mutual fund business model

Mutual Fund Direct Business — Is It Still a Viable Option for Broker-Dealers?

by James Pfeiffer | Updated: Dec 21, 2020 | Strategic Growth

“Is mutual fund direct business a viable option for our firm?” remains an important question for broker-dealers to ask. This article provides a framework to help find the answer.

Simply put, direct business involves transactions between a broker and a mutual fund company. In recent years, broker-dealers have limited — even discontinued — this practice, and have consolidated fund assets onto brokerage platforms. This industry-wide shift was largely a reaction to DOL Fiduciary Rule hysteria, which, although the regulation was struck down, many firms proactively made significant changes to their business models in order to comply with the rule. Yet, mutual fund direct business is not a well-understood model within the industry, and firms should understand their service options. Direct trading can reduce costs, help attract and retain top-performing advisors, and improve the bottom line. As your firm examines current costs, advisor compensation plans, and business models consider (or reconsider) whether direct trading is a viable option. This article covers the basic mechanics of how direct business works, looks at the benefits and costs, and concludes with key considerations.

Direct trading can reduce costs, help attract and retain top-performing advisors, and improve the bottom line.

How Mutual Fund Direct Business Works

On the surface, mutual fund direct business is simple. On behalf of their client, the broker buys mutual fund shares directly from fund companies. These assets are held directly at fund companies versus a brokerage account. Typically it is carried out in the following ways:

• Check and App:  This is the “old fashioned” method. The advisor completes a paper application, then the investor signs the paperwork and writes a check. Then the paperwork and check are sent directly to the mutual fund company.
• Wire Transfer:  The broker-dealer arranges for an electronic transfer from an investor’s account to the mutual fund. In some cases, firms use a special holding account for all transfers. Typically, the paperwork applications are transmitted when the funds are transferred.
• Fund/SERV:  Although Fund/SERV clears mutual fund transactions and is not a pure direct business option, it deserves mention here because broker-dealers can use it to manage their mutual fund transactions. It is a basic platform for mutual fund transactions offered to NSCC members, which is compatible with other NSCC services.

Most broker-dealers use some or all of the above mechanisms, along with clearing firms, for managing mutual fund transactions. The complications associated with directly held mutual fund accounts — which prevent some firms from expanding direct business or even considering the option to use it — revolve around managing the numerous reporting and compliance requirements that are normally handled by a clearing service.

Benefits of Mutual Fund Direct Business

• Direct access to mutual fund’s customer services.  Clearing firms often hold “omnibus” accounts for mutual funds, which means that individual investors officially have accounts with the clearing firm, not the mutual fund. In such cases, investors — and their advisors — usually don’t have access to a mutual fund’s customer services. Direct trading, which establishes an individual account at a mutual fund for each investor, gives the broker-dealer secure access to that fund’s customer service for the investor and advisor.
• Tax reporting responsibility.  The fund company generates and sends out tax statements, which means that the broker-dealer does not have to pay the per-mailing fee charged by a clearing firm.
• Simplicity for advisors.  Direct trading allows advisors to set up accounts directly with mutual funds and thus bypass the extra steps involved in setting up an account with a clearing firm, which is especially helpful when establishing smaller and simpler mutual fund accounts.
• Smaller fees.  Postage and wire transfer fees are the most significant direct expense associated with direct business mutual fund transactions. However, these fees are often much lower than a clearing firm’s per-transaction fees. Direct business also frees broker-dealers from costs associated with maintaining accounts with clearing firms.
• Less ongoing costs.  Committing to a clearing firm for mutual fund processing means committing to their fee hikes or the expense (and hassle) of switching providers.

Costs of Mutual Fund Direct Business

The central cost of direct business to broker-dealers is a technology platform and a back-office system that carries out functions customarily done by clearing firms. They need, in other words, to utilize a financial technology solution that does the following:

• Interfaces with multiple mutual fund companies.
• Tracks commissions, advisor information, and dozens of other data points associated with mutual fund transactions.
• Aggregates account data.
• Generates reports, notifications, and alerts for ongoing monitoring and internal and external audits.

Purchasing, installing, maintaining, and updating such a system in-house is, of course, capital intensive, both in terms of dollars and employee hours. By contrast, a technology outsourcing partner furnishes access to a turnkey product. Subscribing to a hosted service usually does not require much of up-front capital investment. However, ongoing payments, need to be taken into consideration. A firm conducting direct business also needs to train advisors to use different investment platforms, even in the process of serving a single investor. In addition, direct business requires a stable relationship with an established financial technology solution provider.

Key Considerations

Our research has shown that the following three broad questions are common among firms who have considered conducting direct trading for some portion of their mutual fund business:

Is mutual fund direct business even possible for our firm?

Do you have the industry expertise to utilize it effectively? What is your level of confidence in your internal systems? These are probably the most critical questions. Today’s regulatory environment — and, in all likelihood, tomorrow’s as well — leaves a tiny margin for error when it comes to breakpoints, suitability reviews, and other compliance mandates associated with mutual funds. The consequences of inaccurate data or deficient supervisory processes can dwarf any advantages gained by direct trading.

The consequences of inaccurate data or deficient supervisory processes can dwarf any advantages gained by direct trading.

How much does direct business cost in real dollars?

The answer primarily depends on the number and size of mutual fund transactions a firm handles each year. In general, a large number of smaller mutual fund transactions may make a clearing service exceptionally expensive. But services to advisors and customers also need to be considered. Clearing firms can manage mailings and other notifications, for example, but at a price that can be higher than the postage and employee-hours a firm would have to pay.

We’ll note here that it is difficult to find comparative pricing information for clearing services outside of direct negotiations with clearing firms themselves. Fees for bank services, mutual fund accounts, wealth management advice, and many other financial services are accessible, but expenses associated with clearing services remain opaque at best.

How much does direct business cost in employee hours?

Direct trading requires not only a reliable provider of financial technology solutions and data aggregation , but adequate personnel that understands the trading platform, reporting systems, compliance requirements, and other details intrinsic to mutual fund transactions. On the other hand, broker-dealers using clearing services need to manage clearing firm accounts and provide customer service that a mutual fund would generally provide. In terms of compliance, regulations require that firms offer the same suitability oversight for both options, so neither is a time-saver.

When considering direct business, a firm also has to factor in its goals for mutual fund transactions and its overall business plan. In some cases, using direct business for more mutual fund transactions can free up capital to invest in marketing and new services for investors. In other cases, using (or staying with) a clearing firm for the majority of mutual fund transactions ensures that staff can invest time in generating new business among existing and potential customers.

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Updated Dec 21, 2020

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What Is a Mutual Fund?

How are mutual funds priced.

• How Are Returns Calculated?

Types of Mutual Funds

Exchange traded funds (etfs), mutual fund fees, classes of mutual fund shares, pros of mutual fund investing, cons of mutual fund investing.

• Mutual Fund FAQs
• Guide to Mutual Funds

Mutual Funds: Different Types and How They Are Priced

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers , who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus .

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.

Most mutual funds are part of larger investment companies such as Fidelity Investments, Vanguard, T. Rowe Price, and Oppenheimer. A mutual fund has a fund manager , sometimes called its investment adviser , who is legally obligated to work in the best interest of mutual fund shareholders.

Key Takeaways

• A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. 
• Mutual funds give small or individual investors access to diversified, professionally managed portfolios.
• Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
• Mutual funds charge annual fees, expense ratios, or commissions, which may affect their overall returns.
• Employer-sponsored retirement plans commonly invest in mutual funds.

The value of the mutual fund depends on the performance of the securities in which it invests. When buying a unit or share of a mutual fund, an investor is buying the performance of its portfolio or, more precisely, a part of the portfolio's value. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give their holders any voting rights . A share of a mutual fund represents investments in many different stocks or other securities.

The price of a mutual fund share is referred to as the net asset value (NAV) per share, sometimes expressed as NAVPS . A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding. Outstanding shares are those held by all shareholders, institutional investors, and company officers or insiders.

Mutual fund shares can typically be purchased or redeemed at the fund's current NAV, which doesn't fluctuate during market hours but is settled at the end of each trading day . The price of a mutual fund is also updated when the NAVPS is settled.

The average mutual fund holds different securities, which means mutual fund shareholders gain diversification. Consider an investor who buys only Google stock and relies on the success of the company's earnings. Because all of their dollars are tied to one company, gains and losses are dependent on the company's success. However, a mutual fund may hold Google in its portfolio where the gains and losses of just one stock are offset by gains and losses of other companies within the fund.

How Are Returns Calculated for Mutual Funds?

When an investor buys Apple stock, they are buying partial ownership or a share of the company. Similarly, a mutual fund investor is buying partial ownership of the mutual fund and its assets.

Investors typically earn a return from a mutual fund in three ways, usually on a quarterly or annual basis:

• Income is earned from dividends on stocks and interest on bonds held in the fund's portfolio and pays out nearly all of the income it receives over the year to fund owners in the form of a distribution . Funds often give investors a choice either to receive a check for distributions or to reinvest the earnings to purchase additional shares of the mutual fund.
• If the fund sells securities that have increased in price, the fund realizes a capital gain , which most funds also pass on to investors in a distribution.
• When the fund's shares increase in price, you can then sell your mutual fund shares for a profit in the market.

When researching the returns of a mutual fund , an investor will see "total return," or the change in value, either up or down, of an investment over a specific period. This includes any interest, dividends, or capital gains the fund generated as well as the change in its market value over some time. In most cases, total returns are calculated for one, five, and 10-year periods as well as since the day the fund opened, or the inception date.

There are several types of mutual funds available for investment, though most mutual funds fall into one of four main categories which include stock funds, money market funds, bond funds, and target-date funds.

Stock Funds

As the name implies, this fund invests principally in equity or stocks. Within this group are various subcategories. Some equity funds are named for the size of the companies they invest in: small-, mid-, or large-cap. Others are named by their investment approach: aggressive growth, income-oriented, value, and others. Equity funds are also categorized by whether they invest in domestic (U.S.) stocks or foreign equities. To understand the universe of equity funds is to use a style box, an example of which is below.

Funds can be classified based on both the size of the companies, their market caps , and the growth prospects of the invested stocks. The term value fund refers to a style of investing that looks for high-quality, low-growth companies that are out of favor with the market. These companies are characterized by low price-to-earnings (P/E) ratios, low price-to-book (P/B) ratios, and high dividend yields .

Conversely, growth funds , look to companies that have had strong growth in earnings, sales, and cash flows. These companies typically have high P/E ratios and do not pay dividends. A compromise between strict value and growth investment is a "blend," which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle.

Large-cap companies have high market capitalizations , with values over $10 billion. Market cap is derived by multiplying the share price by the number of shares outstanding. Large-cap stocks are typically blue-chip firms that are often recognizable by name. Small-cap stocks refer to those stocks with a market cap ranging from $250 million to $2 billion. These smaller companies tend to be newer, riskier investments. Mid-cap stocks fill in the gap between small- and large-cap.

A mutual fund may blend its strategy between investment style and company size. For example, a large-cap value fund would look to large-cap companies that are in strong financial shape but have recently seen their share prices fall and would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects: small-cap growth. Such a mutual fund would reside in the bottom right quadrant (small and growth).

A mutual fund that generates a minimum return is part of the fixed income category. A fixed-income mutual fund focuses on investments that pay a set rate of return, such as government bonds, corporate bonds, or other debt instruments. The fund portfolio generates interest income, which is passed on to the shareholders.

Sometimes referred to as bond funds, these funds are often actively managed and seek to buy relatively undervalued bonds in order to sell them at a profit. These mutual funds are likely to pay higher returns and bond funds aren't without risk. For example, a fund specializing in high-yield junk bonds is much riskier than a fund that invests in government securities.

Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest and all bond funds are subject to interest rate risk .

Index Funds

Index Funds  invest in stocks that correspond with a major market index such as the S&P 500 or the Dow Jones Industrial Average (DJIA). This strategy requires less research from analysts and advisors, so there are fewer expenses passed on to shareholders and these funds are often designed with cost-sensitive investors in mind.

Balanced Funds

Balanced funds invest in a hybrid of asset classes, whether stocks, bonds, money market instruments, or alternative investments. The objective of this fund, known as an asset allocation fund, is to reduce the risk of exposure across asset classes.

Some funds are defined with a specific allocation strategy that is fixed, so the investor can have a predictable exposure to various asset classes. Other funds follow a strategy for dynamic allocation percentages to meet various investor objectives. This may include responding to market conditions, business cycle changes, or the changing phases of the investor's own life.

The portfolio manager is commonly given the freedom to switch the ratio of asset classes as needed to maintain the integrity of the fund's stated strategy.

Money Market Funds

The money market consists of safe, risk-free , short-term debt instruments, mostly government Treasury bills . An investor will not earn substantial returns, but the principal is guaranteed. A typical return is a little more than the amount earned in a regular checking or savings account and a little less than the average certificate of deposit (CD).

Income Funds

Income funds are named for their purpose: to provide current income on a steady basis. These funds invest primarily in government and high-quality corporate debt, holding these bonds until maturity to provide interest streams. While fund holdings may appreciate, the primary objective of these funds is to provide steady cash flow ​ to investors. As such, the audience for these funds consists of conservative investors and retirees.

International/Global Funds

An international fund , or foreign fund, invests only in assets located outside an investor's home country. Global funds , however, can invest anywhere around the world. Their volatility often depends on the unique country's economy and political risks. However, these funds can be part of a well-balanced portfolio by increasing diversification , since the returns in foreign countries may be uncorrelated with returns at home.

Specialty Funds

Sector funds are targeted strategy funds aimed at specific sectors of the economy, such as financial, technology, or healthcare. Sector funds can be extremely volatile since the stocks in a given sector tend to be highly correlated with each other.

Regional funds make it easier to focus on a specific geographic area of the world. This can mean focusing on a broader region or an individual country.

Socially responsible funds , or ethical funds, invest only in companies that meet the criteria of certain guidelines or beliefs. For example, some socially responsible funds do not invest in "sin" industries such as tobacco, alcoholic beverages, weapons, or nuclear power. Other funds invest primarily in green technology, such as solar and wind power or recycling.

A twist on the mutual fund is the exchange-traded fund (ETF). They are not considered mutual funds but employ strategies consistent with mutual funds. They are structured as investment trusts that are traded on stock exchanges and have the added benefits of the features of stocks.

ETFs can be bought and sold throughout the trading day. ETFs can also be sold short or purchased on margin . ETFs also typically carry lower fees than the equivalent mutual fund. Many ETFs also benefit from active options markets, where investors can hedge or leverage their positions.

Compared to mutual funds , ETFs enjoy tax advantages. ETFs also tend to be more cost-efficient and liquid.

A mutual fund has annual operating fees or shareholder fees. Annual fund operating fees are an annual percentage of the funds under management, usually ranging from 1–3%, known as the expense ratio . A fund's expense ratio is the summation of the advisory or management fee and its administrative costs.

Shareholder fees are sales charges, commissions, and redemption fees, that are paid directly by investors when purchasing or selling the funds. Sales charges or commissions are known as "the load" of a mutual fund. When a mutual fund has a front-end load, fees are assessed when shares are purchased. For a back-end load, mutual fund fees are assessed when an investor sells their shares.

Sometimes, however, an investment company offers a no-load mutual fund, which doesn't carry any commission or sales charge. These funds are distributed directly by an investment company, rather than through a secondary party. Some funds also charge fees and penalties for early withdrawals or selling the holding before a specific time has elapsed.

Currently, most individual investors purchase mutual funds with A-shares through a broker. This purchase includes a front-end load of up to 5% or more, plus management fees and ongoing fees for distributions, also known as 12b-1 fees. Financial advisors selling these products may encourage clients to buy higher-load offerings to generate commissions. With front-end funds, the investor pays these expenses as they buy into the fund.

To remedy these problems and meet fiduciary-rule standards, investment companies have started designating new share classes, including "level load" C shares , which generally don't have a front-end load but carry a 12b-1 annual distribution fee of up to 1%.

Funds that charge management and other fees when an investor sells their holdings are classified as Class B shares .

There are a variety of reasons that mutual funds have been the retail investor's vehicle of choice , with an overwhelming majority of money in employer-sponsored retirement plans invested in mutual funds.

Diversification

Diversification , or the mixing of investments and assets within a portfolio to reduce risk, is one of the advantages of investing in mutual funds. A diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers. Buying a mutual fund can achieve diversification cheaper and faster than buying individual securities.

