Mutual funds’ share in m- cap at a new high

Mutual funds’ share in m- cap at a new high Domestic mutual funds ( MF) now account for 4.5 per cent of India’s total market capitalisation ( m- cap), up from 2.9 per cent two years ago. The rise comes amid robust and consistent investor flows into equity schemes, rise in stock prices, and market- beating performance by fund managers. MFs’ share in domestic m- cap is at record levels and significantly higher than 2007- 08 levels, which is considered to be a boom period for the mutual fund sector. In January 2008, equity assets under management — as a percentage of overall m- cap — were just 3.48 per cent. Investments into equity schemes are mostly from retail investors. Since May 2014, after the new government took charge, inflows into equity schemes have totalled a whopping Rs. 1.75 lakh crore and it goes without saying that a large part of these investments has been invested into stocks. Nimesh Shah, managing director and CEO of India’s largest fund house ICICI Prudential Mutual Fund, says investors have made a shift away from physical assets to financial assets. “ Investors have become aware of the advantages of consistent investing, which has helped the industry. A positive investor experience will help make sure retail investors continue to take exposure to the markets through the mutual fund route, rather than direct investing.” Industry players say investors put in around Rs. 3,000 crore a month through the so- called systematic investment plan ( SIP). The flows through the SIP route had dropped to around Rs. 800 crore a month a few years ago. The number of equity folios has risen by seven million over the past two years — from 29 million to nearly 37 million now. “There has been a welcome increase in domestic MF ownership of Indian equities over the past three years. There is a clear shift in domestic appetite for financial assets over hard assets like real estate and gold. Our fiscal and monetary policies have strengthened the case for financial assets over hard assets. India’s strong macroeconomic platform and potential for higher growth have also strengthened the case for equities,” said Vetri Subramaniam, chief investment officer of Invesco Mutual Fund He added the sector’s good track record and SIPs have contributed to the growth. The increase in dominance of mutual funds will act as a good counter balance to foreign flows, say experts. Foreign institutional investors’ share of India’s m- cap, however, is significantly higher at 20 per cent. “There is still a lot of potential for mutual funds to grow. Investors are fast learning the importance and need of investment in mutual funds. The industry’s responsibility will increase as more and more retail investors look towards mutual funds for wealth creation,” said Sundeep Sikka, chief executive officer of Reliance Mutual Fund.

Take Right Steps

SIP CALCULATOR : Investment of Rs. 5,000/- per month
TENURE	3 YEARS	5 YEARS	10 YEARS	15 YEARS	20 YEARS	25 YEARS
Amount Invested	1,80,000	3,00,000	6,00,000	9,00,000	12,00,000	15,00,000
Compounded Returns @ 10%	2,10,650	3,90,412	10,32,760	20,89,621	38,28,485	66,89,452
Compounded Returns @ 15%	2,28,397	4,48,408	13,93,286	33,84,315	75,79,775	1,64,20,369

(  An investment of Rs 5000.00 per month  for  20  years  can give a  returns of Rs 38,28,455.00  even at  a moderate rate of 10 % ).

Understanding Systematic Investment Plans:

Systematic investment plans as the name suggest allows a user to build an investment portfolio with a small systematic investment at regular intervals. The investor can choose his or her preferred mode of investment as monthly, quarterly or annually and invest the funds according to his or her convenience.

 Advantages of investing using a systematic investment approach:

Investment discipline: The one basic rules of investing is to always maintain a focused and dedicated approach towards investment.  A large number of people enter the investment markets with a lot of enthusiasm but fail to maintain a monthly investment towards building a regular investment corpus. Investing in a systematic investment plan allows users to maintain a monthly investment scheme which is far easier to maintain in the long run rather than investing a lump sum amount each year. Investing in systematic investment plans must be considered by all investors who are yet to attain an investment discipline allowing them the convenience to invest a pre determined sum every month towards their future.

Rupee cost averaging:

Rupee cost averaging, also commonly known as RCA is one of the very significant reasons why investing in a systematic investment plan must be considered by almost every investor. Investing  a fixed amount of money every month enables the  purchase of more units when the price of the investment is lower. This reduces the average cost of purchasing of the financial asset over time. Considering a long term investment approach, rupee cost averaging can even out any market ups and downs in the long term, allowing the investor to gain maximum benefits ion his or her investments over time.

In simplistic terms, let us consider an investor is investing a monthly fixed amount in a mutual fund investment plan. Considering the fact that the investor invests the same amount each month irrespective of the market cycle, be it a bull phase or a bear phase, the average cost of investment is eventually maintained at a lower level allowing maximum gains in the long term.

Power of compounding:

One of the basic rules of being a successful investor is to start early. Since all investment and returns are based on the power of compounding, an investor starting out early can earn much higher returns than a one starting out late even with a higher corpus. Since  a systematic investment plan does not seek a large amount of investment and one can start investing with a low sum each month depending on their financial condition, it allows them to start investing much early in life.

Let us consider Mr. A and Mr. B and understand how the power of compounding helps the investor using a systematic approach. 

Mr. A started investing in a systematic investment plan investing a sum of Rs. 1000 when he was 30 years old. By the time Mr. A reaches 50 years of age, he would have invested Rs. 24 Lakhs if the money grew on an average rate of 7% per annum. Now let us consider Mr. B who starts out earlier than Mr. A and started investing the same amount of Rs. 1000 from the time he was 20 years old or ten years earlier than Mr. A. Mr. B's investment growing at the same rate of 7% per annum would end up as high as Rs. 36 Lakhs by the time he is 50 years old. So while both Mr. A and Mr. B invested same amount each month, the one starting out early has made a substantial gain compared to the one starting out late.

Investment convenience:

A systematic investment plan gives the investor the advantage of investing small amount of money each month without any hassles. The investor can send a onetime instruction to the bank to allow auto debit of the investment amount each month from the account, without worrying about missing out  any monthly investment.

SIPs in ELSS

One of the best tax saving instruments is the equity-linked saving schemes (ELSSs).You can claim tax benefits under section 80C of the Income Tax Act.