Mutual Funds in general means an investment scheme that provides a pool of securities to be invested in various entities such as stocks, shares etc. and is managed by an asset management company.
In recent years, the mutual funds have been famous among middle class. The middle class have been the primary reason for the growth of mutual funds. The middle class investor which are known as retail investors are those individuals who purchase the securities for their own account instead of any organization.
Now, the retail investing works through three ways, which are, individual investors, accounts managed by retail brokers and through investment clubs.
REASONS FOR INVESTING IN MUTUAL FUNDS
The retails investors opt for mutual funds because-
(1) They have less capital and that is why they invest in options such as mutual funds unlike the institutional investors.
(2) The reason for more and more retail investors investing through mutual funds is in order to get maximum returns with minimum risk.
(3) The mutual funds are managed by asset management company wherein they people associated have expert knowledge and expertise. The retail investor ordinarily will not be able to take help of such experts as they have less capital.
So, mutual funds allow them to ensure them that their capital is in expert hands and that too with less amount of investment.
(4) The stock market in India is very volatile and the retail investor does not have that much knowledge about the functioning of the market.
As the retail investors are very cautious about their investing options, they tend to choose an option which is less risky and more profitable. Therefore, they opt for mutual fund.
(5) As the retail investor have their own personal account objective unlike institutional investors, which means they also have different investment objectives. The mutual funds offer them a variety of products based upon their investment objectives and risk quotient.
(6) The retail investors’ one of the major problems while dealing with the market is to know when to enter and when to exit the market. The mutual fund through its expert follow a systematic method of investment as well as withdrawal. This solves the problem of entry and exit.
PROBLEMS WITH RETAIL INVESTING IN MUTUAL FUNDS
The reason for more and more retail investors choosing mutual fund was that it provided much protection and profitability to them but there have been some concerns about the protection of these investors. They are-
(1) One of the major problems is with structure of the laws governing mutual funds. The mutual fund are governed by SEBI Regulations, Companies Act and Indian Trusts Act.
The Indian Trusts Act does not allow the concept of perpetual succession but the same is allowed under Companies Act. The concept of perpetual succession can protect the interest of investors but under the same act the concept of “limited Liability” also simultaneously applies.
If these two concepts works simultaneously under the same act, then how can the retail investors can be protected.
(2) The retail investors generally invest in those mutual funds which are guaranteed by the Central government. The main entity for the same is Union Trust of India. The retail investors lack the knowledge about the concepts of mutual funds in initial stages.
They tend to ask many queries from the mutual fund manager. But we see that though having many resources, UTI lacks in answering the queries of the retail investors due to large number of queries received.
(3) The schemes under the mutual funds are designed so that the retail investor can invest more and more. In order to do the same the agents of the mutual fund shows a rosy picture and promise higher returns to investors.
The agents also take the advantage of lack of knowledge of the retail investors. The agents are just concerned about their commissions and nothing else. This sometimes leads the retail investor to not know about the risk factors involved with the scheme before investing. This leads to lack of transparency in such investments.
So, we can see that though the retail investors are benefiting from the mutual funds but we also cannot ignore the problems associated with the mutual fund. Also, one cannot ignore its inability to provide the protection which is generally promised under this investment option.
So, the investor should make an informed choice while choosing such an investment option. At the same time, the government should try to amend the laws to provide the required protection to investors.
- Rekha Rathore, Shelly and Jaya, Attitude of Investor towards Mutual Fund: A Case Study of
Retail Investors in District Yamuna Nagar, Haryana (India), International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 3, No. 9
- Dr. K.D. Mehru, Problems of Mutual Funds In India
Visit our Instagram page @lawyergyan at this link.