Factors Conducive to the Growth of Mutual Funds

On observing the past trends, it can be seen that certain factors are essential for the growth of the mutual funds industry. These factors are:

  • Investor Base: A mutual fund makes it possible for investors to earn a higher return on their capital by pooling the capital of a large number of small investors and investing the pooled sum in a diversified manner. As the small investors cannot diversify on their own, their presence acts as a catalyst for the mutual funds to grow. As different investors have different investment requirements, their presence also acts as an incentive for the mutual funds to come up with new schemes, thus helping in further evolution of the industry.
  • Returns On Market: Mutual funds invest in a diversified manner; the returns generated by them are generally reflective of the market returns. Higher the market returns, higher the expected returns from mutual funds. Higher expected returns attract more investors, giving a boost to the mutual funds.
  • Investment Avenues: The presence of certain investment avenues make mutual funds more attractive than direct investment. One example of such investment avenues is money market instruments. These instruments generally involve a large minimum investment which makes it impossible for a small investor to invest directly. Another example is investment in real estate. While a small investor may not be able to invest in real estate, especially on a diversified basis, internationally, there are mutual funds dedicated to such investments and are called Real Estate Mutual Funds (REMF) such funds are now introduced in Indian mutual fund market. Then there are some investment avenues which require in-depth knowledge of complex instruments, for example, securitized debt, derivatives, etc. Small investors may not have the knowledge to understand the complexities of such instruments on their own, and may find it preferable to depend on the expert knowledge offered by mutual fund managers. The presence of such instruments makes investments flow to mutual funds.

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