The Role of Mutual Funds is an important one and understanding it helps an investor in making any sort of investment decision. But before we go to understand what the role of mutual funds is, let us understand what Mutual Funds are.
What are Mutual Funds?
A mutual fund is a form of financial vehicle that invests in securities such as stocks, bonds, and money market instruments. It also invests in other assets by pooling money from multiple participants. Professional money managers manage mutual funds, allocating assets and attempting to generate capital gains or income for the fund’s investors. The portfolio of a mutual fund is constructed and managed to meet the investment objectives indicated in the prospectus.
Mutual funds provide access to professionally managed portfolios of stocks, bonds, and other assets to small and individual investors. As a result, each stakeholder shares in the fund’s gains and losses proportionately. Mutual funds invest in a wide range of assets. After which, their success is often measured by the change in the fund’s total market capitalization. This is calculated by combining the performance of the underlying investments.
What is the Role of Mutual Funds?
Mutual funds support new company investment by using money from investors to invest in newly issued debt or equity instruments. They invest in debt or equity securities that are already owned by investors, and, they are transferring ownership of the securities from one investor to another.
Mutual funds are able to maintain diverse portfolios (combinations) of debt and equity assets by pooling individual investors’ modest investments. Individuals who prefer to let mutual funds make their investing decisions for them can benefit from them as well. Mutual fund investors’ earnings are proportional to the returns produced by the mutual funds on their assets. After performing a credit review of the businesses that have issued or will issue debt securities, money market mutual funds and bond mutual funds choose which debt securities to acquire. Stock mutual funds invest in companies that meet their specific investment objectives (such as capital appreciation or high dividend income) and have a high return potential, given the stock’s level of risk.
Mutual funds employ a lot of resources to make investment decisions since they generally have billions to invest in securities. Each mutual fund is managed by one or more portfolio managers, who buy and sell assets in the portfolio of the fund. These managers are well-informed about the companies that issue the securities they can invest in.
Mutual funds can always sell shares that do not project to perform well after making an investment choice. If a mutual fund has made a substantial investment in a security, its portfolio managers may strive to enhance the asset’s performance rather than selling it. For instance, a mutual fund could own more than a million shares of a stock that has underperformed. Rather than selling the shares, the mutual fund may try to influence the management of the company that issued it in order to improve the company’s performance. The stock price of the company could benefit from these efforts. Thus, an important role of Mutual Funds is to keep the companies they invest in, in check.
How Do Mutual Funds Benefit an Economy?
In India, mutual funds have a long and successful history. In 1963, when the Government of India and the Reserve Bank of India established the Unit Trust of India. Various public and private sector participants entered the mutual fund business, which was then booming, during the following two decades. The SEBI Regulations of 1996, as well as mutual funds’ exemption from income tax distributions since 1999, were the two major turning points in making mutual funds more appealing to the general population.
Mutual funds have now transitioned into a phase of consolidation and coherent growth during the previous 15 years. Mergers and acquisitions of well-known private-sector fund firms, as well as increased investor awareness, have aided the expansion of India’s mutual fund business.
Due to the diversification of investment resources, mutual funds have played a key role in developing and stabilizing the Indian economy. In the mutual fund market, there have been several developments that have affected shareholders’ investing selections. For example, due to its history and reliability, UTI was the most popular option for mutual fund investing in the early 1990s. Income/debt-based plans grew in popularity in the 2000s, since the ordinary Indian favored a low-risk investment due to a cautious perspective. The investor’s age, employment, domicile, and gender have all had a significant impact on shareholder decisions.
With a few exceptions, the constant rise in mutual fund investment reflects the persistent expansion of the Indian economy. The financial system has four important features from a bird’s eye perspective: stability, efficiency, transparency, and inclusiveness. Mutual funds, as an intermediary that enhances each of these elements, are a significant contributor to the country’s financial growth.
The high volume of mutual funds allows for active involvement in the financial market as a pool of resources. This enhances market inclusion and efficiency. Mutual fund diversification is a well-informed selection. It is based on thorough market research, in-depth market analysis, and a thorough grasp of financial trends. There is no guessing involved, and there is no bidding on dark horses. Every choice is based on data, and this understanding of risks and returns helps to keep the market stable. Complete openness regarding investment methods and projected returns provide investors with a clear understanding of their position, fostering trust and economic certainty among shareholders.
All of these variables contribute to the country’s overall economic stability, making them a key influencer in the Indian economy.
Sharma, Nishi. “Indian Investor’s Perception towards Mutual Funds.” Business Management Dynamics 2.2 (2012): 1. https://www.academia.edu/download/54785544/bmd110248-01-09.pdf
Tripathy, Nalini Prava. “Mutual Fund in India A Financial Service in Capital Market.” Changing Profile of Financial Services (1997): 21. https://books.google.com/books?hl=en&lr=&id=w5XBe18iwmoC&oi=fnd&pg=PA21&dq=importance+of+mutual+funds+in+india&ots=Geoiti2W9l&sig=sjrdt-6jlS-BC60SBVsHDiIolrQ
Mishra, P. K., K. B. Das, and B. B. Pradhan. “Role of mutual funds in India: An empirical analysis.” The Research Network 4.4 (2009): 79-88. https://www.researchgate.net/profile/Pk-Mishra/publication/280324122_Role_of_Mutual_Funds_in_India_An_Empirical_Analysis/links/55ca0e0008aeb975674a4083/Role-of-Mutual-Funds-in-India-An-Empirical-Analysis.pdf