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Perception of Investors

Why don't people see mutual funds as lucrative investment products?
-Rahul Jain

Mutual funds are still not the first choice of most Indians when it comes to investing. The foremost reason for this is the availability of government backed savings instruments that offer a high rate of assured returns.

Not only do instruments like National Savings Certificate and public provident fund guarantee a high rate of interest, but they also come with the backing of central government, thus assuring capital safety of the highest order. Add to this, such instruments come with powerful tax saving incentives.

High returns, coupled with the risk-averse mentality of the average middle-class that constitutes majority of our population, have kept the bulk of savings away from mutual funds.

Long-term savings find their way into instruments like NSC and PPF, while bank fixed deposits are preferred for short-term investments.

On the other hand, when it comes to investments in instruments having no assured returns, people prefer to invest directly into stock markets. One of the reasoning is that 'why should I pay for a fund manager when I can invest in the stock market on my own?' Secondly, the lack of penetration of the mutual funds across the country also keeps them from tapping the savings potential of smaller towns.

However, certain developments in recent years have been encouraging for the mutual funds industry. First, the rates of return offered by the assured return instruments have come down significantly, inducing people to look beyond them.

Second, the mutual fund industry has become more transparent in terms of disclosures. Third, the ELSS category of funds has come at par with other instruments in terms of tax saving incentives.

These developments are likely to attract more people towards mutual funds. SEBI's initiatives to widen

distribution of mutual funds across the length and breadth of the country might just provide them the well-needed kickstart.

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