Easy Access

Trading on the major stock exchanges, mutual funds can be bought and sold with relative ease, making them highly liquid investments. Also, when it comes to certain types of assets, like foreign equities or exotic commodities, mutual funds are often the most feasible way —in fact, sometimes the only way—for individual investors to participate .

Economies of Scale

Mutual funds also provide economies of scale by forgoing numerous commission charges needed to create a diversified portfolio. Buying only one security at a time leads to large transaction fees. The smaller denominations of mutual funds allow investors to take advantage of dollar-cost averaging.

Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. A mutual fund can invest in certain assets or take larger positions than a smaller investor could.

Professional Management

A professional investment manager uses careful research and skillful trading. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments. Mutual funds require much lower investment minimums so these funds provide a low-cost way for individual investors to experience and benefit from professional money management.

Variety and Freedom of Choice

Investors have the freedom to research and select from managers with a variety of styles and management goals. A fund manager may focus on value investing, growth investing , developed markets, emerging markets, income, or macroeconomic investing, among many other styles. This variety allows investors to gain exposure to not only stocks and bonds but also commodities , foreign assets, and real estate through specialized mutual funds. Mutual funds provide opportunities for foreign and domestic investment that may not otherwise be directly accessible to ordinary investors.

Transparency

Mutual funds are subject to industry regulation that ensures accountability and fairness to investors.

Minimal investment requirements

Professional management

Variety of offerings

High fees, commissions, and other expenses

Large cash presence in portfolios

No FDIC coverage

Difficulty in comparing funds

Lack of transparency in holdings

Investopedia / Ellen Lindner

Liquidity, diversification, and professional management all make mutual funds attractive options, however, mutual funds have drawbacks too.

No Guarantees

Like many other investments without a guaranteed return, there is always the possibility that the value of your mutual fund will depreciate . Equity mutual funds experience price fluctuations, along with the stocks in the fund's portfolio. The Federal Deposit Insurance Corporation (FDIC) does not guarantee mutual fund investments.

Mutual funds require a significant amount of their portfolios to be held in cash to satisfy share redemptions each day. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a larger portion of their portfolio as cash than a typical investor might. Because cash earns no return, it is often referred to as a "cash drag."

Mutual funds provide investors with professional management, but fees reduce the fund's overall payout, and they're assessed to mutual fund investors regardless of the performance of the fund. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative long-term consequences as actively managed funds incur transaction costs that accumulate over each year.

"Diworsification" and Dilution

" Diworsification "—a play on words—is an investment or portfolio strategy that implies too much complexity can lead to worse results. Many mutual fund investors tend to overcomplicate matters. That is, they acquire too many funds that are highly related and, as a result, lose the benefits of diversification.

Dilution is also the result of a successful fund growing too big. When new money pours into funds that have had strong track records, the manager often has trouble finding suitable investments for all the new capital to be put to good use.

The Securities and Exchange Commission (SEC) requires that funds have at least 80% of assets in the particular type of investment implied in their names. How the remaining assets are invested is up to the fund manager. However, the different categories that qualify for the required 80% of the assets may be vague and wide-ranging. A fund can, therefore, manipulate prospective investors via its title. A fund that focuses narrowly on Congolese stocks, for example, could be sold with a far-ranging title like "International High-Tech Fund."

End of Day Trading Only

A mutual fund allows you to request that your shares be converted into cash at any time, however, unlike stock that trades throughout the day, many mutual fund redemptions ​ take place only at the end of each trading day.

When a fund manager sells a security, a capital-gains tax is triggered. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax-sensitive mutual funds in a tax-deferred account, such as a 401(k) or IRA .

Evaluating Funds

Researching and comparing funds can be difficult. Unlike stocks, mutual funds do not offer investors the opportunity to juxtapose the price to earnings (P/E) ratio, sales growth, earnings per share (EPS), or other important data. A mutual fund's net asset value can offer some basis for comparison, but given the diversity of portfolios, comparing the proverbial apples to apples can be difficult, even among funds with similar names or stated objectives. Only index funds tracking the same markets tend to be genuinely comparable.

Example of a Mutual Fund

One of the most notable mutual funds is Fidelity Investments' Magellan Fund (FMAGX). Established in 1963, the fund had an investment objective of capital appreciation via investment in common stocks. The fund's height of success was between 1977 and 1990 when Peter Lynch served as its portfolio manager. Under Lynch's tenure, Magellan's assets under management increased from $18 million to $14 billion.

Fidelity's performance continued strong, and assets under management (AUM) grew to nearly $110 billion in 2000. By 1997, the fund had become so large that Fidelity closed it to new investors and would not reopen it until 2008.

As of March 2022, Fidelity Magellan has nearly $28 billion in assets and has been managed by Sammy Simnegar since Feb. 2019. The fund's performance has tracked or slightly surpassed that of the S&P 500.

Are Mutual Funds a Safe Investment?

All investments involve some degree of risk when purchasing securities such as stocks, bonds, or mutual funds. Unlike deposits at FDIC-insured banks and NCUA-insured credit unions, the money invested in securities typically is not federally insured.

Can Mutual Fund Shares Be Sold at Any Time?

Mutual funds are considered liquid assets and shares can be sold at any time, however, review the fund's policies regarding exchange fees or redemption fees. There may also be tax implications for capital gains earned with a mutual fund redemption.

What Is a Target Date Mutual Fund?

When investing in a 401(k) or other retirement savings account, target-date funds, or life-cycle funds, are a popular option. Choosing a fund that is dated around retirement, like FUND X 2050, the fund promises to rebalance and shift the risk profile of its investments, commonly to a more conservative approach, as the fund approaches the target date.

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FINRA. " Market Cap, Explained ."

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Hedge Fund vs. Mutual Fund: Where Should You Start (and End) Your Career?

If you're new here, please click here to get my FREE 57-page investment banking recruiting guide - plus, get weekly updates so that you can break into investment banking . Thanks for visiting!

Good luck finding much about the recruiting process, compensation, daily life, and long-term career prospects.

Companies that offer mutual funds are referred to as asset management firms , so you’ll also see articles that frame this as “hedge funds vs. asset management.”

Technically, “asset management” is much broader and could also include private equity, hedge funds, infrastructure, real estate, and more – any firm that manages financial assets.

For our purposes, though, asset management firms are ones that collect money from the public and invest it into specific pooled investments called mutual funds .

Here’s how they work, and how recruiting and careers are quite different from what hedge funds offer:

Hedge Fund vs. Mutual Fund: The Business Model

Hedge funds and mutual funds seem similar at first glance: both raise capital from investors and then invest it in financial assets, such as publicly traded stocks and bonds.

But past that basic similarity, everything else is quite different:

• Availability: Hedge funds are lightly regulated and limited to accredited investors , which means very high minimum investments that are only available to wealthy individuals and institutions like pension funds . By contrast, anyone can invest in mutual funds, and the minimum amounts are much lower or do not even exist.
• Returns Benchmarking: Mutual fund returns are usually measured against a specific index, such as the S&P 500 , while hedge funds focus on absolute returns. If the S&P falls 20% in one year, but your portfolio is down only 10%, that’s great if you’re at a mutual fund, but terrible if you’re at a hedge fund.
• Investment Strategies: Mutual funds stick to traditional asset classes (stocks and bonds), and most, but not all, are long-only . Hedge funds use a wider variety of strategies , including short-selling, derivatives, alternative assets, and betting on events like mergers and spin-offs.
• Liquidity: Mutual funds offer much higher liquidity because investors can sell their shares whenever they want (maybe with limitations on frequent selling). But hedge funds often have lock-up periods and limited redemption periods each year.
• Active vs. Passive: A mutual fund may be “active,” meaning that a human Portfolio Manager makes buy and sell decisions, or “passive,” in which case it’s effectively a low-fee index fund that tracks a certain market segment. But hedge funds are always active, or no one would pay their fees.
• Fees: Mutual funds charge fees based on a percentage of assets under management (AUM). So, a firm managing $100 billion earns higher fees than one managing only $10 billion. For actively managed funds, the fees could be anywhere from 0.5% to 1.0%. Hedge funds, on the other hand, charge both management fees and performance fees . The management fees could be 1-2% of AUM, with performance fees of 10-20%. Some of the top funds even charge 30-40% fees on their profits!
• Skin in the Game: Finally, most hedge fund Portfolio Managers put a significant portion of their own money into their funds, which incentivizes them to perform and avoid catastrophic risk (in theory). Some PMs at mutual funds do this as well, but it’s less common and not seen as quite as much of a “requirement” there.

How These Business Model Differences Also Explain Recruiting and Compensation Differences

Since the economics of mutual funds and hedge funds are quite different, each fund type hires, grows, and operates differently as well:

• Asset management firms are incentivized to grow their AUM to earn higher fees. Performance matters for client retention and winning new clients, but it doesn’t directly result in higher or lower bonuses.
• So, the biggest asset management firms have over $1 trillion under management. But the biggest hedge funds are in the tens of billions, and Bridgewater is the only one with over $100 billion.
• With higher AUM, mutual-fund firms need to operate more strategies to meet the diversification requirements . Also, not all strategies scale well, so “growth” usually means “run more strategies and teams.”
• There’s a race to the bottom on fees because mutual funds also compete against index funds and ETFs. It’s difficult to win retail investors who could pay a 0.1% fee on a passive index fund when your firm charges 0.7% for an actively managed fund with average performance.

These differences mean that the compensation ceiling at mutual funds is lower, there’s less entry-level recruiting, and there’s lower turnover – especially at the top levels.

The name of the game is stability , which is great for 20-year veterans and not so great for students who want to get into the industry.

Ideal Candidates at a Hedge Fund vs. Mutual Fund

Both fund types seek similar qualities in candidates:

• Passion for the markets and investing.
• Ability and willingness to be a team player.
• Work experience in a related field, such as equity research or smaller mutual funds.
• Ability to generate new investment ideas.
• Risk management and staying calm under pressure.

Yes, grades and university/MBA quality still matter, and, unlike in IB/PE, the CFA designation helps .

As a student, you can boost your chances of breaking into both industries with internships, participation in investment clubs, and networking, networking, and more networking.

With all that said, there are some important differences in the types of candidates that each fund type recruits.

First, there is far less entry-level recruiting at long-only mutual funds because turnover is much lower than it is at hedge funds.

Similar to equity research , “Associates” are at the bottom of the hierarchy at large asset management firms, and they’re the ones who are hired out of undergraduate programs.

They usually support the Analysts with a bit of modeling and research, but there isn’t a direct promotion path to Analyst or PM.

Above Associates are the Analysts, who are often recruited out of MBA programs or from other AM firms, hedge funds , equity research , or sales & trading .

The large AM firms might hire a few new Analysts each year, but they don’t have huge classes.

By contrast, there’s huge turnover at multi-manager hedge funds because they’re always promoting people and firing underperforming PMs and Analysts.

A larger MM hedge fund might make several dozen new hires per year .

Aggregated globally, there are probably 500 – 1,500 entry-level hedge fund hires per year vs. maybe ~100, or something in the high dozens to low hundreds, at asset management firms.

In practice, this means that investment bankers and sales & trading professionals are much more likely to end up at hedge funds than at asset management firms.

It also means that conversion rates from internships into full-time roles can be quite low in AM.

People often say that mutual funds recruit from a broader set of universities and MBA programs than the top banks, so recruiting is less “elitist” than IB/PE recruiting.

There’s some truth to that, but the problem is that there aren’t that many entry-level spots to begin with .

The Hedge Fund vs. Mutual Fund Recruiting Process

The recruiting process is similar for both firm types: apply online or do a lot of networking, expect an initial phone or HireVue interview , and then do a series of in-person or video interviews where you meet the entire team.

We’ve covered process details in the article on asset management internships previously; see the articles on hedge fund internships and how to get a job at a hedge fund for coverage of the process there.

There’s a heavy focus on stock pitches (or pitches for other investment types at certain hedge funds) in the interview process, and you can expect technical questions about accounting and valuation.

You’re unlikely to get many M&A and LBO-related questions unless you’re interviewing at a hedge fund that uses merger arbitrage or one that acts more like a PE firm.

The best advice for stock pitches is to know your audience and pitch appropriately.

For example, if you’re interviewing at a fund that likes mature, undervalued industrial companies, don’t pitch a tech company growing at 100% per year that’s currently trading at 20x revenue.

Different Portfolio Managers use different criteria to evaluate investments, and some like specific companies/industries, some emphasize valuation multiples , and others like to do in-depth research.

Rather than spending days on a detailed stock pitch, ask about the preferences of the PM and the group as a whole, and go from there.

You’ll perform much better with a 1-page pitch and simple DCF model if your idea fits the PM’s preferences than you will with a 20-page pitch and complex model that has nothing to do with their strategy.

Beyond stock pitches, structured case studies are also possible, but they’ll usually be fairly simple 3-statement modeling or valuation tests.

Finally, one general difference in interviews is that in asset management, you could receive much broader questions about trade policy, economics, regulation, and other macro topics.

There’s no single source to learn everything about those subjects, so you have to read the WSJ, FT, and other financial publications to stay apprised.

Hedge Fund vs. Mutual Fund: The Best Firms

With mutual funds , you’re usually better off starting at one of the largest firms worldwide with $100+ billion in AUM – the likes of Fidelity, Wellington, T. Rowe Price, PIMCO, MFS, and so on.

The higher the AUM, the higher the fees, and the higher your potential compensation.

Also, most entry-level hiring takes place at these larger firms.

If the firm’s AUM is below ~$10 billion, the economics get squeezed unless the team is extremely lean.

Just make sure that you work in a group that does active investing instead of passive investing.

For example, Vanguard is a great firm with huge AUM, but most funds there are passive – so it’s not the ideal place to build a career as a stock picker.

With hedge funds , there are some advantages to starting at the larger funds, but it’s more of a mixed picture because management fees are higher, and performance fees can make even smaller funds quite lucrative.

Also, the main question with hedge funds is not so much size but single-manager (SM) vs. multi-manager (MM) .

You could potentially earn similar amounts at either one, but MM funds tend to be short-term, trading-oriented with higher stress levels, while SM funds often take a longer-term view.

Finally, note that if you join a smaller or startup hedge fund, that doesn’t necessarily mean that you have a higher potential for advancement.

It may be a slower process because the PM of a smaller fund will be reluctant to promote you and reduce his paycheck unless you add a lot of value.

At the larger, multi-manager funds, there’s more of a structured promotion process based on your performance.

Daily Life, Lifestyle, and Culture

Life at hedge funds and mutual funds doesn’t seem that different because you complete similar daily tasks in both:

• Generate and evaluate investment ideas.
• Monitor current positions.
• Build financial models and gather data to support your views.

If you look at our coverage of the hedge fund Analyst and hedge fund Portfolio Manager roles, you’ll have a good idea of what to expect.

Asset management offers a few subtle but significant differences:

• Somewhat Lower Stress Levels and Shorter Hours – The hours at many hedge funds are in the 60-70 per week range (12-14 hours per weekday), while many AM professionals work closer to 50-60 hours per week. Also, stress levels tend to be lower because you’re not paid directly based on performance.
• Less Granular Analysis – Many hedge funds, especially single-manager ones, tend to be fairly concentrated in specific positions. But many mutual funds hold dozens or even 100+ stocks. At that level, it’s not possible to analyze each company’s new quarterly or annual reports in detail.
• Less “Banker Culture” – While hedge funds recruit plenty of former bankers and private equity professionals, the mix of professionals is quite different in asset management. As a broad generalization, the culture is less “fratty” and more intellectual.

These points may sound small, but they add up to fairly significant differences.

In general, asset management offers better work/life balance and less stress, but also a lower compensation ceiling and slower advancement.

Again, though, many differences depend on the single-manager vs. multi-manager distinction.

If you’re working at a newer single-manager fund with a small team, your daily life and hours might be similar to those at a mutual fund.

Hedge Fund vs. Mutual Fund Salaries and Bonuses

As a post-MBA Analyst at a large mutual fund, total compensation might be on par with what post-MBA IB Associates earn: maybe something in the $250K to $350K range.

We listed a much wider compensation range for HF Analysts in the hedge fund career path article ($200K to $600K), and the upper end of that range is extremely-unlikely-to-impossible at mutual funds.

And if you start as an Associate, i.e., out of undergrad rather than an MBA program, expect something closer to hedge fund Junior Analyst pay: the $100K to $150K range.

