Rise of Mutual Funds, and Why They Worked

by Kshitij Goel

4th August 2020

A mutual fund pools the savings of many investors sharing a common financial goal. They are managed by professional money managers who invest fund’s assets in financial instruments such as stocks, bonds, debentures, and other securities. Each shareholder earns income through these investments in proportion to the number of units owned, thus the word “mutual”. Thus, it is the most suitable investment for the common man as it provides an opportunity to invest in a diversified, professionally managed portfolios at a low price.

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Flow Cycle of a Mutual Fund

History of Mutual Funds

The concept of mutual funds dates back to 1774 when a Dutch merchant created the world’s first mutual fund. Even after two centuries, it remains to be the most popular choice for individual retail investors.

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Rise of Mutual Funds in India

The concept of Mutual Funds started in 1963 when Union Trust of India (UTI) was established, a joint initiative of Government of India and Reserve Bank of India, which was later delinked from RBI. The mutual fund industry has seen exponential growth and sits close to Rs 28,00,000 Crore today.

As per the latest data, there are at least 44 AMFI (Association of Mutual Funds in India) registered fund houses in India offering more than 2,500 mutual fund schemes together.

But what makes Mutual Funds so popular?

Advantages of Mutual Funds

  1. Professional Management by Fund Managers: An investor doesn’t need to have in-depth knowledge of the market as funds are managed by fund managers with ample knowledge and experience who take decisions with regards to investment.
  2. Diversification of Portfolio: The large pool of money is optimally diversified, thus reducing the adverse impact of company-specific risk.
  3. Returns are tax-free: The returns from mutual funds are tax-free. Thus, the yield on mutual funds is marginally higher as compared to income from other investment options.
  4. Variety of options: Within the broad categories of stock, bonds and money market funds, there are various schemes available suited to investor’s needs.

Like any other financial instrument, Mutual Funds suffers from some cons too.

Disadvantages of Mutual Funds

  1. High Cost: A fees is to be paid to the fund managers for managing your funds. It reduces the fund’s overall payout, and have to be paid irrespective of the performance of the fund. “Every dollar spent on fees is a dollar that is not invested in growing over time.”
  2. Active Fund Management: There has been growing consensus in people for making their own decisions in picking stocks as compared to the professionals in mutual funds. At the end of the day, the fund managers still get paid if the funds lose money.
  3. “Diworsification” leads to dilution: Diversifying a portfolio in such a way that the returns get worsened is called “diworsification”. Too much diversification leads to dilution of funds.
  4. Lack of Liquidity: Unlike stocks, mutual funds allow you to convert shares into cash only at the end of the trading day.

The financial industry has changed drastically from using pocket calculators to employing advanced technologies like AI, ML and Deep Learning for maximizing investment returns.

Future of Mutual Funds

SIP or Systematic Investment Plan has been the way to invest in Mutual Funds till now. But with the disruption caused by AI and ML in the last decade, the picture is changing quickly with funds now being managed by intelligent platforms.

This has added another dimension to fund management. They enable machines to imitate human judgement to a certain extent while maintaining the advantages of disciplined rule-based investing. Investment strategies employing such techniques tend to leverage market opportunities better while avoiding bias errors caused by human intervention.

With advanced platforms available in the market, it is possible to create customized funds tailored-made only for an individual, i.e. one can dictate everything ranging from setting goal-limit to portfolio balancing to target tracking, and much more.

Zecide is the best solution for individuals looking to make their own investment decisions. It provides you with various data science tools, which helps you customize your portfolio for the best returns. These are fully do-it-yourself and don’t require any prerequisites. With our platform, you can be your own fund managers and overcome all the limitations in traditionally managed Mutual Funds.

There is a whole world of finance which investors don’t get to live in due to lack of relevant knowledge. Don’t worry, we are here to bridge that gap. So, what are you waiting for? Sign up on our waitlist today and be your own financial masters.

Kshitij Goel
On a mission to disrupt the world