Sep 20, 2006

Mutual Funds and Wealth Creation - I

My first week into my project… reading all about Mutual Funds… am attempting to put up my understanding of what I have read over one week… but, first a little background…

(My post is so long that I have to break it into 2 parts... read ahead at your own risk!!!)

History of Investing in India:

Earlier, people used to go to work, earn, save a small portion, put it in a bank account and forget about it. The stock market was shunned and people who invested in shares were looked down upon as shameless gamblers.

Then came Dhirubhai with his ‘Reli-able’ IPO and changed the face of the Indian stock markets. Suddenly, every TDH started dabbling a bit in shares. But, the stock market bug had not penetrated enough and people still viewed them as risky gambles, with stock broker tips acting as the basis for most investments. Analyzing stocks was not very popular.

Then, ‘Big Bull’ Harshad Mehta happened and stories of people becoming millionaires overnight hit the headlines. Alas, it turned into a scam that many people would rather forget, but would do well to remember lifelong, for it would repeat itself. It was momentous in the sense that SEBI came into operation soon, and troubled the lives of finance managers for ever.

Then, the Y2K season came, and IT stocks with nothing but eyeballs in their revenue account zoomed. HP no longer meant Hindustan Petroleum, but Hewlett-Packard. Sabeer Bhatia was the new role model, and Infosys guru Narayanmurthy was the ‘God who doled out Infy shares to employees and made his driver a millionaire’. Alas, the IT bubble also burst, and people lost their shirts and more. But, this IT zoom had led to a more than ever awareness of stock markets, and soon, my barber was giving me stock tips.

The era of assured double digit returns was now a pleasant dream, but long forgotten. A mirage in fact, for the senior citizens who feel they are too old to learn the tricks of the stock market, but are left with no other option. The collapse of US-64 of UTI was one of the symptoms, and the elderly soon realized that a post office is an extinct species today, as you don’t post letters anymore (e-mail ka zamaana jo hai!!!), nor do you park your money in the ever reliable Indra Vikas Patra…

In this scenario, where every person, young or old, has to invest some portion of his money in the stock markets to earn some decent returns, Mutual Funds emerged as the ‘knights in shining armour’ to save the day. They promised a lot, and have also delivered decent returns, although the debate continues whether a fund manager can consistently beat the market.

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