When Are Mutual Funds Considered A Bad Investment?

6 mins read
by Angel One

Are mutual funds good or bad?

The proliferation of Mutual Fund investors and the funds they have invested has been at a breathtaking speed. But the question arises whether investing in Mutual Funds is good or bad. Is it the best option available for investors to grow their assets and diversify their funds? Or is it only a case of investors just flocking to invest in Mutual Funds due to the fear of missing out? With so much hype being created around Mutual Fund investing, is it all that worth it? Let’s find out. But before getting to that, let’s learn the history and the growth of the Mutual Fund industry. A brief history will help you understand the general outlook of the crowd towards the industry and how it has modified over the years.

The history of Mutual Funds investing

Mutual Funds have had a glamorous past in India, and we’ve come a long way. Let’s first look at its mesmerising history.

The first Mutual Fund industry was started in 1963 when UTI was established. Till 1988, UTI had managed to get rupees six thousand seven hundred crores of Assets Under Management (AUM). Around this time, Public Sector Mutual Funds were allowed to set up their operations – SBI Mutual Fund was the first non- UTI MF. This set-up was followed closely by other Public Sector Banks, with LIC & General Insurance Corp. of India launching their Mutual Funds. Due to the variety of choices available, the Investors started flocking to these investment options, and by the end of 1993, the AUM of the Mutual Fund industry had grown to nearly Rs. 47,000 crores.

How did privatisation change the outlook of the Mutual Fund industry?

The Mutual Fund industry was consolidating its position in the financial markets. Undoubtedly the most considerable boost the industry received was during these heady days of liberalisation when in 1993, permission was granted to Private Sector Mutual Funds. Kothari Pioneer was the first Private Sector Mutual Fund registered in July 1993. This registration led to the beginning of a new era in the Mutual Fund industry, with more entrants gaining a foothold in the market. Currently, there are 44 Fund houses in India offering more than 2,500 Mutual Fund Schemes.

The growth of this industry has been extraordinary and incremental. While, by the end of January 2003, the combined AUM across all Mutual Funds houses was around Rs. 1,20,000 crores – it jumped up to reach the magical figure of Rs. 10 lakh crore by May 2014.

Does the Mutual Fund market rise further?

Henceforth, humankind witnessed something that had never been seen before. With aggressive marketing, increased options, opening up the global economy, and the advent of a new generation of millennials, the Mutual Fund industry suddenly zoomed up to stratospheric levers. The AUM doubled to Rs 20 lakh crores in a short span of 3 years, reaching the milestone in August 2017. There was no looking back for the Mutual Fund industry – the next Rs. 10 Lakh crore was added in the next three years, with the Indian MF industry AUmM reaching Rs. 30 lakh crore by November 2020.

Even though the world has faced challenges of Covid-19, there has been no stopping in the Mutual Fund industry. The investors have taken a fancy to this investing, and with the propagation of social media, the Mutual Fund industry has grown from strength to strength. In the last year alone, the size of AUM has grown by Rs. 7.3 Latch crore. By the end of October 2021, the AUM stands at Rs.37.3 Lakh Crore.

Are mutual funds good or bad

This is the perennial question investors have been asking. Mutual Funds are considered a safe investment especially considering the turbulence of the financial markets. But there are a few points to be considered by the investors before venturing into these investments.

1) Finding a return-generating Mutual Fund is difficult

Due to the massive choice of Mutual Funds schemes available, the investor needs to do due diligence before investing her hard-earned money. As straightforward as this sounds on paper, it is a mammoth task to look for a scheme that generates consistent returns. There are nearly 2500 options available, and not all of them give positive returns. Several Schemes are not yet profitable even after having been operational for so many years! So it might seem that the chances of being in the green after accounting for the above factors are less.

2) High Annual Expense charges

Mutual Funds have an expense percentage rate of 0.54 on average. However, in some cases, it can be as high as 3%. Apart from this, Mutual Funds have load charges. These are charges levied on investors by the mutual fund houses while buying or selling the fund units and range from 2% to 4%. When all these expenses are taken together, and the cumulative percentage is applied to the amount invested – the resulting cost turns out to be massive. These expenses eat away the investor’s returns – well, the aim is to make money and not to churn out cash for meeting fund management expenses.

3) Investors’ lack of control over investment decisions

A significant drawback faced by some investors is their lack of control over investment strategies and choices. Although Mutual Funds outline their plans beforehand, several ambiguities prevent them from achieving their desired plan of action. The departure may lead to discomfort for a particular class of investors, who would want the fund to follow the stated objectives judiciously.

4) Returns dilution

Due to the safety feature of the Mutual Funds, there is a caveat that does not allow concentrated holding exceeding 25% of the overall portfolio. This averse feature can be a double-edged sword. The reason for this rule is safety first, but at the same time, it can limit the earning potential of a fund for those investments, which could give multi-fold returns.

Parting thoughts

Maybe an investor could relate to the above points to understand why mutual funds are bad investments. However, a wise investor needs to take a balanced view, understand all the pros and cons properly – and only then decide about investing her hard-earned money. After all, such investments are for securing the future, and the investor needs to be aware of all possible risks before investing.