safeguard investor interests. Every investor needs to be aware of these changes and follow them. A mutual fund distributor makes sure that information is sent to investors in a timely and accurate manner. When it comes to guiding you through the most recent regulatory and market changes, MFD is crucial.

Many of us use Google Maps as a navigational aid when we set out to travel to a new location. We can arrive at our destination on time and avoid getting lost when travelling thanks to navigation apps. In the world of finance, a mutual fund distributor serves as a consultant to help you meet your financial goals on schedule. In light of this, if you’re interested in investing in mutual funds, you should check out NJ E-Wealth site and speak with a committed mutual fund distributor who can support you on your path to financial security.