These figures assume that you are working at a large asset management firm, i.e., one with $100+ billion in AUM.

At smaller firms, you can assume lower compensation closer to the bottom of these ranges.

At the Portfolio Manager level, once again, size matters: PMs at larger AM firms might earn around $1.0 – $1.5 million per year.

But at much smaller funds, total compensation could be closer to $500K.

We’ve listed the compensation range for hedge fund PMs as $500K to $3 million… so, what’s the difference?

The short answer is that the average compensation for PMs at hedge funds vs. mutual funds isn’t much different, but the ceiling is higher at hedge funds because of the performance fees.

If you have a blowout year as a PM at a hedge fund, you could potentially earn a multi-million-dollar or $10+ million bonus.

That would not happen at a mutual fund because even if you beat the S&P by 10%, you still earn only a percentage of your AUM.

Institutional Investor has a good summary of hedge fund vs. mutual fund compensation .

(Note: Compensation figures as of 2020.)

Long-Term Careers and Advancement

Another big difference is that the path to the top can be much slower in asset management because turnover is lower.

You have to perform well against your index and also be in a group that keeps attracting and retaining client money.

Also, some AM firms have a model where PMs earn more the longer their tenure, which further incentivizes people to stick around for 10, 15, or 20+ years.

On the hedge fund side, if you have a few great years, you could reach the Senior Analyst or PM positions quickly – but if you underperform, you could also get fired very quickly.

Even when you reach the PM level or start your own fund , the job doesn’t become “easier” – in fact, it’s arguably more stressful at that level.

In short, mutual funds offer more of a slow, stable climb to the top, while the pathway is rockier but also potentially faster at hedge funds.

Hedge Fund vs. Mutual Fund Exit Opportunities

There isn’t a big difference between the fund types here: your most likely exit opportunities are other funds that use similar strategies.

You are unlikely to get into fields like private equity , investment banking , venture capital , or corporate development because they all require deal experience .

You may be able to do it if you’ve worked in one of those before joining a hedge fund or mutual fund, or you complete an MBA, but otherwise, it’s a challenge.

Doing investment analysis at both hedge funds and mutual funds is fairly specialized, so if you decide that you hate it and need a total career change, you may have to complete an MBA to make it happen.

It’s probably easier to move from a hedge fund to a mutual fund than to do the reverse because the mutual fund lifestyle, hours, and stress levels are all better.

But if you’re at a mutual fund and you find a hedge fund that uses a similar strategy and needs to hire someone ASAP, it’s possible to move in that direction as well.

Long-Term Industry Outlook

If you’ve been breathing oxygen, you’ve seen all the negative headlines about hedge fund performance since the 2008 financial crisis.

The Credit Suisse hedge fund index offers a good summary: HFs have outperformed the MSCI World Index but greatly underperformed the S&P 500.

Some individual funds have done quite well, but in aggregate, it’s hard to justify the fees they charge. As a result, both management fees and performance fees have been falling .

Fee compression is a big issue in both industries, but actively managed mutual funds are probably worse off because they’re directly competing against index funds, ETFs, and robo-advisers.

And unlike hedge funds, they can’t point to fancy strategies or quantitative models or “quantamental” strategies to justify their fees.

To be clear, I’m not saying that either industry will “disappear.”

You can still make money even in a declining industry if you’re good enough at your job.

But if the number of firms declines, you can expect lower compensation and less hiring in the future.

Hedge Fund vs. Mutual Fund Summary

Summing up everything above, hedge funds are better if:

• You have a traditional IB/PE background, and now you want to invest in the markets rather than work on deals.
• You want a higher probability of making it into the industry, even if it means working at a multi-manager fund.
• You want faster advancement and potentially higher compensation, at the expense of a less stable career and higher stress levels.
• You’re interested in investment strategies beyond traditional stocks and bonds (e.g., derivatives, distressed debt, alternative assets, merger arbitrage , quant funds , convertible arbitrage , global macro, etc.).

And mutual funds or “asset management firms” are better if:

• You have more of a public-markets background, you have a longer track record of investing, and you want to stick with investing.
• You’re willing to compete for a very limited number of entry-level spots at one of the large asset management firms.
• You can accept slower advancement and lower potential compensation at the top, knowing that you’ll have more stability and lower stress levels.
• You’re more interested in traditional equities and fixed income, and you don’t necessarily care about fancier strategies.

And if you just can’t decide, intern in both, and pick the winner for your full-time job.

Additional Reading

You might be interested in

• Long-Only Hedge Funds: A Cozy Career, or a Complete Contradiction?
• How to Start a Hedge Fund – and Why You Probably Shouldn’t

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street . In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews

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12 thoughts on “ Hedge Fund vs. Mutual Fund: Where Should You Start (and End) Your Career? ”

Hi Brian! You mentioned Vanguard wouldn’t be a good place to build a career as a student. I’m hoping for more insight on this; is working in passive investing a dead end for students?

It’s fine if you want to stay in passive investing for the long term. But the point is that it would be difficult to move from Vanguard to, say, a hedge fund or any other fund that does more than passive investing. I’m also a bit skeptical that passive investing will “take over” any more than it already has, as it’s largely linked to central bank policies, which will not last forever.

When you work at a hedge fund are you trading with the companies money or your own money?

When you first start, the firm’s money. But as you advance, you’ll have to contribute some of your personal net worth to the firm in most cases, which means you’re at risk losing it if things go poorly.

Do you think the hedge fund industry is dead? Is it impossible to start your own fund now a days?

It’s not “dead” but it is getting more difficult to start your own fund.

Why is it more difficult to start your own fund now compared to the early 2000’s

You need much more capital and more of a track record.

Hi I am the libraryboi from Twitter, this is off topic. You have permission to email me if you would rather. I was accepted into Arizona State MSF. I am really conflicted and need someone to help me make a final decision if I should go through with the program. Is it cool if I gave some background info on my life? Or sent it to you in a email for more privacy? I am scared if I will fit in and be able to network. Basically TL:DR, I have a weird messed up background and am bad at math but love people and love investing in stocks.

It’s impossible to answer your question without more background information. Feel free to reply to one of the newsletters here if you want brief advice (I’m not going to read a multi-page life story or respond with more than 1-2 sentences).

Any idea if merger arb funds or groups are just as stressful as other hedge fund groups such as long/short or distressed? Or is it a little bit more relaxed vs. other strategies?

I think they’re all about the same. I don’t see how merger arb could be *less* stressful than the others, considering that you’re betting on specific events taking place or not taking place and not on a company’s long-term prospects over many years.

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Cams business model & research report.

Rishika Mukherjee

Created on 27 May 2021

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The back-end mechanism of a product is often overlooked but is of utmost importance. In the same line, Mutual Funds are futile without RTAs. The case in point is  CAMS .

With an ever-increasing number of retail participants in mutual funds, it becomes a pretty arduous task for a fund house to keep track of all investor transactions. Investor transactions include buying units, redeeming units, switching between schemes, updating personal information, etc.

Rather than getting involved in this headache, fund houses outsource this work to Registrar and Transfer Agents (RTAs), who manage this back-office work. Such an RTA is  Computer Age Management Services Ltd .

Computer Age Management Services Ltd (CAMS) - An Overview

Since its incorporation in 1988, CAMS is currently the largest Infrastructure and Services Provider in the Indian Mutual Fund Registrar and Transfer agent (MF RTA) space. With listing gains of 23 percent, the company's initial public offering was among the 2020's some of the most talked-about IPOs . 

Computer Age Management Services has recently received the Certificate of Registration for Central Record Keeping Agency (CRA) under the National Pension Scheme (NPS). The company has a pan-India presence with its 271 service centres country-wide. With about 70% market share, it is the market leader in the MF RTA space.

The Business Model of CAMS

A substantial portion of the fees that CAMS charges its mutual fund clients is calculated and set based on the average assets under management ("AAUM") of the funds serviced. Therefore, the fee structure is not directly linked to its expenses and depends more on the mutual funds. In other words, lots of advertisements made by mutual funds & other organizations, and India's growing under-penetrated mutual fund sector will directly benefit the company.

Apart from providing services to mutual fund houses, they also offer certain other services that include:

• Alternative Investment Fund (AIF) services - accounting and reporting of the transactions 
• Banking and Non-Banking services - facilitation of loan processing 
• Electronic payment collection services - CAMS becomes the intermediary between banks for debiting amounts and purchasing the units of mutual funds, as in the case of a SIP.
• Insurance Repository services - converting physical insurance into dematerialized form & storing these policies into Demat Account .
• KYC registration agency services 
• Software Solution 
• Handling paper-based transactions of AMC's (comprises about 20% of total revenue)

What is the moat?

Their moat is a sound competitive barrier because their work is quite critical, so Mutual fund companies would not like to take it into their hands. Instead, they will be more focused on research and marketing for mutual funds.

They have a pretty sticky business model, and the chances of a new player entering the RTA space are difficult.

They are so involved in the paperwork that no company would switch to it as CAMS has its distribution channel from which customers directly invest in MF, and that can affect the business of the attempting-to-switch company.

What is good?

• The services all top 5 MFs and 9 of the 15 largest MFs.
• With rising disposable incomes and growth in the GDP, gross domestic savings are expected to rise. With higher focus saving instruments, the proportion of financial protection in household savings and the net household financial savings are expected to increase during the next five years. For FY 2015 to FY 2020, Assets under Management increased at a CAGR of 18% and is poised to grow this way for the next five years as well. And with this resultant increase in AUM, the total collection fees will also increase.
• The company is Debt-free and with Zero Promoter Pledge , and institutional Holders like Goldman Sachs, SBI Funds Management, HDFC Asset Management Co. have string holding in the company.

What is bad?

• Any future revenue and profit are primarily dependent on the growth, value, and composition of the AUM of the mutual funds managed by their clients. That means the company is highly reliant on the industry.
• In the future, SEBI may regulate fees they charge for some of their services, resulting in an adverse impact on the operation and profits.
• CAMS has a Strong Focus on Process and Risk Management, so any malfunction in information technology systems or data security breaches would negatively affect the business and its reputation.

Financials 

With increasing AUM levels managed by the mutual funds, the company has shown a decent profit growth of 18.69% CAGR over the last five years; meanwhile, the company has delivered a robust 33.06% return on equity .

Except FY 2019-20, where overall business was impacted by the Covid-19 led lockdown company is continuously delivering good operating profits. Consolidated EBITDA increased by 5.4% CAGR in FY20. Depreciation increased by 9.8%. Other income increased by 15.5% CAGR, leading to a 9% CAGR higher Profit After Tax.

The company had a positive operating cash flow over the last five years, with an operating cash flow of 180.10 crores in FY20. The average operating cash flow over the previous three years was around Rs. 170.85 crore.

The company's balance sheet also looks good with zero Borrowings and with growing reserves of the company. The total assets of 716.07 crores and total cash Reserves of 440 crores look impressive as well.

CAMS has a technology-driven business model. It is the most significant financial infrastructure and service provider in India. A CRISIL report states that the RTA industry is expected to grow at a rate of 16% CAGR over the coming 5 years. This sounds good for the company as it is almost the single-player in that space. It has witnessed steady revenue growth in the last few years, and with its sound competitive barrier, it is expected to grow in India's under-penetrated mutual fund sector.

However, the company's future revenue and profit mainly depend on the growth, value, and composition of the AUM of the mutual funds managed by its clients.

Having said that, the high growth prospects of the Indian mutual fund sector suggest that the company could be an offshoot beneficiary, and hence, an attractive bet.

Anyway, what's your take? Is CAMS worth investing in? Tell us in the comments below

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Using Machine Learning to Predict Mutual Fund Performance

I n Machine-Learning the Skill of Mutual Fund Managers (NBER Working Paper 29723) Ron Kaniel , Zihan Lin , Markus Pelger , and Stijn Van Nieuwerburgh use a neural network to predict mutual fund performance. They estimate relationships among a large set of fund attributes to identify the US mutual funds with the best relative performance. They apply their model to predict the best-performing decile of funds each month and to compute portfolio weights for different funds that will produce the maximum return within the top decile.

Investing according to the model’s predictions generated a cumulative abnormal return of 72 percent over the 1980 to 2019 period. The decile of mutual funds that was predicted to exhibit the worst returns each month produced a cumulative abnormal return of −119 percent over the same period. The difference between the returns in the best and the worst deciles, 191 percent, was both economically large and statistically significant.

A model that includes interaction effects between investor sentiment, fund flows, and fund momentum has substantial power to predict the best- and worst-performing funds.

The average mutual fund in the sample of 3,275 funds was almost 14 years old, had $1.15 billion in assets, and charged a monthly expense ratio of about 0.1 percent. Abnormal returns were those earned in excess of what an investor would expect given a fund’s level of risk. Such returns were estimated by subtracting the monthly Treasury-bill yield from a fund’s monthly performance before fees, minus the estimated compensation for systematic risk factor exposure. Ten to 20 percent of funds in the sample generated positive abnormal returns after fees were subtracted, with most gains accruing from avoiding the worst-performing funds. The average abnormal return was −0.03 percent per month.

The researchers conclude that little can be learned about a fund’s performance from the characteristics of the stocks it holds. Their alternative approach began with 59 fund characteristics and studied how they were associated with subsequent fund returns. The machine learning model they apply to these data uncovered substantial interaction effects between investor sentiment and both fund flow and fund momentum. A fund’s momentum is its mean abnormal return in the preceding 12 months, excluding the most recent month. Flow is the change in total net assets in a month. Abnormal returns were nearly identical when the fund characteristics in the model were pared down to these three attributes.

Periods of above-average investor sentiment drove the strong association between fund momentum, flow, and the next month’s abnormal performance. When combined with fund characteristics, the state of the macroeconomy, proxied by the Chicago Fed National Activity Index (CFNAI), predicted the best and worst performers as well as investor sentiment. Though models that use sentiment and the CFNAI put 78 percent of the same funds in the bottom decile and 74 percent of the same funds in the top decile, the model with sentiment did a better job of predicting funds’ actual abnormal returns. Investor sentiment was also better at predicting the relative returns within the top and bottom deciles. Prediction-weighted portfolios created from the top decile of funds earned a cumulative abnormal return of 72 percent. Investing in equally weighted portfolios returned just 48 percent.

The results are consistent with investors successfully detecting skilled managers and reallocating their investments toward them. They are also consistent with funds and fund families successfully using marketing to attract investors. Fund inflows create buying pressure for the stocks held, raising their prices and lifting fund returns. That demand pressure increases prices further, generating momentum in fund returns. The fact that flows and fund momentum have a much stronger association with fund performance in high-sentiment periods lends further credence to this marketing-driven channel. However, changes in inflows were gradual and small enough, the researchers found, to take several months before the fund ran into zero marginal abnormal returns. Skill, therefore, leaves a trail in the form of fund return momentum, and investors can exploit this to earn higher returns.

— Linda Gorman

Working Groups

Conferences, also in this issue:.

• Copayment Coupons and the Pricing of Prescription Drugs
• Engineers and the Industrial Revolution in 19th Century Britain
• Computerization’s Impacts on Office Jobs and Salaries
• Estimating Lives Saved by COVID Vaccines
• Why Stock Markets Are Less Volatile When the US Is at War

More from NBER

In addition to working papers , the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter , the NBER Digest , the Bulletin on Retirement and Disability , the Bulletin on Health , and the Bulletin on Entrepreneurship  — as well as online conference reports , video lectures , and interviews .

© 2023 National Bureau of Economic Research. Periodical content may be reproduced freely with appropriate attribution.

Millions of Americans use mutual funds to help meet their investment and retirement goals, but you may not know exactly what they are or how to start investing in them . Like many financial products, they can be intimidating at first, but mutual funds are fairly simple to understand with a little help.

What is a mutual fund?

A mutual fund is a pool of money collected from investors that is then invested in securities such as stocks or bonds. Each share in the fund represents a proportional interest in the fund’s portfolio, so the more shares you own, the larger your interest in the fund.

If a fund holds 5 percent of its portfolio in Apple and 2 percent in Tesla , for example, your share of the fund will hold the same stocks in the same proportions.

There are thousands of mutual funds that allow you to invest in a variety of ways. You can find funds that invest in a diversified group of large companies, small companies, specific geographies or even certain sectors of the economy.

Who should invest in a mutual fund?

Mutual funds can make sense for lots of different people at different points in their investing lives. But it’s important to remember that it’s not about the mutual fund itself, but rather what goes into the mutual fund that will determine whether the investment makes sense for you.

