Does Equity-Dedicated Mutual Fund Investment Beat Inflation In The Long Run?

Equity dedicated mutual funds find popular favour among investors while building and managing their investment portfolios.

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Particularly investors lacking knowledge and understanding of directly picking stocks, they prefer to invest through mutual funds to add an equities component in their portfolios. An AMFI BCG report suggests that the mutual fund industry could attain an AUM of Rs.100 lakh crore and 10 crore customers by the year 2025. As of September 2019, assets managed by the Indian mutual fund industry stood at Rs.25.60 lakh crore as against Rs. 24.31 lakh crore a year back, which is a growth of 5.31 per cent over the previous year. Although these figures look sizable, we need to view them relatively, to get a better perspective. India ranks 7th in the world on GDP, but the country's mutual fund AUMs rank at 17. So, in a country with a population of ~130 crore people, only about 2 per cent invest in mutual funds. This does not match with other developed nations, where a larger proportion of their populations are invested in mutual funds. In India, equity-oriented mutual funds (which includes equity and equity-oriented hybrid funds) account for 42.1 per cent of the overall industry assets (which comes to around Rs. 10.78 lakh crore) as on September 2019. Said that, it is interesting to know that 68 per cent of the individual investor assets are in equity-oriented mutual funds.

Many investment facilitators and intermediaries including stock brokers, insurance agents and mutual fund distributors driven by the intent to earn higher commissions, often create a rosy picture about investment products, which may not exactly be true. Commonly, when suggesting avenues to meet your long-term financial objectives, investment advisors fail to factor in inflation while determining estimated returns from investments. Financial planning is about how much money you would need to attain your goals at a future date with due consideration to the inflation factor and make investment decisions accordingly.

Why to account for inflation?