Why Mutual Funds Exist: The Problem They Solve for Investors

1. Fixed Deposits and Inflation Risk

   Fixed deposits have traditionally been valued for safety and predictable returns. However, over time, FD returns may not always keep pace with rising prices. In such periods, they may mainly help protect the value of money rather than grow it meaningfully.

   The real returns, what's left after inflation and tax can often turn slightly negative. Your investment is getting eroded slowly.

2. Barriers to Direct Stock Market Investing

   Stocks offered growth potential, but they came with barriers.

   • Capital requirements: Buying a diversified portfolio of 20 to 30 stocks meant lakhs of rupees up front.

   • Knowledge gap: You needed to understand balance sheets, sectoral trends, management quality, and macroeconomic factors for investing in stocks.

   • Concentration risk: One bad investment could wipe out your returns.

• Professional Management
You don't need to track earnings reports or decode monetary policy announcements. A fund manager and research team do that full-time. You pay a fee (the expense ratio), and in return, they manage your fund.

• Diversification
Mutual funds pool money from thousands of investors. That pooled capital buys a diversified portfolio - 30, 50, sometimes 100+ securities. This diversification in mutual funds reduces the impact of any single company or sector shock.

• Simplified Market Access
You can start a SIP with ₹100 a month except ELSS MF Scheme. No need to wait until you've saved enough. No need to time the market. The investment happens automatically, and over time, you build a position without the pressure of lump-sum deployment.

SIP investment benefits go beyond convenience. Rupee-cost averaging means you buy more units when prices are low and fewer when they're high. It smooths out volatility without requiring you to predict market movements.

Mutual funds opened the door for anyone even with a smaller capital.

As of 2024, there are over 19 crore investor folios, up from 10 crore just three years ago.

It's not just about access to stocks. It's about participating in India's economic growth without needing a large capital.

• Increased Awareness and Digital Onboarding
SIPs became a household term in the last decade. Digital platforms made onboarding seamless - KYC in minutes, investments in clicks. No branch visits, no physical paperwork.

The ease of access lowered the psychological barrier. Transparent SEBI Framework

SEBI regulates mutual funds with clear disclosure norms. NAVs are published daily. Portfolio holdings are disclosed monthly. Fund categories are standardized.

These regulatory framework gave retail investors confidence to invest.