These funds can hold assets like bonds, stocks, commodities or a combination of several asset classes. You’ll want to do your research before investing in a fund and make sure you understand the risk of the fund’s underlying assets.

Mutual funds are good options for both beginners and more experienced investors alike. Both types of investors will benefit from the diversification benefits of mutual funds, and experienced investors can find funds that target specific areas they think are poised for growth.

Active vs. passive mutual funds

One of the biggest distinctions between different mutual funds is whether they pursue an active or passive investment strategy . The difference will determine how the fund invests and can ultimately have a big impact on the returns you earn as an investor.

Active mutual funds

Active funds are managed by professional investors with the goal of outperforming a market index, such as the S&P 500 index. For an active stock fund, the fund manager and a team of analysts will work to identify which stocks to own and in what quantities to achieve the best returns. Similarly, active bond funds will attempt to beat bond indices through superior management.

But it’s not as easy as it sounds, and actively managed funds often fail to match the performance of the index they’re trying to beat in the first place. On top of that, active funds come with larger fees (often around 1 percent of the fund’s assets) to pay for professional management, so the returns to investors are lowered further through these types of costs.

Passive mutual funds

Passive mutual funds are managed to track the performance of a market index. They do not require an expensive investment team to manage the portfolio because they aren’t trying to identify the best performers, they’re just trying to match the index. This allows passive funds to charge very low fees and sometimes no fees at all, which leaves more of the return for the fund’s investors.

Passive funds may sound simple and even a little boring, but they have consistently beaten actively managed funds over long time periods. There will always be a few active funds that outperform their benchmark over short time periods, but very few will do so consistently over the long term.

Types of mutual funds

There are many different mutual funds available and it can be confusing to navigate them all. Let’s take a look at some of the more popular types of funds.

Stock funds

Money market funds

Index funds

How to choose a mutual fund

Choosing which fund to invest in can be intimidating when you look at all the different options. The first thing to consider is whether a fund’s investment objectives are aligned with your long-term financial plan . For beginning investors who are early in their careers, investing in a low-cost S&P 500 index fund is likely to be an attractive option.

For more experienced investors or for people looking to invest in an actively managed fund, more research may be required. You’ll want to understand a fund’s overall approach and investing philosophy and who the portfolio managers are that will be making investment decisions on your behalf.

Ultimately, a fund’s performance is what will matter to you as an investor, so try to understand the drivers of a fund’s long-term performance and whether that is likely to continue in the future.

You’ll also want to consider the fees associated with purchasing shares in a fund. Remember that if two funds have the same investment performance, the one with the lower fees will leave their investors better off.

How to buy mutual funds

Mutual funds can be purchased through online brokers or through the fund manager themselves. But there are some differences between the way mutual funds trade and the way a stock or ETF trades.

Pricing : Mutual funds are priced at the end of each trading day based on their net asset value, or NAV . The NAV is calculated by adding up the value of the fund’s holdings, subtracting expenses and dividing by the number of shares outstanding. When making a purchase, you’ll receive the next NAV, so if you place an order after the market has closed, you will receive the next day’s closing NAV as your price.

Minimum investment : Most mutual funds have a minimum investment of a few thousand dollars and you can choose to buy a certain dollar amount of a fund or a specific number of shares.

How to sell mutual funds

Mutual funds are sold similarly to the way they’re bought. Using an online broker or the fund’s manager, you’ll place a sell order and will receive the next available NAV as your price. Since mutual funds don’t trade throughout the day like stocks or ETFs, you won’t know the price you’re selling at until the trade goes through.

Mutual funds sometimes have fees for selling the fund in a short period of time, known as early redemption fees, and are therefore not ideal for short-term trading. They’re best used as vehicles for long-term investment and are commonly held in retirement accounts or invested towards another long-term goal. You don’t need to monitor the fund’s performance daily or even weekly when you’re invested for the long run. Checking in quarterly or a couple of times each year should be enough to make sure the fund is still aligned with your objectives.

Why should you invest in a mutual fund?

You should consider investing in a mutual fund if the fund’s objective matches your investment needs. A fund that invests primarily in stocks isn’t going to be suitable if you think you’ll need the money one year from now, while a bond fund likely won’t be the best option if you’re looking for a fund to help meet long-term retirement goals in the distant future.

Make sure to read a fund’s prospectus before investing to understand how your money will be invested and whether it makes sense for your own financial goals.

How do mutual funds make you money?

Mutual funds make money by investing in securities on your behalf. The fund can only do as well as the underlying securities it holds. Income and appreciation are generally the two ways you can make money in securities.

Income comes in the form of interest or dividend payments that are then passed on to you as a fund investor. Appreciation can be reflected in the net asset value per share of the fund or distributed to investors in the form of capital gains, minus any losses.

Watch out for mutual fund fees

One of the most important things to be aware of when investing in mutual funds is the fee you’ll be paying. You can find this information in the fund’s prospectus, and while it may not sound like much, costs really add up over time.

Funds can charge fees for a number of costs that relate to the operating expenses of the fund. Management fees pay for the fund’s managers and investment advisor, while 12b-1 fees cover the costs of marketing and selling the fund. Other expenses include legal, accounting and a variety of administrative costs.

You may also come across what are known as load and no-load funds . Loads, or commissions, are charged by some funds and paid to brokers at the time of purchase or sale of shares in the fund. The commissions are typically calculated as a percentage of your overall investment. Funds that don’t charge this commission are known as no-load funds.

Just a 1 percent annual fee can significantly eat into your return over a decades-long investing life and throw a wrench into your retirement plans. While no one knows how well an investment might perform, everyone can be certain how much they’ll pay in fees. In many cases, you can buy the same kind of fund, such as an S&P 500 index fund, with much lower expenses.

How are mutual funds taxed?

Taxes might also be considered fees that eat into the ultimate return you earn as an investor. If you own mutual funds in a taxable account such as a brokerage account, you’ll owe capital gains tax if the fund has appreciated from where you bought it at the time of sale. One way around this is to own the funds in tax-advantaged accounts such as a traditional or Roth IRA. In those accounts, your funds will be allowed to grow tax-free even if you sell them. You’ll eventually pay taxes on withdrawals from a traditional IRA, but Roth IRA withdrawals are tax-free during retirement.

Mutual funds vs. ETFs: How they differ

Mutual funds and ETFs have a lot in common, but there are some key differences. Here are the main ones to consider.

Minimum investments : Mutual funds typically come with a minimum investment of a few thousand dollars, while ETFs usually have no investment minimum.

Trading : ETFs trade throughout the day on exchanges similar to the way that stocks trade, while mutual funds can only be bought and sold once a day at their closing NAV.

Expense ratios : While it will depend on the type of fund you’re investing in, expense ratios tend to be lower for ETFs than for mutual funds. However, a mutual fund that tracks an index such as the S&P 500 will be cheaper than an ETF that tracks a very narrow industry or geography.

Fees : ETFs typically have no fees beyond the fund’s expense ratios, while mutual funds sometimes have sales commissions that are charged during the purchase or sale of the fund. Be sure to understand all of the fund’s fees before investing.

Remember that a mutual fund or ETF isn’t itself the investment, but rather they’re the vehicles that allow you to invest in stocks, bonds or other securities. A fund can only be as good as the investments it holds, so be sure to understand how a mutual fund or ETF is invested before making a purchase.

Bottom line

Mutual funds can be a great way to invest in a diversified portfolio of securities for a relatively small minimum investment. Be sure to read a fund’s prospectus before investing and understand the risks involved. Consider investing in index funds as a way to help keep your costs low so that more of the return ends up in your pocket.

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How can distributors leverage mutual fund solution technology to transform their business models.

December 29, 2022

‍In an ever-evolving financial services industry, mutual fund distributors must stay ahead of the curve and leverage new technologies to transform their mutual fund service. From embracing automated processes to utilizing digital marketing tactics, mutual fund distributors can benefit from technology in many ways. 

By using a mutual fund solution to streamline processes, reduce costs, and optimize customer experience, distributors can gain a competitive advantage and better serve their clients. With the right technology, mutual fund distributors can create a future-proof business model that will help them succeed in the years to come.

Benefits of leveraging technology for mutual fund distributors

Leveraging technology for mutual fund distributors has many benefits. 

First, using a mutual fund software helps to streamline processes, resulting in a more efficient workflow. This can help to reduce costs, increase productivity, and create a better customer experience.

Technology also helps to create a consistent digital experience for customers. This includes creating digital channels to reduce reliance on traditional sales channels, improving customer service and communication, and creating digital assets to retain customers.

Finally, mutual fund software for distributors can help to protect and secure business data. Distributors can also use technology to create efficiencies in other areas of their business, such as marketing and sales.

Automating processes to increase efficiency

The first step in leveraging technology for mutual fund distributors to provide investment fund services is to automate processes. This includes automating sales and marketing activities, such as building a sales engine and creating sales campaigns. 

But it also includes automating operational processes, such as sales and marketing logistics, inventory management, and CRM operations. Additionally, distributors should integrate systems to connect data and processes across departments. Doing so will help distributors to create an omni-channel experience for customers across all touchpoints and channels. 

Automating processes can help to reduce costs by minimizing manual efforts and reducing headcount. It can also help distributors to increase efficiency, allowing them to serve more customers.

Optimizing customer experience with technology

Fund distributors should use technology to create a consistent and seamless customer journey across all channels for their mutual fund service. Distributors can do this by investing in omnichannel systems that increase the customer experience across all channels. 

Distributors should also use AI and automation to create more automated customer interactions. This includes integrating AI and automation into product recommendations and sales interactions. Distributors should also use technology to personalize the customer experience. 

Distributors can do this by creating customer personas to better understand customer needs and preferences. They can also use technology to create a personalized customer experience by integrating CRM and marketing systems to create personalized communications.

Streamlining communication with clients

A key way to create a consistent customer experience is to streamline communication with clients. This includes integrating communication channels and creating a communication hub. It also means that distributors should leverage AI and machine learning for communication. This will help to create more automated and personalized communication tools, such as chatbots. Distributors can also use a single platform that integrates all communication channels, such as emails, text messages, and live chat.

Enhancing data security and compliance

Mutual fund software can also help distributors to create a more secure and compliant environment. Distributors can use AI, machine learning, and data analytics to detect threats and prevent cyber attacks. Distributors can also use blockchain technology to secure data and reduce risk. Using blockchain technology to store and secure data can help to reduce fraud and identify breaches quickly.

Implementing technology to reduce costs

Aside from the benefits listed above, mutual fund software can also help to reduce costs for mutual fund distributors. Distributors can use technology to connect with customers, create marketing campaigns, and manage digital assets. 

Distributors can also use technology to manage service delivery and operations. They can also use technology to create a scalable and cost-effective customer experience across all channels. Distributors can also use technology to create an automated hiring process to reduce headcount.

Building a future-proof business model with technology

By leveraging mutual fund solution technology to transform its business model, a mutual fund distributor can create a future-proof business model. Technology can help distributors to reduce costs, increase automation, and increase scalability. This can help to increase profit and expand the business. Distributors can also use technology to create a consistent customer experience and improve customer satisfaction. This can help to retain customers and increase customer loyalty.

To recapitulate, distributors can transform their business models by leveraging Mutual Fund Solution Technology. This technology provides a comprehensive suite of tools, such as data aggregation, portfolio analytics, order management, compliance, and reporting. With this technology, distributors can increase operational efficiency and improve client satisfaction. Additionally, they can offer a more comprehensive range of services, including portfolio analysis, portfolio construction, and risk management. By taking advantage of Mutual Fund Solution Technology, distributors can create more value for their clients and increase their competitive advantage.

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• Company and Financing Summary
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• Marketing Plan
• Personnel Plan
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1.0 Executive Summary

The purpose of this business plan is to raise $10,000,000 for the development of a mutual fund while showcasing the expected financials and operations over the next three years. Mutual Fund, Inc. (“the Company”) is a New York based corporation that will provide investments into marketable securities on behalf of investors. The Company was founded by John Doe.

1.1 Products and Services

The business, through its open ended mutual fund, will manage investments into marketable securities including stocks and bonds that are traded within the United States. At this time, Management is seeking to retain a qualified securities law firm that will draft the Company’s N-1A filing along with other appropriate filings so that the business can acquire its custodial accounts and begin soliciting capital from the general public. The Mutual Fund will generate assets under management fees equal to 1.5% of the total assets that are in the Mutual Fund. The third section of the business plan will further describe the services offered by the Mutual Fund.

1.2 The Financing

Mr. Doe is seeking to raise $10 million from a number of investors via a private placement offering that will be used to make investments into publicly traded companies. Primarily the financing will be used for the following: • Development of the Company’s Mutual Fund location. • Financing for the first six months of operation. • Financing for the investments to be made by the Mutual Fund.

1.3 Mission Statement

Management’s mission is to develop the Mutual Fund into a premier asset management firm that uses highly proprietary market research to determine the best companies for investment within the United States.

1.4 Mangement Team

The Company was founded by John Doe. Mr. Doe has more than 10 years of experience in the investment management industry. Through his expertise, he will be able to bring the operations of the business to profitability within its first year of operations.

1.5 Sales Forecasts

Mr. Doe expects a strong rate of growth at the start of operations. Below are the expected financials over the next three years.

1.6 Expansion Plan

The Founder expects that the business will aggressively expand during the first three years of operation. Mr. Doe intends to implement marketing campaigns that will effectively target investors and publicly traded companies within the target market.

2.0 Company and Financing Summary

2.1 Registered Name and Corporate Structure

Mutual Fund, Inc. The Company is registered as a corporation in the State of New York. All shares of investments will be held through a third party entity.

2.2 Required Funds

At this time, the Mutual Fund requires $10 million of investment funds funds. Below is a breakdown of how these funds will be used:

2.3 Investor Equity

Mr. Doe is seeking to raise capital via the Company’s private placement memorandum. He will retain a 100% ownership interest in the investment management company that will oversee the firm’s publicly traded stock investments.

2.4 Management Equity

This will be further discussed in the Company’s private placement memorandum.

2.5 Exit Strategy

If the business is very successful, Mr. Doe may seek to sell the business to a third party for a significant earnings multiple. In all likeliness, a qualified investment bank would be hired to manage the complex aspects of selling the Mutual Fund to a third party for a significant earnings multiple. We encourage you to review the Company’s PPM in regards to the potential sale of the Mutual Fund to a third party investor.

3.0 Products and Services

Below is a description of the mutual fund services offered by the Mutual Fund, Inc.

3.1 Assets Under Management Services

The primary revenue center for the business will come from the ongoing assets under management fees that will be received from the ongoing management of publicly traded securities that are bought and sold through the Company’s mutual fund. The business will focus on a number of different types of investment strategies including value and growth investing. The business will hire number of highly educated investment professionals that can provide insight into the economic viability of any business that is reviewed by the Mutual Fund for a potential investment.

4.0 Strategic and Market Analysis

4.1 Economic Outlook

This section of the analysis will detail the economic climate, the mutual fund industry, the customer profile, and the competition that the business will face as it progresses through its business operations. Currently, the economic market condition in the United States is moderate. The meltdown of the sub prime mortgage market coupled with increasing gas prices has led many people to believe that the US is on the cusp of a double dip economic recession.

4.2 Industry Analysis

The financial services sector has become one of the fastest growing business segments in the U.S. economy. Computerized technologies allow financial firms to operate advisory and brokerage services anywhere in the country. In previous decades, most financial firms needed to be within a close proximity to Wall Street in order to provide their clients the highest level of service. This is no longer the case as a firm can access almost every facet of the financial markets through Internet connections and specialized trading and investment management software. With these advances, several new firms have been created to address the needs of people in rural and suburban areas. The Bureau of Labor Statistics estimates that there are approximately 94,000 investment advisors currently employed throughout the United States. The average annual income for an investment advisor (including mutual fund employees) is $62,700. Salaries are expected to increase at a rate of 2.1% a year as inflation increases. In the last study conducted by the U.S. Economic Census, it was found that the revenues of the investment advisory industry increased from $14.8 billion dollars in 1999 to over $52.9 billion dollars by 2009. The number of investment advisory establishments increased 61.5% over the same period.

4.3 Customer Profile

As the Company intends to operate an open-ended mutual fund, any person will be able to make an investment into the business’ fund. However, Management has developed the following demographic profile of individual investors that will provide capital for the mutual fund: • Between the ages of 35 and 65 • Annual household income of $60,000+ • Will invest $3,000 to $25,000 with the mutual fund. Based on the above demographic profile, approximately 45 million Americans could become potential investors in the fund.

