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What is a mutual fund?
Well, the most common definition goes; the mutual fund is an investment vehicle or pool of money managed by professionals who are known as fund managers or portfolio managers.
Their job is to oversee and invest a corpus of funds in different securities or financial assets such as bonds, stocks, gold, and other assets to provide potential returns for their clients.
Why invest in mutual funds?
- Professional expertise– a professional fund manager takes care of your investments and strives hard to provide reasonable returns.
- Returns– Scope for higher returns than traditional investment.
- Diversification– Diversify your eggs in different baskets.
- Tax benefits- Mutual funds also help investors post-tax returns.
What are the different types of mutual funds?
The main source of income for these financial intermediaries is the fees they charge the investor. Based on the types of funds the fees are decided
Each of the most popular types of mutual funds type aims to achieve specific goals. Types of funds based on asset class:
- Debt funds
Debt funds mainly invest in corporate and government securities.
- Equity funds
Equity funds invest in stocks.
- Hybrid funds
These are a combination of equity and debt funds.
Types of funds based on structure:
- Open-ended mutual funds
These funds are bought and sold at their Net Asset Value (NAV) on any business day.
- Close-ended mutual funds
These funds are bought with a pre-defined maturity period.
Types of funds based on investment objective:
- Growth funds
Capital appreciation is the main goal of a growth fund.
- Income funds
Income funds try to provide investors with a stable income by investing in bonds, government securities, and certificates of deposits, etc.
- Liquid funds
These are short-term money market instruments like treasury bills.
- Tax saving funds
Tax benefits are offered under Section 80C of the Income Tax Act.
- Inverse funds These try to go up when the market is down using complex and risky strategies.
- ESG funds These invest based on environmental, social, and governance factors.
- Exchange Traded Funds(ETF)
- Overseas Funds
ETF and Hedge funds are not the same as mutual funds. Usually, high net-worth individuals opt for Hedge funds.
Investor Point of View
Now let’s see how investors make money from investing in mutual funds. Investors can make money through dividends and capital gains.
The fund manager puts money in stock and various other securities that give returns in the form of dividends on market earnings. The other way is capital gain if they sell the stock at prices higher than that of which they were initially purchased.
The investor should always be prudent about the risk involved. No investments give assurance of the return.
MF History
Though the historical roots are uncertain. Many consider van Ketwich’s fund, Eendragt Maakt Magt, (meaning- ‘unity creates strength,’) as the first investment company in the Netherlands followed by a few more companies in Switzerland in 1849 and Scotland in the 1880s.
In 1924, Massachusetts Investors’ Trust in Boston marked the arrival of the modern mutual fund
It was only in the 1980s and 1990s that Mutual funds captured the attention of American investors
Recent Developments in Mutual Funds
The collapse of the tech bubble in 1997 and the Great Recession in 2007 and various other scandals almost brought the industry to its knees.
In India
The history of mutual funds in India broadly divided into four noticeable phases
First Phase – 1964-1987
Unit Trust of India (UTI) originated in 1963 through an Act of Parliament.
Public Sector Funds entered the market. 1987 marked the entry of non-UTI players and the first PSU fund house was SBI Mutual Fund.
Entry of Private Sector Funds.
Fourth Phase – since February 2003
SEBI started regulating mutual funds.
In the next five years, a mutual fund is expected to double. Opportunities from rural and semi-urban areas in India are knocking at the doors of Mutual funds. At present technology is disrupting how funds are managed.
Future of Mutual Funds- Powered by AI
AI is used by several mutual fund houses to analyze data and forecast market movements for skillful asset allocation. This has the potential to assist a team to combine different strategies. AI also reduces the prevalence of the misbehaviors of traders.
AIEQ, the most popular fund and first AI-powered public fund which began in 2017 raised more than $70 million within a few weeks.
How does Future Fit Mutual Funds Work?
AI-powered funds make use of proprietary methods to carry out the real-time prediction and greatly increase the flexibility and timeliness of traditional quantitative funds.
AI offers super computational power to analyze big data in a short period with reasonable performance
The spectrum of Future Fit Funds
AI is prominently used across a wide spectrum of investment managers from pure AI-driven strategists to large quant-driven fund houses and also by traditional fundamental investors looking for an edge.
1. ChatGPT
Not long ago if you have asked the language bot ChatGPT it would have said it doesn`t have access to live stock prices.
While the language bot ChatGPT has gone viral, a nearly doubled the returns of the broader market.
In 2023, The AI Powered Equity ETF is up 10.4%, against the Vanguard Total Stock Market
Index’s 5.67%.
2. Quant Funds as a diversification tool
Statistical models are used to reduce the risk of losses and reduce portfolio volatility. Quant funds manage their exposure to market risk by frequently diversifying their portfolios across various securities and asset classes.
A growing number of mutual fund players across the spectrum are also taking advantage of AI to improve efficiency in their operations and investor relations functions. Bright days of the fund are still ahead…
Being future-ready is inevitable. So what investors should do?
Investors should treat quant funds as a source of diversification rather than a replacement for regular discretionary funds. Diversifying across funds and fund houses can also help investors.
End of the day investors investing in quantitative funds must be aware of the risks like market volatility or even the risk of the algorithmic model would fail.
Bottom line- Robots are watching…
Thus far the progress has been positive but is in no way a breakthrough. Though the
advantages of AI are multifaceted compared to human beings the cons can’t be overruled.
The performance of artificial intelligence (AI)-powered mutual funds shows that AI-powered funds-powered funds significantly outperform their human-managed peer funds by 5.8% per year. But the outperformance of AI-driven funds is due to lower transaction costs, superior stock-picking capability, and reduced behavioral biases.
There are qualities required by the fund managers like Originality Persuasion Negotiation Social Perceptiveness which are very difficult to be replaced by a machine but there is a chance of 64% as of the present maturity of AI that the fund managers` jobs can be replaced by automation. But mutual fund per se has always been Sai Hai and with the prudent governmental watchdogs; in future bhi Sahi rahega.
