MFs will remain one of the main picks for investors

The mutual fund (MF) industry has been playing a greater intermediation role in the financial market for more than two decades now. While the industry was small in size, less regulated and less transparent in the early 90s, but as the financial market evolved, the industry also got regulated and thus continued to emerge as a strong financial intermediary between the savers of money and capital market.

In the financial market, ups and downs are a part and parcel of the investment world. At all points of time, financial markets do get influenced by various factors such as interest rate movements, credit environment, political uncertainty and excessive speculation driven by both fear and greed. These global and local factors affect the sentiments of the investors and their investment decisions. In all these market cycles, fear and greed and its associated volatility is the one thing which has remained constant. During such phases, regulatory framework and related operating boundaries for mutual funds also get revisited and, in turn, either get formed or tightened in the interest of investors.

The mutual fund industry has gained the trust and confidence of the investors by not only navigating the money into the capital markets, but also by generating long-term wealth and income for the investors. The industry has seen phenomenal growth in the last five years, replacing the heavy dependence on foreign portfolio investor (FPI) inflows from the overall economy perspective. Today the concern on FPI inflows and outflows are the least, given the emergence of MF industry in India. While this is true, challenges and criticism of the MF industry also remain constant during volatile times.

I am sure one will appreciate that the Indian mutual fund industry has become one of the most transparent industries in the financial sector. Every rupee of investment is disclosed to the last digit. Hence, analysis of such investments is no more a rocket science. In fact, it has become so easy that even a common investor can analyse and take an informed decision. In the interest of retail investors, all the above practices have been emerging as core principles for managing the money of investors. As Benjamin Graham said, "Market is a voting machine in the short term, but is a weighing machine in the long run".

Given the fact that a mutual fund is a pass-through vehicle, returns to the retail investors may remain volatile in the short term, however, the very fact that he stays invested for the long term ensures he does get benefited in the long run. As it is known, there is very limited choice for investors to choose products from, however, mutual funds will remain one of the main picks for investors given the strength of the industry.

Over the years, the asset base of mutual funds has grown by leaps and bounds and has crossed the monumental milestone of Rs 23 lakh crore. The retail asset base of the industry too has crossed Rs 10 lakh crore. While this growth is tremendous, the potential of the industry is still largely untapped as the mutual fund industry is just 18% of the overall banking deposit base. Going forward, it makes me believe that a wider participation coming from the large retail investor base will gain all the more prominence and mutual funds will remain a dominant vehicle.

The recent prediction by World Bank that India would be the dominant economy in the world in the next five years, complements the point that the market cap of the Indian economy should be as big as the economy size in the next five years which is estimated to be $5 trillion. I am sure, the mutual fund industry will play a pivotal role and contribute significantly to the projected growth.

The writer is CEO of Aditya Birla Sun Life Asset Management Company.