4.4 Competitive Analysis

As the investment advisory industry has grown, so has the level of competition. One of the drawbacks to the industry is that there are very low barriers to entry. Any individual or business may register itself as an investment advisor after completing the proper examinations and filings. The expected costs to build an investment advisory are low as it is a service oriented business. Success in this market will depend on several factors including: • The ability to create and market new and innovative products. • Generation of an outstanding track record for Mutual Fund, Inc. As stated earlier, there are more than 8,000 other mutual funds that operate in a similar capacity.

5.0 Marketing Plan

The Mutual Fund intends to develop a marketing campaign that will attract both investors and potential investment companies to the brand name of the firm. Below is an overview of these strategies.

5.1 Marketing Objectives

• Develop relationships with brokers throughout the United States.

• Develop a strong presence among funds of funds.

• Remain within the letter of law regarding the advertisements and marketing campaigns carried out by the Mutual Fund.

5.2 Marketing Strategies

Management intends to use a broad based marketing campaign that will target individual investors (or retail investors), investment institutions, other mutual funds, stock brokerages, and other firms that will invest capital into the Company’s open ended mutual funds. As this is a highly competitive industry, Management will hire a qualified investment focused marketing firm to assist in this process. These marketing firm will work closely with the Company’s Chief Compliance Officer and retained securities law firm to ensure that all advertisements are in line with the requirements set forth by the Securities and Exchange Commission. The Company will also maintain a highly informative website showcasing the operations of Mutual Fund, an outline of the Company’s mutual fund program, and how to contact the business for more information regarding the Company’s asset management services.. This website will also have a portal for investors to learn more about the Company’s operations and its investments.

5.3 Pricing

In this section, describe the pricing of your services and products. You should provide as much information as possible about your pricing as possible in this section. However, if you have hundreds of items, condense your product list categorically. This section of the business plan should not span more than 1 page.

6.0 Organizational Plan and Personnel Summary

6.1 Corporate Organization

6.2 Organizational Budget

6.3 Management Biographies

In this section of the business plan, you should write a two to four paragraph biography about your work experience, your education, and your skill set. For each owner or key employee, you should provide a brief biography in this section.

7.0 Financial Plan

7.1 Underlying Assumptions

• Mutual Fund will have an annual revenue growth rate of 16% per year.

• The Owner will acquire $10,000,000 of equity funds.

• The business will generate revenues equal to 1.5% of the total funds managed by the Company.

7.2 Sensitivity Analysis

The Company’s revenues are not sensitive to changes in the general economy or securities marketplace. The mutual fund intends to invest in a number of other mutual funds that produce profits despite deleterious stock market conditions.

7.3 Source of Funds

7.4 General Assumptions

7.5 Profit and Loss Statements 

7.6 Cash Flow Analysis

7.7 Balance Sheet

7.8 General Assumptions

7.9 Business Ratios

Expanded Profit and Loss Statements

Expanded Cash Flow Analysis

• Investment Planning
• Retirement Planning
• Best Investments
• Meaning & Definition
• Mutual Fund Guides

What is Mutual Fund?

What is a Mutual Fund?

Mutual fund is a financial instrument that pools money from different investors. The pooled money is then invested in securities like stocks of listed companies, government bonds, corporate bonds, and money market instruments .

As an investor, you don’t directly own the company’s stocks that mutual funds purchases. However, you share the profit or loss equally with the other investors of the pool. This is how the word “mutual” is associated with a mutual fund.

You get the advantage of the expertise of the fund manager and regulatory safety of the Securities Exchange and Board of India (SEBI) . The professional fund manager ensures a maximum return to investors.

What are Mutual Fund Units?

A mutual fund invests across a diverse range of securities. It builds the corpus by investing investors’ capital across all these securities. When an investor decides to invest in a mutual fund, they will ideally buy a part of the mutual fund. Like company shares, mutual funds are divided into fund units. Thus, to invest in a mutual fund, you should buy the fund units. Each unit will give you exposure to all the assets held by the fund. For example, if Fund X invests in Company A (20%), Company B (15%), Company C (10%), Company D (25%), and 30% in debt instruments. Thus, buying one fund unit will give you exposure to all the securities in the same ratio. 

Each unit is bought and sold at the prevailing Net Asset Value (NAV). When purchasing a share, investors get ownership of the company. However, in mutual funds, purchasing units will not give ownership of any stock or bond. Thus, to invest in mutual funds, you must purchase the fund units at the NAV and similarly sell the units to realise gains.

How Do Mutual Funds Work?

Mutual fund investment is simple. You invest in a fund consisting of several assets. Thus, you need not risk putting all eggs in one basket.

Additionally, the headache of tracking market movements is not there. The mutual fund house takes care of the research, fund management, and market tracking. This makes the mutual fund a highly popular investment option for all types of investors.

An Asset Management Company (AMC) manages the mutual fund. Mutual fund investment starts with the pooling of money from several investors.

The pooled money is invested in a meticulously built portfolio of different asset classes like equity, debt, money market instruments, and other funds. Hence, you have the advantage of diversification, the time tested market mantra.

Additionally, your money is invested in instruments like Government bonds , that you wouldn’t be able to afford individually.

Also, the best part about mutual funds is that a team of experts along with the fund manager picks all the investments to build a portfolio. The investments are made according to the defined objective of the mutual fund.

Expert and professional fund management help you outperform the returns of traditional investment vehicles like a bank savings account and fixed deposits.

Also, as an investor, you are allotted units for your contribution to the pooled fund.

The portfolio value depends on the price movements of the underlying assets. The portfolio value is net assets divided by the number of outstanding units which is called the Net Asset Value (NAV)

Furthermore, the gains are reflected in higher NAV and lower NAV indicates a loss in portfolio value.

Types of Mutual Funds Based on Asset Class

Investors should pick mutual funds based on their financial objectives and risk appetite. Proper mutual fund selection helps you meet your life goals in the defined time period.

Mutual fund type depends on the defined objective and the underlying asset. Following are the categories of mutual funds:

1. Equity Mutual Funds

Equity mutual funds invest the pooled money majorly in stocks of different companies. Hence, equity mutual funds have an inherent higher market risk. Factors like earnings, revenue forecasts, management changes, and company & economic policy impact price movements and the returns. Returns from equity funds have high fluctuations. Hence, you should invest, if you have a fair understanding of the asset class risks associated with equity.

Types of Equity Funds

Equity fund can be further categorised depending on market capitalisation and sectors.

• Large-cap Equity Funds – Invest in shares of large-cap companies that are well-established with a track record of performing consistently over a longer time period. These companies have sound fundamentals and are least affected by business cycles.
• Mid-cap Equity funds – Invest in shares of mid-cap companies. Mid-sized companies have relatively lower stability in terms of performance. But have the potential to grow more than the large-cap companies.
• Small-cap Funds – Invest in shares of small-cap companies. Small-cap companies have the highest potential to grow or fail. Thus, small-cap funds have a high-risk exposure but also offer an opportunity to generate the highest returns.
• Multi-cap funds – Invest in a defined proportion across all market caps. Based on cues and trend analysis, the fund manager allocates aggressively to capitalize on the volatility.
• Sector Based Equity Funds : Sector-based equity funds invest in stocks of a specific sector. For example, sectors like FMCG, technology, and pharma. Sector funds are prone to business cycle risk and sector getting out of focus.

2. Debt Mutual Funds

A debt mutual fund invests a major portion of the pooled corpus in debt instruments like government securities, corporate bonds, debentures , and money-market instruments. The bond issuers “borrow” from investors by giving an assurance of steady and regular interest income. Thus, debt funds are less risky in comparison to equity funds. The debt fund manager ensures that the fund is invests in the highest-rated securities. The best credit rating signifies the creditworthiness of the issuer in terms of regular interest payments and principal repayment.

Who Should Invest in Debt Funds?

Debt funds have less volatility and range bound returns as compared to equity funds. Thus, debt funds are safer for conservative investors who are looking to grow wealth with minimal risk.

In fact, the interest income and maturity amount are known beforehand. Thus, debt funds are best for short-term (3 to 12 months) and medium-term (3 to 5 years) investment horizon.

Type of Debt Funds

Following are the debt funds available in India:

• Dynamic Bond Funds : Dynamic bond fund investment basket comprises of both shorter and longer maturities. The debt fund manager aggressively tweaks the portfolio composition based on changing interest rate regime. This aggressiveness makes the debt fund dynamic, hence the name.
• Liquid Funds : The short maturity of the underlying securities (not more than 91 days) makes the liquid funds almost risk-free. It is better than parking funds in saving bank accounts as it gives better returns with much-needed liquidity. You can redeem liquid funds almost instantly. If you are short-term investors then debt funds like liquid funds could be better as you get returns in the range of 6.5 to 8%. Liquid funds are an effective tool to meet emergency fund needs.
• Income Funds : Fund managers invest majorly in securities with longer maturities to have more stability and regular interest income flow. Most of the income funds have an average maturity of 5 to 6 years.
• Short-Term and Ultra Short-Term Debt Funds : There is another category in the maturity range of 1 to 3 years. The fund manager takes a call on interest rate regime and invests in securities with maturity of the said range. This is suitable for those investors who are risk-averse and looking for interest rate movement safety.
• Gilt Funds : Gilt funds invest only in high-rated government securities. Since the government rarely defaults, it has zero risks. You can park your money in this instrument to have assured returns in longer maturity range.
• Credit Opportunities Funds : Credit Opportunities Funds are a relatively riskier instrument that focuses more on higher returns by holding low-rated bonds or taking a call on credit risks. The fund manager of credit opportunity funds relies more on interest rate volatility to earn higher returns.
• Fixed Maturity Plans : These closed-ended debt funds invest in fixed income securities like government bonds and corporate bonds . You invest only during the initial offer period and your money remains locked-in for a fixed tenure, which could be months or years.

Types of Mutual Funds based on Investment Objectives

Since mutual funds are all about the mutuality of common goals, mutual fund schemes are also categorized on the basis of the objectives of investors.

Following are some popular types of mutual funds based on investor objectives:

1. Growth Oriented Scheme

As the name suggests the primary goal of this type of mutual fund is to ensure wealth creation in the medium and long-term.

Aligned with the objective, the fund manager allocates the corpus predominantly (over 65%) in equities. With a focus on higher returns, the manager aggressively shuffles the portfolio to reap the benefits of market movements.

2. Income Oriented Scheme

The objective of the regular income could be achieved only when the underlying assets assure a steady return.

To meet the objective, fund manager of income funds allocate a major portion of the corpus in fixed income securities such as government securities, bonds, corporate debentures, and money market instruments.

Lesser risks and assured return makes it safe for regular income as dividends. However, these products have very limited potential for wealth creation in the defined period.

3. Balanced Fund

The name comes from the asset allocation as the fund is allocated in both equities and debt instruments in defined proportions. The objective of the balanced fund is to have reasonable growth and regular income with the lowest possible risk.

Fund managers of these funds normally allocated approx 60% in equities and rest on debt instruments. NAV of balanced funds is less volatile as compared to equity funds.

The balanced objective is suitable for those who want to have advantages of market movements and the safety of the debt market.

4. Liquid Fund

The objective of these schemes is to ensure liquidity, capital protection, and reasonable income in the short-term.

Most of the pooled fund is invested in short-term safe instruments like government securities, treasury bills, certificates of deposit, commercial paper, and inter-bank call money.

Since there isn’t much volatility, these funds are suitable for investors who want to park money for short-term and earn better returns compared to savings bank accounts.

Advantages of Investing in Mutual Funds

There are over 8000 mutual funds in different categories to meet the objectives of all types of investors. The right mix of growth, income, and safety makes mutual funds suitable for everyone.

Following are the advantages of investing in mutual funds:

1. Expert Money Management

Your pooled money is managed by a team of experts. So, you have the advantage of expert guidance in creating wealth. The fund manager does meticulous research in deciding equities, sectors, allocation, and of course the buy and sell.

2. Low Cost

If you calculate the benefits of expertise, diversity, and other options of return, then mutual funds are definitely a very cost-effective instrument of investment.

There is a regulatory cap of 2.5% on the expense ratio .

3. SIP Option

Systematic Investment Plan gives you the flexibility to invest at an agreed interval which could be weekly, monthly, quarterly. You can start investing in mutual funds with an amount as low as Rs. 500.

4. Switch Funds

If you are not happy with the performance of a particular mutual fund scheme, then some mutual funds do offer you an option to switch funds. However, you need to be very cautious while opting to switch.

5. Diversification

Mutual funds offer you the benefit of diversification in such asset class which otherwise isn’t possible for an individual investor. You reap the dividend of maximum exposure with minimum risk.

6. Ease of Investing and Redemption

Now, it is pretty easy to buy, sell, and redeem fund units at NAV. Just place the redemption request and you will get your money in the desired bank account within a few days.

7. Tax Benefit

Under the ELSS, tax-saving mutual fund you have the double benefit of tax saving and wealth creation. Under Section 80C of the Income Tax Act, you can have a deduction of a maximum of Rs. 1,50,000 a year.

8. Lock-in Period

Close-ended mutual funds have a lock-in period, meaning as an investor you are not allowed to redeem the fund before a certain period.

You get benefits in terms of long-term capital gain tax.

Ways to Invest in Mutual Funds

Thanks to the fast adoption of internet technology, now your MF units are just a few clicks away. Depending on your resources, you have several options to start investing in mutual funds. Following are some ways to invest in mutual funds:

1. Direct Investment

You can visit the branch of the concerned mutual fund company and deposit the duly filled form. Alternately, you can download the form and fill it carefully.

You should read the document carefully before handing over the cheque.

2. Online Mutual Fund Investment Platform

For investing online, all you need is your mobile phone and internet connection. There are several platforms that help you in choosing the right mutual fund based on defined objectives, risk appetite, and other factors.

Scripbox is an online investment platform that helps you save your time and energy. The step-by-step process from selection to payment and redemption makes it simple for even a beginner to start investing without any assistance.

Thus, all you need is your PAN Card details, Identity details, and an active bank account to link with the mutual fund house.

3. Using a Demat Account

You can use your existing Demat account and bank account for investing and transacting in the mutual fund. Your stockbroker needs to be a registered mutual fund distributor providing the facility.

For investing, you need to log-in to your Demat account and look for the option to invest in the mutual fund.

In the next step, you need to choose the fund in which you want to invest. Then you need to complete the investment by transferring the amount online.

4. Through Karvy and CAMS

You can invest online and offline in funds through registrars like Karvy and CAMS.

In Online Method – You need to visit the website of CAMS or Karvy, create an account, provide folio number, select the scheme and make payment.

In Offline Method – You can invest by visiting the local office and complete the application form, hand over the cancelled cheque and also a copy of KYC documents.

5. Mutual Fund Agents

Investing through agents is a time consuming and costly method that should be avoided. You can call an agent to help you choose and fill the requisite form. Nowadays, agents come with digital devices to help you fill form digitally and activate your account instantly.

However, you should make sure that the agent is genuine. Some agents may charge a commission for services.

How to Invest in Mutual Funds Through Scripbox

Mutual fund investment through Scripbox is a quick, paperless and hassle-free experience. Following are the steps to invest;

Step 1 – Visit Scripbox and Get Started

Click the box “Let’s Get Started” on the Scripbox home page. The page will scroll down to show you different objectives.

Mutual fund schemes fulfill most of the financial objectives. You can pick the objective that aligns with your financial needs.

For example, we have taken “Start a SIP” to invest in the best equity and debt mutual funds.

Step 2 – Create a Plan

Here you will be prompted to create a plan for investing in the mutual funds.

Provide investment amount and number of years to create a plan. The hypothetical example shows a SIP of Rs. 8000 and 10 years as the stay invested period.

Click on “Create a plan” to proceed.

Step 3 – Choose Between “Long Term Wealth” and “Short Term Money”

Scripbox gives you two options to build wealth. You have the option to pick one of them.

Long Term Wealth – The plan invests in risky equity and is for aggressive investors.

Short Term Money – The plan invests in safe debt & money market instruments and is for risk-averse investors.

The example has selected the “Long Term Wealth” option. Where you will get plan details indicating the best mutual funds and the expected returns.

Click on “Continue” to proceed with fund investment.

Step 4 – Account Creation and Login

Create an account for investing through Scripbox. You will need an email ID and password for creating an account.

