As Demat Accounts in India Breach 100-mn Mark, Here’s Why Mutual Funds Are A Rookie Investor’s Best Friend

The number of Demat accounts in India reached a staggering 100.5 million in August 2022, breaching the 100 million mark, as per data from prominent depositories NSDL and CDSL. The number, which stood at a mere 40.9 million before the Covid pandemic struck in 2020, accelerated to this historic mark, thanks to the largely growing account-opening pace in 2022.

While February saw the highest opening figures this year, 2.9 million new accounts, it was followed by 2.7 million in May, 2.4 million in April, and 2.2 million last month. Reflective of investor confidence in the market, increased Demat account openings work in lockstep with a bullish market.

As of August 31, 2022, CDSL has Rs 38.5 trillion as assets in custody, while NSDL managed custodial assets worth Rs 320 trillion. Foreign investors, too, have been making a solid comeback in Indian markets, energising it further. Last month, FIIs invested Rs 51,200 crore in the country’s equities. Money is flowing in mutual funds as well, with the industry’s average AUM standing at Rs 37,76,911 crore in July 2022, according to AMFI.

However, as Indians throng the market, the risks associated with directly investing in stocks also need to be considered. While you can straightforwardly invest in the shares of specific companies you like via your Demat accounts, it needs time, experience, and serious expertise to timely spot them in light of the ongoing macroeconomic trends.

While the prospect of skyrocketing and immediate returns may be alluring, take the jump in direct stock investing only if you intricately understand the fundamentals of businesses and markets and have the time to do so.

What’s more, it’s way more expensive to invest in a single company’s stock, meaning that in case the company’s fortunes plunge, a significant amount of your savings could be at risk.

Mutual funds, on the other hand, delegate this decision-making to an experienced fund manager, who works full-time to manage your funds at a nominal cost. With an amount as low as Rs 500, you can invest in more than one company and diversify your risks across various companies, instead of sticking to a few.

As Sanjeev Dawar, veteran financial planner, puts it, “MFs suit salaried employees and retail investors who can invest a predefined amount each month, commonly known as SIP i.e. systematic/smart investment plan. If one follows a discipline of investing Rs 3000 a month (100 a day) for 30 years, the corpus can reach nearly 1 crore (returns assumed @12%). The total invested amount here is less than 11 lakhs. That’s the power of compounding in MFs. Investing through SIP is favourable during volatility as it results in rupee cost averaging. As a fixed amount is invested each month, a lower NAV (unit price of an MF) results in a higher number of units being purchased. A higher NAV on the other hand means a greater fund value of accumulated units.”

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