Trysts with April are rather financial ones, where we scurry about trying to understand taxes, the new rules and how can we maximise our investments. We started off on a similar note too – but with a goal to get y’all upto speed with Stock markets, technical analysis et al. And so we’re here, talking about Mutual Funds & ETFs today! Let’s get straight into it 👇
Let’s set the agenda clear! Whether you’re a seasoned investor or just dipping your toes into the world of finance, there’s no denying the excitement and potential for growth that comes with these intriguing financial instruments. So, today we dive right into the world of mutual funds and ETFs in India and discover what makes them such a fascinating and lucrative investment option!
Off the bat, let’s start with a simple explanation. For the uninitiated, a mutual fund is an investment instrument that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. The fund is managed by a professional fund manager who makes investment decisions on behalf of the investors. The returns generated by the mutual fund are distributed among the investors in proportion to their investment.
And simply put an ETF or exchange-traded fund, is a type of investment fund that is traded on stock exchanges. ETFs invest in a diversified portfolio of stocks, bonds, or other securities, and the returns generated by the ETF are distributed among the investors in proportion to their investment.
Alright, let’s make this easier ✅
Say hello to Mr Kanan 👋
Mr Kanan here is a mutual fund manager.
He studied Finance and went into the business of investment banking. A few years of experience and multiple successful investments later, he approached a mutual fund house and curated a portfolio of multi-bagger stocks, or stocks that gave a good return on their investment value, to show to the house.
Once the mutual fund house was satisfied with the concept, and they did their due diligence on Kanan, our friend started getting more & more people to invest in this bag of stocks that he had curated, creating a mutual fund for investors and helping take decisions on their behalf, of course with their consent!
Mutual funds are created and managed by asset management companies (AMCs) that are regulated by the Securities and Exchange Board of India (SEBI). (Think of SEBI as a big boss that is super-strict with its rules to avoid any manipulation or malpractices.)
Now, These AMCs employ fund managers who are experts in the field of finance and have a deep understanding of the stock market. They use their knowledge and expertise to make informed investment decisions that can generate maximum returns for the investors.
🤩Fun Fact: The first mutual fund in India was introduced in 1963 with the formation of the Unit Trust of India (UTI). However, it was only in 1987 that private sector mutual funds were allowed to operate in India. Today, there are several mutual funds available to investors, offering a range of investment options.
But, what are the benefits of investing in mutual funds?
You see, mutual funds offer diversification within your financial portfolio, which helps reduce the risk of losses.
Secondly, mutual funds are managed by professional fund managers who use their expertise to make informed investment decisions that can generate maximum returns for the investors.
Thirdly, mutual funds are an affordable investment option and offer liquidity, which means investors can easily buy and sell their investments.
Lastly, mutual funds also offer tax benefits to investors!
How about ETFs?
Moving on to ETFs, or exchange-traded funds, are a type of investment fund that is traded on stock exchanges. ETFs invest in a diversified portfolio of stocks, bonds, or other securities, and the returns generated by the ETF are distributed among the investors in proportion to their investment.
It’s important to note that ETFs try to replicate the performance of a particular index, such as the NIFTY 50 or the SENSEX. So, when you invest in an ETF, you are essentially investing in a basket of securities that make up the underlying index.
And to make things more clear for you, An index ( in the context of ETFs) is designed to represent the overall performance of a particular market or a particular segment of the market. For example, if an ETF is tracking the NIFTY 50, it will invest in all 50 stocks that make up the NIFTY 50 index, and in the same proportion as the index, simple right?
🚀 Duplicate the effort, replicate the success 😛
Now, ETFs are beneficial for investors in many ways! Firstly, they provide a low-cost way to diversify your portfolio. Since ETFs track an index, they hold a large number of stocks or other securities, which means that your investment is spread across many companies, reducing the risk of any single company significantly impacting your returns.
Secondly, ETFs are highly liquid, meaning that they can be bought and sold easily on the stock exchange at any time during market hours, just like any other stock. This makes it easy for investors to enter and exit positions quickly without incurring high transaction costs.
Thirdly, ETFs offer a great deal of flexibility. You can invest in ETFs through a variety of channels, including online trading platforms, mutual fund distributors, and even through a systematic investment plan (SIP).
💡A piece of history: The story of ETFs in the Indian stock market dates back to 2001 when the first ETF in India, the Nifty BeES, was launched by Benchmark Mutual Fund. Since then, the Indian ETF industry has grown significantly, and today there are several ETFs available across various asset classes, including equities, fixed income, and gold.
Hold, on 🖐️ Please compare mutual funds with ETFs.
Right off the bat, mutual funds offer professional management and are more suitable for long-term investments, and ETFs on the other hand, offer greater flexibility and are more suitable for short-term investments.
We also need to know that Mutual funds also have a higher expense ratio compared to ETFs, which simply means that investors need to pay higher fees for the professional management. ETFs generally have very low or nil expense ratios – making them ideal when you have large sums of capital deployed for a shorter term.
However, mutual funds under the category of ELSS, aka Equity Linked Saving Scheme offer tax benefits to investors, whereas ETFs do not.
Wisdom for the wise 🤓
So, there you have it, a complete guide to mutual funds and ETFs. As a young and dynamic investor, it’s also important to evaluate your investment goals and risk tolerance.
A piece of advice from the wise old folks out here: It’s important to understand that investing in the stock market can be a rollercoaster ride, and it’s equally important to do your research before making any investment decisions. Don’t forget, investing is a long-term game, and patience is key. It’s important to remember that past performance is not a guarantee of future returns, and investing always carries a certain level of risk. It’s important to do your research, choose a mutual fund or ETF that aligns with your investment goals and risk tolerance, and have a long-term investment horizon.
P.S.: We did some fun research, and found these interesting numbers to share with you!
- Equity mutual funds have been the best-performing asset class in the last decade, delivering an average annual return of 12.98%.
- According to a study by CRISIL, the number of mutual fund investors in India has grown from 2.5 million in 2014 to 4.4 million in 2020.
- In 2020, the top-performing mutual fund in India was the Parag Parikh Long Term Equity Fund, which delivered a return of 32.62%.
- The ETF market in India has also been growing steadily, with the total AUM of ETFs increasing from Rs 1.5 trillion in March 2020 to Rs 2.9 trillion in March 2021.
- The ETF market in India is dominated by equity ETFs, which account for around 93% of the total AUM of ETFs.
- In terms of returns, the Nifty 50 index, which is the benchmark index for most ETFs in India, has delivered an average annual return of 11.46% over the last decade.
Note that these are educational in nature and do not offer to advise in any form whatsoever. Always, make sure to do adequate research before investing!