You can also create the account using your Facebook or Google account.

Step 5 – Plan Confirmation

When you log-in you will get the plan as shown below.

Click on “See Recommended Funds” to proceed with mutual fund investment. Next, you will the list of algorithmically selected best mutual funds and investment amount.

You can either go with the selection or can change the funds and the amount. For that, you need to click “I Want to change funds/amount”.

Click the tab “Next” to proceed with payment.

Step 6 – Bank Details and Money Transfer

You need to provide Bank account and PAN details necessary for investment. Also, the account will be used for investment and crediting the redemption amount by the mutual fund houses directly into your specified bank account.

A mutual fund is a powerful investment option that has the potential to generate long-term wealth for investors. Also, mutual funds have schemes for all types of life goals, right from creating a pool of wealth to retirement. You have schemes for risk-averse and conservative investors.

The option has benefits of diversification, low cost, flexibility to invest in smaller amounts and professional fund management.

Furthermore, combined with online investment platform you have a great tool that makes mutual funds investing a quick and hassle-free experience.

Explore our article on factors affecting the mutual funds performance

Frequently Asked Questions

A mutual fund is a financial instrument that pools money from different investors. The pooled money is then invested in securities like stocks of listed companies, government bonds, corporate bonds, and money market instruments. The expert and professional fund management help investors outperform the returns of traditional investment vehicles like bank savings accounts and fixed deposits . Mutual funds are definitely a very good investment option for investors who are looking for a diversified investment. Investors who do not have the time and expertise to shortlist, invest and track their investments can consider investing in funds. Mutual funds are managed by professional experts who dedicate their time to build a portfolio of different asset classes. Moreover, one can start their investment through small amounts. Also, they can regularly invest through SIPs and develop disciplined investment habits. Mutual funds do not have any lock-in period, and hence the redemption process is hassle-free. Furthermore, mutual funds offer a variety of schemes that suit a diverse range of investors. In other words, investors who seek to get equity exposure can invest in equity funds. While investors who like to limit their equity exposure can either invest in debt funds or hybrid funds. Therefore, mutual funds are for everyone who wishes to start their investment journey with the help of professional fund managers. They are also suitable for investors who lack time to manage their investments. Moreover, the returns from funds in the long term have been promising for its investors.

Mutual fund investments are subject to market risks. In other words, mutual fund investments are market-linked and hence are subject to market volatility. Therefore, no mutual fund is 100% safe. However, mutual funds are regulated by the Securities Exchange and Board of India (SEBI), and default risk is nil. Mutual funds have varying levels of volatility. In other words, equity funds majorly invest in equities and are highly volatile to the changing market dynamics. On the other hand, debt mutual funds invest across different debt instruments issued by the government and corporates and hence are comparatively less volatile than equity mutual funds. Unlike bank deposits or government bonds, mutual funds do not guarantee returns. Moreover, in the long term, mutual funds have the capacity to earn high returns in comparison to traditional investment options. Therefore, investors who understand the markets and have the capacity to undertake some volatility can invest in mutual funds.

The Securities Exchange and Board of India (SEBI) is the regulatory body for mutual funds. SEBI strives to protect investor interests. The Association of Mutual Funds in India (AMFI) is association of all the Asset Management Companies of SEBI-registered mutual funds in India. It also ensures best business practices and code of conduct and represents SEBI, RBI, and the Government of India on all matters concerning the mutual fund industry.

Relevant Pages

• Best Mutual Funds
• Best ELSS Funds
• Best Liquid Funds
• Best SIP Mutual Funds
• Best Mutual Fund for Lumpsum Investment
• Best Equity Mutual Funds
• IDCW in Mutual Funds
• NPS Tier 2 vs Mutual Fund
• Loan Against Mutual Funds
• IDCW vs Growth

Scripbox Recommended Goals

Plans that will help you to achieve your life goals across multiple time frames.

Retire Confident

My first crore, dream planner, child education, related articles, investment meaning, sovereign wealth fund, what is icai india, difference between nav vs inav, direct mutual funds, sharpe ratio.

Posted on 18 Oct, 2023

Last updated October 18, 2023

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Anjana Dhand

Anjana Dhand is a Chartered Accountant who brings over 5 years of experience and a stronghold on finance and income tax. She is a writer by day and reader by night. You can find her churning content at express speed. She is on a mission to stamp out unawareness and uncomplicate boring personal finance blogs to sparkle. Anjana believes in the power of education in making a smart financial decision.

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Statutory Disclosure

ABCL and ABC Companies are engaged in a broad spectrum of activities in the financial services sectors. You understand and acknowledge that Aditya Birla Money Limited (‘ ABML ’), Aditya Birla Finance Limited (‘ ABFL ’) and Aditya Birla Sun Life Asset Management Company Limited and trustees and sponsor of Aditya Birla Sun Life Mutual Fund (‘ ABSLMF ’) are group companies and ABML / ABFL also acts as a distributor of ABSLMF.  Any recommendation or reference of schemes of ABSLMF if any made or referred on the Website, the same is based on the standard evaluation and selection process, which would apply uniformly for all mutual fund schemes. You are free to choose the execution facilities in the manner deemed fit and proper and no commission will be paid by ABSLMF to ABML / ABFL if you choose to execute a transaction with ABSLMF on the Website, unless otherwise agreed by you and ABML/ABFL separately. Information about ABML/ABFL, its businesses and the details of commission structure receivable from asset management companies to ABML/ABFL, are also available on their respective Website.

Similarly Aditya Birla Money Insurance Advisory Services Limited and Aditya Birla Insurance Brokers Limited are insurance intermediaries and engaged in the distribution of Insurance Products and it may services may include products of Aditya Birla Sun Life Insurance Company Limited and Aditya Birla Health Insurance Company Limited. However there is no conflict on these services and commissions if any payable are in accordance of the extant regulations.

Force Majeure

The Facilities Provider, ABC Companies and any of its Third Party Service Providers shall not be liable for any delay or failure in performance resulting directly or indirectly from acts of nature, forces, or causes beyond their reasonable control, including, without limitation, Internet failures, computer equipment failures, telecommunication equipment failures, other equipment failures, electrical power failures, strikes, virus, other malicious computer code, hacking, labour disputes, riots, insurrections, civil disturbances, shortages of labour or materials, fires, flood, storms, explosions, acts of God, war, earthquake, governmental actions, orders of domestic or foreign courts or tribunals, non-performance of third parties, or loss of or fluctuations in heat, light, or air conditioning.

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Asset Management Companies Business Model

In the world of financial services, the term Asset Management refers to the investment of securities and cash in a managed way. A wide range of financial products is available for investment purpose under asset management. Asset management is considered as a service that is generally handled by a firm that directs or handles investment portfolio or wealth of clients on their behalf. The clients are mostly high net worth individuals. In other words, Asset management refers to a systematic approach of developing, maintaining, operating, disposing, and upgrading assets in the form of the most cost-effective way.

Asset management companies (AMCs) are investment firms that pool investments or funds from different stakeholder, i.e. institutional and individual investors. These firms further do investment management of these funds by investing in various investment options available such as equities, real estate, stocks, gold, bonds, debt. In professional terms, these companies are known as fund managers as they decide where to invest the pooled money. It is the responsibility of fund managers to identify suitable investment options to meet the investor’s objectives. For this, fund manager of asset management companies performs evaluation task of different aspects like industry risks, market scenario, before deciding upon the right investment options as per investment goals. The ultimate aim of doing such an evaluation is to make investment decisions that are profitable in terms of providing maximum ROI (return on investment) to investors. AMCs are considered as buy-side companies as they support clients in purchasing investments, i.e. which investments to buy.

The evolution of asset management companies is discussed below:

• The origin of Asset Management companies can be seen at the time of the introduction of first mutual fund in 1924 in the US, i.e. MFS Massachusetts Investors Fund. If we talk about the origin of Mutual fund or Asset management industry in India, then it was initiated in 1963 with the foundation of UTI (Unit Trust of India) which was the initiative of RBI (Reserve Bank of India) and Indian Government as the first mutual fund company in India. In 1987, the emergence of the public sector, Non-UTI mutual funds were held by the LIC (Life Insurance Corporation of India), public sector banks, and GIC (General Insurance Corporation of India).
• In the 1960s, alternative assets i.e. hedge funds were introduced in the US and it became an asset class by the 1980s. In the Indian context, asset class like hedge funds was introduced as AIFs (Alternative Investment Funds) in 2012.
• In 1980, the first IPO (initial public offering) was initiated in the US by an asset manager through State Street Corporation. In India, Reliance Nippon Life Asset Management listed for the same in 2017.

The evolution is discussed in the chart below:

Business Model of Asset Management Companies

The business model of Asset Management Companies is described below.

Different elements mentioned in the above business model canvas of Asset management companies are as under:

Value Proposition

• Risk reduction: Investment management demands risk management and is considered as a crucial element of any type of investment. Asset management companies are able to reduce risk by creating a pool of savings from a lot of investors and supporting individuals to diversify their financials in different assets. Asset managers identify and track risks as per past experiences and by doing so; they can identify and shrink the critical factors that may harm the investment.
• Professional analysis: Asset management companies provide valuable guidance in making important decisions related to investments. Decisions related to assets of clients are being assessed by professionals carrying a vast experience and knowledge of how the investment market revolves.
• Outperforming the market possibility:  Asset management companies offer a much better opportunity of outperforming the market, which can result in a higher return than average return. This can be possible by taking more risks and asset managers are efficient at handling those risks.
•  Protection of Portfolio in the market slow down: Nowadays the market is quite uncertain and insecure. Unexpected changes can be there in politics and environment that lead to uncertainties. Asset management companies provide a way to protect investments in such an uncertain and unstable market environment.
• Investment expertise services: The manpower of asset management companies is finance professionals carrying extensive knowledge and experience in handling investments and these professionals have specialization in certain asset areas like equities of specific sectors, real-estate, etc.

Customer Segments

Asset management companies mainly serve the following three categories of customers or clients:

1.Retail Investors: These are individual investors who are non-professionals and usually sale and purchase the mutual funds, securities or exchange-traded funds by taking services of Asset management companies. Securities are purchased by retail investors for their own personal accounts and generally, they trade in comparatively fewer amounts as compared to big investors.

2.Institutional Investors: These are big investors or large entities that are indulged in the trading business in the financial markets. Different corporate and other business entities come under this category of clients. Credit unions, mutual funds, insurance companies, investment banks, etc. generally fall under this category of investors. Institutional investors carry a large pool of resources, and they do a lot of financial analysis and research while deciding upon investments. A large pool of assets that are represented by these clients are utilized for pension funds at the corporate level, government pension funds, foundations, etc.

Institutional investors are broadly classified in below 6 types:

• Pension funds: This investment pool is aimed at paying employees at the time of retirement.
• Mutual funds: This is an investment tool that includes a portfolio of bonds, stocks, or other securities. There are three ways to earn money from these funds i.e. capital gain due to security sale, dividend payouts, and actual mutual fund sale. The different variety of mutual funds includes bonds in terms of fixed-income, stocks or equity, money market funds, etc.
• Hedge funds: This includes capital that is pooled from investors for investment purpose. These are financial partnerships carrying the purpose of earning active returns through the investment of their investors by using pooled funds and adopting different strategies.
• Investment Banks: Different banks such as CitiBank, JP Morgan, Bank of America, etc. fall under the category of Institutional investor clients of Asset management companies. These facilitate capital market access and support corporations with financial decisions of investment.
• Insurance companies: These invest the premium paid by their clients into more stable sources like bonds. They also invest in the stock market.
• Endowment funds: Different funds gathered from donations, grants, contributions, etc come in this category and are invested further.

 3.  High-Net-worth Individuals (HNIs): These are the fastest-growing type of clients of AMCs. In India, HNI clients are those individuals who have 2 crores plus investible capital. These clients have assets more than liabilities and of a huge margin.

Key Partners

Asset management companies are in collaboration with different organizations and businesses such as

• Advisory and supplier partnership: This includes suppliers related to technology, tools, and various other services to assist AMCs in developing and offering their products and services.
• Strategic and Alliance partnership: This covers various financial service and technology firms as well as other service companies with whom AMCs are in partnership for resource sharing and collaboration on JV (joint venture) projects.
• Channel partners: This includes various 3 rd parties that are indulged in providing products and services on behalf of Asset management companies.

Key Activities

Below are the various activities an Asset management company performs:

•   Allocation of asset: AMCs invest the money of clients or distribute assets in equity and debt based on the market conditions and rate of interest. Depending upon the financial goal of the mutual fund, asset manager or fund manager decides for suitable assets for making an investment. For this, knowledge and professional expertise of asset managers play a significant role in resource allocation to various asset segments efficiently.
• Formulation of the portfolio of investment: One of the key tasks or activities of AMC is to develop or create an investment portfolio. It requires extensive research and analysis of the performance of different asset segments so that a risk-adjusted portfolio can be created. For this, experts review macro and microeconomic aspects, the market, and the performance of funds on a regular basis. They further transfer the relevant reports to the asset managers or fund managers who take decisions for generating good returns on investments.
• Performance assessment: Asset management companies are answerable to investors and trustees for justifying investment-related decisions. To ensure this, fund performance assessment is done by considering fund returns, asset allocation, etc. AMCs further make this performance review available to all the trustees and investors.

Key Resources

  Asset management companies have different key people who are the main resources that enable the business to manage and act on their client’s behalf. These key individuals include:

• Financial analysts: These play a significant role within an AMC. The activities of Financial Analysts include conducting research on various investment options and due diligence on futuristic opportunities, identifying the best opportunities to sell and purchase of assets.
• Economists: These individuals keep track of the current scenario of the market situation, which is an essential activity for AMCs.
• Asset managers: These people are responsible for final decisions related to asset management based upon the insights from economists and financial analysts. Liasioning with clients and ensuring their best interest come under the portfolio of Asset Managers.
• Website: All relevant information and important contact details are available on the website of Asset management companies for their clients. One can apply online for their services through the website, even.
• Mobile app: Asset management companies provide a Mobile app facility to its clients for providing all reports, digital transactions, and host of other related services. The partner portal is also facilitated by AMCs for their partners to support report generation and transactions.
• Information technology: AMCs use best and advanced IT systems and processes as its resources for customer services, research activities, dealing, risk management, saving time in their operations, and other functions. These companies upgrade their application software and IT infrastructure on periodic intervals.

The channels of AMC are:

• Brokers: These are the individuals that develop and maintain a relationship with investors through trade execution, providing research, and advice. For this brokers get a commission from the AMCs.
• Salesforce team: AMCs internal sales team also provides clients the access of AMC’s entire range of mutual funds
• Websites: Asset management companies are using the internet for maintaining direct contact with their clients via website. Through these websites of investment plans like mutual funds, investors make an investment in direct plans. Websites of AMCs contain all information related to their products and services as well as global operations.
• Financial Advisors: Different Tax consultants, Chartered accountants are also distribution channels of AMCs.
• Mobile App: AMCs also offers its products and services through mobile apps that can be easily downloaded on smartphones.

Customer Relationship

The customer relationship of AMC is maintained through:

• Asset management companies provide different services to their clients through both mobile and online platforms that facilitate customers to access and manage accounts, payment set-up, money movement, etc. Customers can even apply for financial products without direct interaction with the sales staff of AMCs.
• AMCs also provide personal assistance in the form of technical assistance and ongoing support to their customers through their staff working in various branches. Customers are able to interact with support teams through email or phone. Moreover, Asset management companies also provide different online resources such as news releases, reports of market insights, data visualizations. In order to keep customers informed and up to date with the activities of the market, social media connection is provided via Twitter, LinkedIn, Facebook, Instagram, etc.
• 24*7 customer support services are available through the use of technology like mobile apps by AMCs. Customers can be connected with these companies through their other ways too, like network branches, call centres, service centres, SMS systems, etc.

Cost Structure

The various expenses incurred by Asset management companies are related to the operation of their branches, Maintenance of communication and IT infrastructure, market schemes implementation, partnership management, salary and benefits cost of staff, payment of professional fee, etc.

Revenue Streams

The revenue model can be described through the chart.

