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Take the fund track to freedom
Kayezad E Adajania, Outlook Money
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August 28, 2007

From the ubiquitous US-64 scheme of the erstwhile Unit Trust of India during the 90s to an industry consisting of 32 fund houses and assets under management of Rs 4,26,549 crore (Rs 4265.49 billion) today, the mutual funds industry has come a long way.

MFs offer a low-cost, transparent and one of the most efficient ways of accessing the equity and debt markets. We cast a glance at its meteoric rise and crystal-gaze to see what the future holds.

More choice
Direct equities to equity funds.
Till 1993, there were only nine diversified equity funds. Kothari Pioneer MF, later Franklin Templeton MF, was the first private sector MF in India. Franklin India Bluechip and Franklin India Prima Funds set the benchmark in performance for years to come. Between 1994 and 1998, 68 equity funds were launched that collected around Rs 4,573 crore (Rs 45.73 billion).

While index and exchange-traded funds came about for the risk averse, sectoral funds were launched for those who wanted to take maximum risk and had a definite view on a sector.

For instance, you could invest in a power-sector fund if you feel the power deficits are a money-making opportunity for power companies. "MFs offer you low-cost structures to participate in equity and fixed-income markets," says Sanjay Santhanam, vice-president (marketing), Sundaram BNP Paribas MF.

Bank accounts to liquid funds. Even the way fixed income portfolios are planned has changed. Earlier, surplus cash that was needed in a few days or weeks, had to be parked in low-paying savings accounts. Now, with liquid funds, you can earn 5-6 per cent returns compared to 3.5 per cent in a savings account, and redeem units within a day.

Fixed deposits to fixed maturity plans. Bank FDs are an old favourite. They may give regular and assured returns, but are taxed at income tax rates. For instance, Rs 10,000 invested in a 390-days bank FD that offers 9.5 per cent interest would yield Rs 10,670.

But after tax the effective return drops to 6.27 per cent if you are in the highest tax bracket (33.99 per cent; including surcharges and cess). Instead, if you invest in an FMP that matures just over a year and yields 9.9 per cent, your post-tax returns would be 8.78 per cent in the growth option. Since the FMP is more than a year old, you end up paying just 11.33 per cent as long-term capital gains tax.

Better tax planning. MFs are now a formidable tax-planning instrument. Take the case of Bangalore-based botanist R Kannan, 40, an ayurveda research scientist. Though an expert in his field, he lacks the necessary skills needed for financial planning. That's why he moved to MFs to allow experts to manage his money.

Kannan decided to move from endowment insurance plans he used to buy (annual contribution Rs 60,000) to save taxes, to the right kind of MFs. "Now, I just have a term insurance policy and invest the rest in equity-linked saving schemes to get a returns kicker while saving on taxes," he says.

Before 2005, most tax-saving instruments, such as Public Provident Fund and National Savings Certificates, were debt-oriented. ELSS was your only road to equities, but came with an upper limit of Rs 20,000.

After Budget 2005, the upper limit was raised to Rs 100,000, as also for the other instruments. This allowed investors to spilt their tax planning between equities and debt, depending on their risk profiles.

What's to come

Number of fund houses. In 2007, 13 new global fund houses are expected to set shop in India. Says Ajay Bagga, CEO, Lotus MF: "Expect this industry to grow from $106 million today to $1 trillion by 2015."

Innovative schemes. New asset classes and ways to invest in markets like real-estate and sectoral-ETF funds.

Global funds. Quite a few of them, equity funds that invest abroad, are already here. Expect this number to go up.


Apart from online stock trading websites such as www.ICICI [Get Quote] and which allow you to buy stocks and MFs online, most MF houses also offer the option to buy and sell units from their own websites.

Launched in 2006, Quantum Mutual Fund offered its units only through its website, avoiding distributors in the process. As MFs typically pass the 2.25 per cent entry loads collected, to the distributors as commission, Quantum Long-Term Equity Fund - Quantum's first equity fund - does not charge entry load, making it India's first no-load fund. 

Other tech-facilities include e-account statements and toll-free numbers. Some funds like UTI and Principal MF also offer 'trigger' facilities that allow you to withdraw your units once they either rise, or fall, beyond a limit.

Future trends

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