However, the migration from traditional instruments like fixed deposits and post-office schemes to mutual funds has been a gradual, even painstaking process.
Traditionally, India has been a country of conservative, risk-averse investors. At least, the generation now in their 50s-60s fits that description well. This is the generation that lived in the era of high, administered rates on post-office schemes like the National Saving Certificate, Public Provident Fund and Kisan Vikas Patra.
Likewise, the rates on other interest-bearing investments like fixed deposits and RBI Relief Bonds were also very attractive. At least they were attractive enough for the investor not to bother himself by looking beyond them.
Of course, the fact that some of these instruments offered tax benefits also made it a compelling investment argument in their favour.
So a father planning for his child's education or his daughter's marriage did not have to worry too much about investment avenues, financial planning and asset allocation. His task was relatively simple. All he had to do was set aside some money regularly across these 'administered rate' instruments, wait patiently over the lock-in period and then collect the redemption monies, the quantum of which was known in advance as the return is guaranteed.
To boot, in most cases, the gains were tax-free. A lot of these instruments like KVP and NSC actually doubled money in 5 years. With a 'guaranteed return' like that, who had the time and inclination for stocks!
This worked wonderfully for investors till the time the government had a tight control on business and borrowing/lending rates. When India made the migration to a market-determined economy in the 1990s, it marked the beginning of the end for the era of high guaranteed returns.
Three events brought the curtain down on the 'high interest yielding' era and ushered in the more dynamic, 'market-linked' era.
1) The most important reason was the embarking of the Indian economy on a growth phase. This obviously raised the demand for credit. Lending rates that were administered until then began spiraling downwards to more realistic levels.
This also had an impact on fixed deposit rates as banks lowered deposit rates in response to the falling interest rate regime. In effect, this was the biggest whammy to the risk-averse investor who rarely had to look beyond fixed deposits.
2) While the lowering of fixed deposit rates was a major disappointment for investors, there was more to follow. Just like fixed deposit rates were too good to be true and a 'correction' was always in the offing, administered rates on PPF, NSC and KVP also had to come down.
The high administered rates (in the region of 12-13%) were an obstacle in the country's endeavour to maintain fiscal discipline. As tightening fiscal norms assumed paramount importance, the first casualty was the administered rates on post-office schemes.
Today at 8.00%, these rates are a far cry from what some investors have seen in the past.
3) While risk-free, fixed income instruments were hitting a nadir, performance of 'risky' instruments (read stocks) was on the ascent. India Inc. was seeing the benefit of liberalisation and the healthy growth
Although the stock market landscape has been dotted with scams (Harshad Mehta, MS Shoes, Ketan Parikh) and precipitous slumps (tech bust, 'Black Friday' on May 17, 2004 among others), investors who have done their homework and selected stocks prudently have made (and continue to make) a neat packet on their investments.
The impact of the third reason outlined above, was most critical and in many ways brought about a sea change in the way investors think of, and plan their investments. When stocks do well, so do investment avenues that are linked to stock markets; like mutual funds, for instance.
Mutual funds may have announced their arrival in the country as early as in 1964, but it was only after the liberalisation of the industry in 1994 did investors get a taste of what mutual funds can help them achieve.
In effect, liberalisation of the industry and the robust performance of blue chip companies were two crucial factors that showed the investing community that there was more to investing than just NSC, PPF and fixed deposits.
That is not to say that retails investor have taken to stocks/equity funds like fish to water, but the interest level in these investments today is a great deal higher than what it was even a few years ago. The significant collections in stock and mutual funds IPOs bear us out on that count.
Over the years, mutual funds have graduated into a flexible and innovative investment avenue for investors. We refrain from describing mutual funds as 'reliable', although a lot of investors have come to rely on them to achieve milestones like child's education and daughter's marriage.
Why mutual funds are so popular
The reason why mutual funds appeal to investors across the spectrum is because as an investment avenue, they offer a lot more variety and flexibility than stocks, NSC, PPF and bonds.
If you are a low-risk investor, you have debt funds and monthly income plans (MIPs). If you are a high-risk investor, you have equity funds and balanced funds. If you have money that you want to invest for just a day, you have liquid funds.
If you have money, but not enough to invest Rs 5,000 in a mutual fund in lumpsum, you can still go ahead and start investing piecemeal with as little as Rs 500 per month through the systematic investment plan (SIP).
In other words, there is very little you can't do with a mutual fund. That's primarily the reason why mutual funds have finally come into their own as an 'independent' investment avenue. Need proof of that -- today mutual fund initial public offerings attract as much investor attention as stock IPOs.
Today investors anticipate and set aside money to invest in mutual fund IPOs like they did with stock IPOs earlier. Today investors invest in tax-saving funds like they used to invest in NSC and PPF. Today there is probably no void in the investor's portfolio that mutual funds have left unfilled.
This is the potential that mutual funds have, now it's over to the investor to realise that potential.
This article forms part of Money Simplified The definitive guide to Mutual funds. Empowered with this issue, you will be able to exercise better control in planning your mutual fund portfolio. This guide will serve as your definite reference point for mutual funds.
Money Simplified - The definitive guide to Mutual Funds. Get your FREE copy now! Click here