• Asset management companies generate revenue mainly through annual management fees. Few AMCs earn money through this only. Wherein, some of the AMCs earn money from commissions and transaction fees.
• AMCs generally take a fee equivalent to a percentage of total AUM (Assets under management) from their customers. AUM is basically the total capital amount that investors provide.
• Revenue from PMS (Portfolio management services) of AMCs:

PMS is basically an investment portfolio in debt, stocks, and fixed income products which are operated and managed by a professional fund manager to meet specific investment goals. Individual securities are owned by an investor while investing in PMS. A PMS fee charged by AMCs is part of their revenue. Three types of the fee are charged by PMS services i.e.

• Entry Load:  At the time of purchasing the PMS, AMCs may charge an entry load of 3%.
• Management Charges : Fund management charges or fee are also collected on each PMS scheme. It may differ from 1%-3% and is charged to the PMS account on a quarterly basis.
• Profit-Sharing : In addition to a fixed fee, few PMS schemes involve profit-sharing revenue too, in which the AMC provider takes a certain fee amount or profit on the return earned in the fund.
• Other than the above charges, investors are also charged Custodian fee, Transaction brokerage, Audit charges, and Charges for opening Demat account, etc. by PMS.

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• Addition of 10 million folios every year from 2005 to 2008, taking up the total to 48 million folios as of today;   
• A network of 95,000 empanelled AMFI-certified Independent Financial Advisors who are present in over 8,000 PIN codes across the length and breadth of the country;   
• To further enhance the distribution reach, the industry has leveraged the presence of public sector banks and post offices to reach out to a larger audience of retail investors;   
• Almost 2,000 touch points by way of AMC branches and R&T service centers have been created in the last 3 years. A majority of these centers are from Tier-II & Tier-III cities;   
• The introduction of Systematic Investment Plans (SIPs) has helped facilitate a greater retail and rural penetration. The SIP movement has grown from two lakh SIPs to 35 lakh in a very short span of time with approximately Rs 8,500 crore of Indian household savings coming into capital markets through mutual fund SIPs. Substantial initiatives have been made by the industry to enhance distributors’ and investors’ awareness for mutual funds — several AMCs have started in-house academies, which are focusing on improving investor and distributor education. And the scope for increasing the number of customers is tremendous — we have over 30 crore bank accounts and more than 40 crore mobile connections but just four crore mutual fund investors. Recent studies have shown that the assets of mutual fund industry could triple by 2014 helped by faster growth in the profitable retail segment.

First Published: Sep 02 2009 | 12:16 AM IST

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How Groww Business Model is Making Revenue

Groww is a Bengaluru-based online investment platform founded in 2016 by four ex-Flipkart employees. Groww is the first Indian fintech company to offer mutual fund direct access where users have full access to their portfolio which is loved by everyone.

Now let us see an overview of the company before moving on to Groww Business Model.

Content Outline

Overview Of Groww

Products offered by groww, groww founders and its team, is groww safe to invest our money, groww mission statement and vision statement, groww business model, groww revenue, groww funding and investors, groww acquisitions, competitors of groww, awards to groww, groww future goals.

Groww is a Bangalore -based brokerage firm that offers online discount brokerage services for the least fee in the market. In Groww we can invest directly in stocks, IPOs, and mutual funds. Next billion Technology Private Limited is the parent company of Groww.

Groww follows a DIY (Do It Yourself) model for its users, in which investors establish and manage their own investment portfolios individually without any third party, which is preferred by most GenC’s.

Initially, Groww started as a platform for direct investment in mutual funds in 2016. But after user demand and surge in stock investing and trading, Groww added stock brokerage in 2020 and also launched digital gold, ETFs, Intraday trading, IPOs services in the same year.

There are about 100 crore people in India with disposable income, but only about 2 crore people are actively investing as per the latest report. Groww’s goal was to provide consumers with a transparent and very easily Understandable process.

Also, Groww offers e-books, resources, and blogs that provide stock market basics and updates to help investors make better decisions.

What Is The Tagline Of Groww?

There’s just one right way

How Simple is Groww Platform? 

One can open a paperless account instantly with ease. If one wants to participate in the primary market, one can submit an online application for an IPO. A Brokerage Calculator is included in the software.

• Mutual Funds
• Digital Gold

Groww was founded by four ex-Flipkart employees named  Lalit Keshre, Harsh Jain, Neeraj Singh, and Ishan Bansal  in 2016. with a mission to make investment more accessible to young people by simplifying the process at a level best.

Lalit Keshre is the current CEO of Groww. Lalit looks after all aspects of the company, especially the product and customer experience at Groww. Before founding Groww, Lalit was a senior product management executive at Flipkart, where he launched and led Flipkart Quick and helped launch Flipkart Marketplace. He also founded an online learning company called Eduflix and was a team member at Ittiam Systems. Lalit is an alumnus of IIT Bombay.

Harsh Jain is currently the Head of Growth and Business at Groww Before joining Groww, Harsh was part of the product management team at Flipkart. Before that, Harsh was a co-founder of a storytelling startup. Harsh has a B-Tech in Electrical Engineering and a Masters in Information and Communication Engineering from IIT Delhi. He also completed an MBA in Product Management and Marketing from UCLA School of Management.

Neeraj Singh leads product development and customer research at Groww. He is a passionate engineer, solution developer, and programmer. Neeraj worked at Flipkart as Engineering Manager and built Flipkart’s customer return and refund system before founding Groww. Neeraj holds a BE degree in Information Technology from ITM, Gwalior, and a PG diploma in Advanced Computing from CDAC.

The fourth founding member is Ishan Bansal , who is currently the Head of Finance at Groww. Before this, Ishan worked at Flipkart in corporate development. He was also responsible for corporate development and M&A at Naspers. Ishan is a graduate from BITS Pilani, has an MBA in Finance from XLRI, Jamshedpur, and is a CFA charter holder.

The Founding team believed that investments in financial products in India are very complex and non-transparent after they started researching the Indian financial sector for interested consumers by spending a lot of time learning about the markets and identifying what are the problems users were facing. They had to conduct numerous tests to determine the best user experience. Since it user’s hard-earned money was at stake, they had to provide a secure solution that took some time to develop.

What Made Them To Start Groww By Quitting Flipkart?

During their time at Flipkart, they witnessed the changes in the e-commerce market and realized that investment was the next big opportunity. The e-commerce boom signaled a rise in average income and technology awareness, and it was at this point that the founders realized that individuals did indeed have discretionary funds and needed support to use them wisely.

Groww’s Team

Groww employees over 100 members in different designations.

Did You Know?

Udaan is also founded by 3 Ex-Flipkart employees named Amod Malviya, Sujeet Kumar, and Vaibhav Gupta

Groww is a completely safe and secure trading platform with SSL certification and 128-bit encryption, one of the most secure encryption Technology.

In addition to that, Groww is a SEBI registered broker and also a member of NSE, BSE, and a mutual fund distributor registered with AMFI. As a member of these regulatory bodies, the company’s transactions are reviewed at regular intervals to protect the interests of investors.

The company’s mission state is to give investors the best experience possible when it comes to managing money.

Lalit Keshre, Co-founder and CEO, Groww, said in an Interview

Over the last few years, we have made investing in mutual funds and stocks simple and transparent for millions of investors in India. If we look at the opportunity that lies ahead, it still feels like Day 1. We started our journey with small steps writing blogs and making videos to educate people about investing. Our wealth as a nation will keep growing, and our mission is to provide the best experience for investors to manage their wealth. We are happy to partner with investors who believe in our long-term vision.

Groww Business Model works on the concept of making money by charging Mutual fund provider companies instead of charging their users which is why Groww is called a direct mutual fund and Also it is why Groww Markets itself as Least Fee Charging Mutual Fund and Stock Broker Company.

But the company profit is replyed on the funds they sell, which is a very complex process. let’s understand how it works

In mutual funds, there are two types of investments Regular and Direct.

In Regular mode, the user has to buy mutual funds through their distributor who charges an X% of commission for the service. The Commission amount is charged in such a way that your investment and profit amount will be compensated.

In Direct mode, the users can choose multiple mutual funds and stocks in a single platform like Groww.

Groww and other direct investment platforms’ only aim is to increases their user base and To reach the right set of audiences Groww uses technology that reduces the operating cost significantly.

Also, users don’t need to switch between multiple investment platforms so that the customer will stay long in their platform, and due to current technological advancements, users can stay invested 24/365 from anywhere around the world.

So, How Does Groww Make Money?

In Simple, Groww Make Money  by providing premium features such as advisory services on investment and portfolio.

The company’s profits increased 4.7 times To over Rs 1 crore in FY20 from Rs 20.14 lakhs in FY19. Operating income increased 3.25 times to Rs 52.05 lakhs, with financial assets making an additional contribution of Rs 48.24 lakhs.

The Y Combinator-backed company saw a respectable increase in earnings but still lags behind its competitors Zerodha and Upstox, which generate earnings of Rs 1,094 crore and Rs 148 crore respectively. Groww earned a total of Rs 1 crore in FY20, while ET Money earned a total of Rs 2.24 crore.

They are expanding rapidly but the founders of Groww have taken the company to unicorn status. They recently received money and were named a unicorn startup.

Groww is one of the few startups in India which is loved by investors.

Updated Till Date.

Groww has acquired only one company to date which is Indiabulls AMC On 11th May 2021 for around Rs 180 crore.

Groww strategically acquired this company to enter in Asset Management business.

On September 10th Competition Commission of India ( CCI ) has approved Groww’s acquisition of IndiaBulls AMC.

Groww’s biggest competitors are Upstox, Zerodha, Upstox, IIFL, Finvasia, Angel Broking, SAS Online, Sharekhan, Edelweiss, and Karvy Stock Broking.

Comparison of Groww with its major competitors :

• Zerodha is the largest stockbroker in India with over 6 million active investors.
• Upstox – They offer almost identical services and a similar brokerage framework
• 5pasia – They offer the same services as 5pasia but their cost is different because they offer trading without brokerage fees. 5paisa offers a better service and charges a lower brokerage fee (INR.10 per order flat rate)
• Flyers – In this case, the services and pricing structure are the same as Zerodha. However, they offer a completely free API.
• Angel Broking offers similar services but with a much larger profit margin.
• 2017-18: BSE Star MF Award for 2nd Best Performer in RFD category in Karnataka
• 2017-18: 3rd Place in BSE Star MF Fintech – Highest Transactions 2017-18
• 2018-19: 1st Place in BSE Star MF Fintech – Highest Transactions 2018-19

In the coming months, Groww will offer deposits, US equities, government gold bonds, futures & options, and other derivative products. Since the company’s inception, Groww has focused on financial education materials.

Lalit Keshre, managing director and co-founder, said in an interview.

” Our philosophy has been to create an internet financial company based on best user experience, transparency, and simplicity to offer all investment products to Indian retail investors. While we cannot advise our customers on what to buy or sell, we can provide them with the right information through our educational initiatives,”

The company plans to launch a series of financial education projects for millennials over the next two years and expand its financial services sector. It plans to add around 7 million customers between September 2020 and April 2021, 60% of which will be in tier-2 cities and beyond, according to the company.

What does Groww do?

Groww is an online investment platform that allows users to invest directly in mutual funds and stocks. The company is the inventor of a platform for direct access to mutual funds.

What is Valuation Of Groww?

As of April 2021, Groww valuation is over $1 Billion.

Is Groww SEBI registered?

Yes , Groww is a SEBI registered Stockbroker in the name of NextBillion Technology Private Limited. Groww SEBI Registration number is INZ000208032.

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Groww Success Story - How it Disrupted Traditional Ways of Investments?

Company Profile is an initiative by StartupTalky to publish verified information on different startups and organizations.

Investing a decade ago entailed a lot of paperwork, many bank visits, long queues, and application processing that used to take days. When you add in a dearth of knowledge about financial products and widespread misselling by agents, the experience becomes nothing short of a nightmare.

These days, all you need is a bank account, some disposable income, and a smartphone to begin investing, increasing, and managing your wealth. Though some of the new investors are starting with mutual funds, equities, and other investment platforms, many of the investment-averse citizens were also noticed to step out from it altogether. However, with the emergence of Groww, the investment industry, it seems, has witnessed a laudable disruption with the easy ways of investing money with stockbroking and direct mutual funds that the platform has encouraged.

Here goes the Success Story of Groww, an organization that has made investing simple for millions of Indians. Know more about the Founder and History, Mission and Vision, Products, Business model, Revenue and Growth, Funding and Investors, Acquisitions, Awards, Competitors of the company, Challenges Faced , and other details ahead!

Groww - Company Highlights

About Groww and How it Works? Groww - Founders and Team Groww - Startup Story Groww - Mission and Vision Groww - Name, Logo and Tagline Groww - Products Groww - Business Model Groww - Revenue and Growth Groww - Funding and Investors Groww - Acquisitions Groww - Advisors and Mentors Groww - Awards Groww - Competitors Groww - Challenges Faced Groww - Future Plans

About Groww and How it Works?

Groww is a web-based investment platform that allows users to invest in mutual funds and equities directly. The company is a creator of a mutual fund direct access platform. Groww's technology is aimed to make investing simple, accessible, transparent, and fully paperless, allowing customers to invest in mutual funds without any difficulties.

Groww users can invest in mutual funds through SIPs and equity-linked savings. According to the company, it has over 20 million registered users, the majority of them are under the age of 40 and prefer to use their phones. It offers over 5,000 mutual funds that can be invested directly through its website and app, which is available on iOS, and Android.

It features a straightforward pricing structure that includes cheap trading fees. You can invest in a mutual fund for free with no hidden fees. Groww does not charge an account opening fee or a monthly maintenance cost. Moreover, with Groww's direct mutual fund plan, you can also earn an additional 1.5%.

Groww offers E-books, Resources, and Blogs that provide stock market essentials and updates to assist investors in making better decisions. One can open a paperless account immediately very easily. If you want to participate in the primary market, you can submit an online IPO application. A Brokerage Calculator is included in the software.

Groww - Founders and Team

Groww, which was founded in 2016 by 4 former Flipkart employees Lalit Keshre, Harsh Jain, Neeraj Singh, and Ishan Bansal , aim to make investment more accessible to young people by simplifying the process. The DIY (Do It Yourself) model, in which individual investors establish and manage their own investment portfolios, is preferred by most millennials.

Lalit Keshre

Lalit Keshre is the Co-founder and CEO of Groww. Keshre was a Btech, Electrical Engineering student in microelectronics from IIT Bombay. He looked after the Product and Engineering of the IITiam Systems. After completing his graduation Lalit founded Eduflix. He eventually joined Flipkart, where he was in the Product department and served for a little less than 3 years before founding Groww in May 2016.

Popularly known as the Co-founder and COO of Groww, Harsh Jain was an IIT Delhi student from where he completed his Master of Technology in Information and Communication Technology. Jain also has an MBA in Product Management and Marketing Technology from the UCLA Anderson School of Management.

Ishan Bansal

Ishan Bansal is another Co-founder of the company. Bansal was a student of BITS, Pilani, from where he completed his BTech in Mechanical Engineering. He has been a Charter Holder from the CFA Institute. Bansal also has an MBA degree in Finance from XLRI Jamshedpur. Ishan Bansal started his career in ICICI Securities. He eventually left the company and joined Naspers Limited as a Manager. Flipkart was the next company that he joined where he was in Corporate Development. After his brief stint with Flipkart, Ishan opted to co-found Groww.

Neeraj Singh

Neeraj Singh is known as the Co-founder and CTO of Groww. Neeraj has a Bachelor' in Information Technology from ITM University, Gwalior. He then opted for a Post Graduate Diploma in Advance Computing from C-Dac. Singh initially joined JDA Software as a Software Engineer and then opted for Ivy Computech as his company which he started as a Senior Software Engineer. He eventually joined Flipkart in the SDE department and eventually decided to co-found Groww with the other founders.

Groww - Startup Story

The founders of the company witnessed the change in the e-commerce market during their time at Flipkart and realized that investment is the next big opportunity. The e-commerce boom signalled an increase in average income and technology savvy, and it was at this point that the founders realized that individuals indeed have discretionary cash and will need assistance in putting it to good use.

When the founding team started investigating Indian financial options for interested consumers, they spent a lot of time learning about the market and identifying the users' basic pain concerns. They have to conduct numerous tests to determine the best user experience. Furthermore, the users' hard-earned money was on the line. This is why they needed to deliver a safe and secure solution, which required some time to develop.

Groww began as a direct mutual fund distribution platform in 2016 and has since grown to become one of the country's most popular mutual fund investing platforms. Groww added equities in the early part of 2020 in response to customer demand, and the following year, it launched digital gold, ETFs, intraday trading, and IPOs in rapid succession.

