Effects of Mutual Fund on Indian Economy

In India, mutual funds have a long and successful history. It plays a crucial role in the economic development of India with their active involvement and dominant presence in the money and capital markets. Since the liberalization and opening up of the Indian economy in 1991, there has been a constant gap in the demand and supply of free-flowing funds in the economy. Mutual Funds, right from their formation by the UTI Act, passed in 1963, have profoundly helped bridge this gap.

Since 2003, the mutual fund industry has been on a constant rise. The unique advantage of mutual funds that is ‘easy investment without anxiety’ makes it a very lucrative investment option for the investors over other investment choices and gives them a place of particular importance in the Indian economy.

The Important Roles of Mutual Funds in the Indian Economy

1. Mutual Funds Act as Financial Intermediaries

Many financial transactions of today are complex and involve more than two parties. In such cases, financial intermediaries, who act as the middlemen in transactions, are useful. Intermediaries can be individuals, financial institutions, banks, and even investment funds like mutual funds. Intermediaries help in effectively managing the available funds as per financial needs, which helps in avoiding unwarranted capital and liquidity situations in the market.

Mutual funds successfully fulfill the role of intermediaries because the mutual fund managers invest the pooled funds in equities or debts and therefore help provide the much-needed capital to business firms. These firms, in turn, use these funds to boost profitability and generate good returns for the shareholders. Therefore, it’s a win-win situation for all parties in the Indian economy.

2. Mutual Funds Stimulate Financial Participation

Mutual Funds offer investment options as low as INR 100. This helps in bringing the previously uninvited small investors to the financial market. The pooling of small amounts from a large number of investors helps in generating ready-to-invest capital, which ultimately fuels economic development in the country.

3. Mutual Funds Encourage Household Savings

Indians have been observed to be able to save up to about 30% of their incomes, which is actually great considering other countries where the cost of living is higher. Attractive mutual fund schemes are stimulating more savings in the salaried class to free up idle money to invest more.

In a 2014-15 survey, average household savings have been found to touch 7.5% of the gross national income, which is higher than in previous years. More than 15 lac new individual investment folios were created last year.

Also, the ever-increasing ‘medium-risk’ and ‘low-risk’ mutual funds consisting of a combination of bond and equity investments are increasing confidence in the investors’ minds. Besides, mutual fund investments enable them to earn more than what they do from bank deposits in the long run.

4. Mutual Funds are Great Sources of Capital for Start-ups

Mutual Funds are one of the best sources of capital for Start-ups and other companies in need of it. This is because a mutual fund serves as both an investment and a source of ownership in the company where the fund is invested proportionally to their investment. This makes investors feel they are a part of the company themselves. On finding the mutual fund satisfactorily profitable, they invest in the same or similar funds again. This helps in the generation of much-needed capital for the companies in need.

5. Mutual Funds Helped in the Growth of Financial Markets

Money Market Mutual Funds (MMMF) were introduced in 1991, which has encouraged short-term investments even further. Mutual funds have helped the Money Market grow steadily. Even the Government Bond Market has benefited a lot from Mutual funds.

As per the Association of Mutual Funds in India (AMFI) data, the total number of mutual fund folios (equity) stood at around 29.22 million as on May 31, 2014, which has touched the whopping 9.21 crore mark as of July 31, 2020. The Assets Under Management (AUM) of the Indian Mutual Fund Industry has grown from INR 6.69 trillion as on July 31, 2010, to INR 27.12 trillion as on July 31, 2020, registering a satisfactory 4-fold increase in a decade. All this clearly points to a positive shift in investors’ outlook towards mutual funds, which is a healthy indication, as far as the Indian economy is concerned.

Conclusion – More to Achieve

Mutual funds have acted as a great stimulant for the Indian economy to grow at a decent pace. This is due to the changing mindset of investors towards mutual funds. However, the growth has mainly been observed in cities and towns, and the rural areas are still lagging behind in mutual fund subscriptions. This is primarily due to the lack of financial know-how and idle money owing to low savings in those areas. These challenges are to be jointly addressed by the Central Government, regulators like the Securities and Exchange Board of India (SEBI), and the mutual fund companies.

Investors also have a role to play. If you are yet to start, talk to a financial advisor. It’s affordable, easy and, of course, profitable!

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh / Enquire