Groww is a Bangalore-based brokerage firm that offers online discount brokerage services for a single charge. Groww can help you invest in stocks, IPOs, and mutual funds directly. Nextbillion Technology Private Limited, a SEBI-registered brokerage, is known as Groww. NSE and BSE both have NTPL as a member.

In India, there are about 200 million people with disposable income, but only about 20 million actively invest. Groww's goal was to provide consumers with the information, resources, and customer engagement they needed to get started with investing as quickly as possible.

Groww - Mission and Vision

The company's mission is to give investors the greatest experience possible when it comes to managing their money.

Lalit Keshre, Co-founder and CEO, Groww, said – “Over the last few years, we have made investing in mutual funds and stocks simple and transparent for millions of investors in India. If we look at the opportunity that lies ahead, it still feels like Day 1. We started our journey with small steps writing blogs and making videos to educate people about investing. Our wealth as a nation will keep growing, and our mission is to provide the best experience for investors to manage their wealth. We are happy to partner with investors who believe in our long-term vision."

Groww - Name, Logo and Tagline

The Groww logo consists of a circle of two colours: Green and Blue. The logo depicts an increasing graph.

'There's just one right way,' says the company's tagline. The main goal of the company is to make the investing process as simple as possible for their clients. Investors can choose from a variety of mutual funds, and they can also invest in a variety of schemes with varying market capitalizations.

Groww - Products

The list of the products of Groww include :

• Mutual Funds
• Digital Gold

Groww - Business Model

Groww charges a tiny fee, however, it is paid by the mutual fund firm, not by the client. They profit on the funds they sell, but it's a complicated process.

To begin, there are two types of mutual fund investments: regular and direct. In ordinary mode, a distributor appears, and you must pay the distributor a commission. The commission is calculated in such a way that it compensates you for your investment and profits.

Apps like Groww, on the other hand, give consumers a direct investing opportunity by combining different funds and companies into a single platform, thereby extending them a wide range of possibilities.

For a fintech company like Groww, the first thing to keep in mind is to expand the customer base. Groww leverages technology to reach the proper target audience, which lowers its operating costs. People rarely switch between these types of applications. As a result, once the correct customer base has been established, they are likely to stick with you for the long haul.

Groww allows users to invest in mutual funds and equities from anywhere in the world, thanks to its high level of technology. With just a few mouse clicks, you can become an owner of a specific stock or mutual fund.

Groww - Revenue and Growth

Groww is one of many that has greatly interested the investors. The company's earnings increased by 4.7 times to a little over INR 1 crore in FY20, up from INR 20.14 lakhs in FY19. Operating revenue increased by 3.25 times to INR 52.05 lakhs, with financial assets contributing an additional INR 48.24 lakhs.

The company has further seen an increase in its operational revenues in FY21, which were recorded at INR 30 crores in consolidated operating revenues. The fees and commission income that the company provides brought it around INR 13 crore in revenues, which was followed by income from its tech platform and support charges and other operational revenue, which helped the company gain Rs 15 crore and INR 2 crore in revenues. The expenditure of the company also grew parallelly, making the total expenditure of the company climb to INR 155.66 crore. Looking at the company's financials on a unit level reveals that Groww has managed to earn Re 1 of operating revenue by spending INR 2.95 during FY21.  

The Y Combinator-backed business has witnessed a respectable increase in earnings, but it still trails companies like Zerodha and Upstox, which have earnings of INR 1,094 crore and INR 148 crore, respectively. Groww made INR 1 crore while ET Money made INR 2.24 crore in total in FY20.

Groww is expanding fast and has also achieved unicorn status in April 2021. The company closed $83 million worth of its Series D funding round led by Tiger Global Management, which helped it turn into a unicorn startup .

The company has enhanced its Broking app by introducing the 'Pay' feature, enabling users to engage in peer-to-peer transactions and make payments to merchants effortlessly by scanning QR codes.

Groww Launched Intraday Trading and ETFs

Groww is hailed as a platform that is trusted by more than 30 million users. It is a customer-first company that is bringing in ease and trust for the users while investing in Mutual funds, FDs, Stocks, Futures and Options, IPOs and more. Groww had equities, and then launched Intraday Trading and ETFs, expanding their product suite. With the launch of these products that cater to two diverse niches within the investing spectrum, Groww aims to provide a gamut of investment options to millennial investors with varied investment objectives. With intraday trading now enabled on 350+ stocks and select ETFs on Groww, investors can short-sell, place a stop-loss order, and track price movements through candlestick charts, within just a few clicks.

On the other hand, ETFs as an asset class can be explored by users who are inclined towards passive investment instruments. With Groww, investors can check all information related to ETFs such as expense ratio, fund manager details, and scheme objectives, as well as track the live price of the underlying securities on the go.

Groww launched Intraday Trading at a time when stock trading is gaining unprecedented popularity amongst Indians, especially young millennials. CDSL reported that the number of demat accounts with CDSL crossed 25 million only in the previous month, registering a 25% increase as against the pre-lockdown numbers. Moreover, since March 2020, mobile trades have more than tripled, as reported in September 2020, according to BSE’s trading data.

Speaking on the launch, Lalit Kishore, Co-founder and CEO - Groww said, “The launch of intraday trading and ETFs on our platform is in line with our promise to provide our customers with all kinds of investment options on a single platform. We already have all the direct mutual funds and gold available on the platform. In the days to come, we will keep adding more features to provide an all-encompassing investing experience”.

Groww also plans to follow this launch with a series of learning modules aimed at educating its investors about the intricacies of intra-day trading and ETFs. The company launched stocks investing on its platform in June 2020 and has recorded more than 4.5 Lakh Demat accounts within a short span, thereby becoming one of the fastest-growing discount brokers in the country. Currently in invite-only mode, customers would soon be able to invest in US equities on the Groww app as well.

Some other growth insights of the brand can be compiled as:

• Groww brags about having 30+ million registered users
• The platform has nearly $400 million in investment
• Groww is a one-of-a-kind startup that recorded over a 10X jump (from $250-300 million to $3 billion) in valuation in a little over a year in India.
• The nearest rival of Groww is Upstox, which recently raised a new round at around a $3.4 billion valuation
• It is a worthy competitor of Zerodha
• Groww had 6.63 million active clients, approximately 150,000 or 2.3% more than Zerodha at the end of September 2023, breaking the latter's lengthy reign at the top.

Groww will Foray into the Neobanking Segment

The company is currently looking to foray into the new banking space with a new neo-banking platform that it will likely launch soon. According to one of the sources close to Groww, the company believes that being a neo-banking company will further make it holistic for the users, which want to emerge as a one-stop solution for banking and investment.

Groww to Launch its Lending Arm

Groww is also looking to foray into lending and is in final talks for the launch of another vertical to its offerings, which would be lending, as per the reports dated January 14, 2021. The company will offer credit lines to some users after selecting them based on their transaction histories as per the mobile app usage, which Groww has already started to do. This step might prove to be playing a great role in multiplying the revenues of Groww, which aren't that noteworthy so far.

Groww Launched Ab Karega Invest

A growing number of investors from tier-II cities are now taking to investing through online platforms. The company will host conferences in selected Indian cities to make investing simple and accessible. Groww, a leading investment platform, stated that 60% of registered users registered with them hail from tier 2 and tier 3 cities. In light of this, Groww has launched a one-of-a-kind financial education initiative “ Ab India Karega Invest”, to bridge investors’ knowledge gap. As per the initiative, the Groww team will tour 52 select cities in 52 weeks and conduct conferences to explain the nuances of investing. The city meets are focused on creating a knowledge-sharing platform for industry players and aspiring investors as well as fostering local investor communities.

As a pilot campaign, Groww previously held meets in Lucknow, Jaipur, and Patna, and the overwhelming reception led to the extension of the campaign PAN India. On the occasion of the launch, Lalit Keshre, Co-founder and CEO, of Groww said “The penetration of financial services in India is really low beyond metros. Groww is making investing accessible to millions of people in India with a sharp focus on customer experience. For us, there are no boundaries. This program helps us in multiple ways, but the biggest one is to closely engage with aspiring investors spread across these cities in India”.

Groww Receives SEBI Approval

Groww has announced that the startup has received approval from SEBI for the Groww Nifty Total Market Index Fund. This development follows Groww's strategic move earlier this year when it acquired the mutual fund business of Indiabulls Housing Finance, paving the way for its foray into the mutual fund market. As the competition in India's mutual fund space intensifies, with formidable players like Groww's rival Zerodha and Jio Financial Services poised to enter the sector, the landscape is becoming increasingly dynamic.

Groww Financials

Groww's revenue surged from Rs 30 crore in FY21 to Rs 351 crore in FY22, driven by a substantial increase in fees and commission income, which went from Rs 13 crore to Rs 326 crore during the same period. Additionally, tech platform and support charge revenue from Rs 15 crore to Rs 2 crore, while other operating system revenue grew from Rs 2 crore to Rs 23 crore between FY21 and FY22.

Operating revenue for the company increased by more than three times to Rs 1,277.8 crore in FY23 from Rs 351 crore in FY22. In FY23, subscription and commission fees accounted for 95.9% of total revenue. During the reviewed year, subscription fees and commission fees brought in Rs 1,226.1 crore for the startup.

Groww achieved profitability for the fiscal year that concluded on March 31, 2023. The company recorded a net profit of Rs 448.7 crore in FY23, compared to a staggering Rs 239 crore loss in FY22.

Company total expenses rose from Rs 663.6 crore in FY22 to Rs 932.9 crore in FY23.

Groww - Funding and Investors

Groww has raised around $393 million over 7 funding rounds that the company has seen to date. The company has recently raised around $251 mn in its Series E funding round on October 24, 2021. Here's a glimpse of the funding rounds of Groww:

Groww - Acquisitions

To date, Groww has acquired only one other mutual fund business, which is Indiabulls AMC. Groww acquired Indiabulls Mutual Fund for INR 175 crore, which includes cash equivalents of INR 100 crore. Groww will be one of the first fintech firms to join the 37 trillion dollar asset management market as a result of this purchase.

Groww acquired a minority stake in the SaaS startup Digio as part of its strategic investment on January 2, 2023.

Groww - Advisors and Mentors

Groww gets Satya Nadella, CEO of the second most valuable company, Google as its investor and advisor. Groww Co-founder and CEO Lalit Keshre is thrilled about this development and has not missed posting it on Linkedin.

Groww gets one of the world’s best CEOs as an investor and advisor. Thrilled to have @satyanadella join us in our mission to make financial services accessible in India. — Lalit Keshre (@lkeshre) January 8, 2022

Groww - Awards

Some of the awards that Groww received to date are:

• 2017-18: BSE Star MF award for Karnataka's 2nd best performer in the RFD category.
• 2017-2018: 3rd place in the BSE Star MF Fintech – Highest Transactions competition. 2017-2019
• 2018-19: BSE Star MF Fintech – Highest Transactions 2018-19: 1st position

Groww - Competitors

The top competitors of Groww are -

• Angel Broking
• Karvy Stock Broking.

Comparing Groww to its basic competitors :

• Upstox- They offer nearly identical services and a similar brokerage framework
• 5paisa- They offer the same services as 5paisa, but their cost is different because they offer zero brokerage trading. 5paisa offers superior service and charges a reduced brokerage fee (INR.10 per order flat)
• Flyers- In this situation, the services and pricing structure are the same as those of Zerodha. They do, however, give an API that is completely free.
• Angel Broking offers similar services, but with a much bigger profit margin.

Groww - Challenges Faced

The industry has risen at a pace of 12.5% per year over the last ten years, which is more than double the world growth rate. However, India's mutual fund asset base as a percentage of GDP is only 11%, compared to the world average of 62% this year. Individual investor demographic data suggests that 48% of somewhat older millennials (aged 29-37) participate in equities, whereas only 4% of the young generation (aged 22-28) do so.

Due to the perceived complexity and the need to have advisors on hand at all times to navigate the dangers, as well as the dread of the hazards, young or first-time investors are hesitant to enter the market. The challenge, according to the founder, was to not only alleviate these concerns but also to educate them. Here's where digital services like PhonePe , GPay , Paytm , and others have made a huge difference by combining a simple user interface with interactive instructional content.

Groww clearly displays a variety of goods to potential investors, together with the corresponding risk level and historic performance. It also provides consumers with a comprehensive summary of all mutual fund facts, which helps to educate them.

Groww - Future Plans

In the coming months, Groww will launch deposits, US equities, sovereign gold bonds, Futures and options, and other derivative products. Groww has prioritized financial education material since the company's beginning.

“Our philosophy has been to create an internet finance company, based on best user experience, transparency, and simplicity, with the goal of offering every investment product out there for an Indian retail investor. Further, while we cannot advise a customer on what to buy or sell, we can definitely provide them with the right information through our educational initiatives," Keshre, chief executive and co-founder, said in an interview.

The company intends to launch a flurry of financial education projects geared at millennials and develop the financial services sector over the following two years. It signed up roughly 7 million customers between September 2020 and April 2021, with 60% of those in Tier 2 cities and beyond, according to the business, and it aims to keep expanding in Tier 2 and Tier 3 cities in the upcoming years..

What does Groww do?

Groww is an online investment platform that allows users to invest in mutual funds and equities directly. The company is a creator of a mutual fund direct access platform.

How does Groww make money?

Groww charges a tiny fee, however, it is paid by the mutual fund firm, not by the client.

What is the Groww headquarters location?

Groww headquarters are located in Bengaluru.

Is Groww app Indian?

Yes, Groww is an Indian company.

Which companies do Groww compete with?

The top competitors of Groww are Upstox, Zerodha, Upstox, IIFL, Finvasia, Angel Broking, SAS Online, Sharekhan, Edelweiss, and Karvy Stock Broking.

What are the Groww app charges?

Groww offers accounts for mutual fund investments with zero transaction charges, no redemption charges, or any other hidden charges. Furthermore, it also offers free account opening facilities that requires zero maintenance charges.

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Tesla to Recall 159 Model S, X Vehicles - NHTSA

FILE PHOTO: The Tesla Logo is seen at a dealership in Durango, northern Spain, October 30, 2023. REUTERS/Vincent West/File Photo Reuters

(Reuters) - Tesla will recall 159 Model S and Model X cars due to the possibility of the driver air bag deploying incorrectly, which increases the risk of an injury during a crash, according to a notice by the National Highway Traffic Safety Administration (NHTSA) on Thursday.

(Reporting by Chandni Shah in Bengaluru; Editing by Savio D'Souza)

Copyright 2023 Thomson Reuters .

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JP Morgan ESG Head Umunna Calls for New Green Tech Funding Model

FILE PHOTO: Chuka Umunna arrives at the BBC in London, Britain December 1, 2019. REUTERS/Toby Melville/File Photo Reuters

By Simon Jessop and Tommy Wilkes

LONDON (Reuters) - Start-up firms in some parts of the green technology industry such as sustainable farming are missing out on capital and need a new funding model, a senior JP Morgan banker said on Monday.

"We need to build a funding model for green tech companies," Chuka Umunna, JP Morgan's head of EMEA ESG and green economy investment banking, told the Reuters Energy Transition Europe 2023 event in London.

Umunna said most of the capital raised in green technology was flowing to sectors including electric vehicles and low-carbon energy, while others such as sustainable food ecosystems that "in some cases make more of a contribution to global greenhouse emissions" are were not seeing the same amount.

This was partly because of the capital requirements for some green tech firms in early stages of development, he said.

Capital raising for green technology companies in general had not been immune to geopolitical ructions "spooking the market", as well as worries about a weak economy, particularly in Europe and in public markets, Umunna said.

But deal activity was increasing in private markets, the former British lawmaker added.

Investment into green tech was also being stymied by bureaucracy, including delays to permitting for the infrastructure needed for renewable energy and other projects.

Cleaner energy stocks have had a tough year as investors fret about rising costs, cancelled or delayed projects and low investment returns.

Umunna also said a shift to a greener, lower-carbon economy offered up a huge opportunity for banks such as JP Morgan.

But he said the world needed to be "realistic about what the banking sector can do".

"Our job is enable and facilitate ... the transition. We are not in a position to deliver the transition," he added, pointing to key areas for decarbonising over which banks had no control, including reform of energy systems and consumer behaviour.

(Reporting by Simon Jessop; Writing by Tommy Reggiori Wilkes; Editing by David Goodman and Alexander Smith)

Copyright 2023 Thomson Reuters .

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