Inference suggests that mutual fund investors are getting more apprehensive based on certain incidents that have surfaced lately, thereby creating a lot of fear and speculation in their minds. Questions like “Is the mutual fund a scam?” and “Are my investments safe?” are often constantly asked by investors who clearly depend upon mutual funds for long-term financial growth.
Mutual funds are increasing in popularity because, in brief, they pool money from different investors to invest in a diversified portfolio of either stocks, bonds, or securities. Professionally managed, mutual funds afford an investor dual benefits of diversification and professional management. This makes them a very attractive platform.
The following paper aims at dissipating the confusion which recently arose about mutual funds. By reviewing what is happening in the news, what the terms, such as front running, mean, and then comparing mutual funds to the alternatives like ETFs, we will see if mutual funds are actually a fraud, or they are still a legitimate investment.
Recent Incidences Which Alarmed the Public
Case 1: SEBI’s Notice to Quant Mutual Fund: Ref. No. SEBI/HO/
The Securities and Exchange Board of India has reportedly issued a notice to Quant Mutual Fund on the allegations of front running. Front running is the practice followed by the Fund Managers or other Insiders in the Company on buying and selling of shares done ahead of the client selling or purchase, thus making illegitimate gains at the expense of other Investors.
Quant Mutual Fund has committed that it will take full cooperation with SEBI, and the rumor has sent jitters among the investors.
Case 2: Transaction Issue on Groww App
A user of the Groww app has reported a transaction discrepancy in which the app did not acknowledge the purchase of a mutual fund, although the user had proof of transactions. After blaming the user for not verifying the transaction, the response of Groww has created concerns over the reliability and accountability of these platforms.
Case 3: NAV Discrepancies on Market Downturn
On the day when election results ensued market crash, numerous mutual funds investors shot to act where the prices were less. However, they were caught off guard during their move as a result of the technicality involved in calculating the fund price, which reflected the market condition of a day subsequent to the date of the purchase, thus causing them losses amidst confusion and dissatisfaction.
What is Front Running?
Front running is one type of insider trading in which people already in possession of privileged information beforehand do a transaction before carrying out large deals on behalf of their clients. It always leads to huge market manipulation and unfair devices.
Likewise, in its case, SEBI has the allegations of front running by Quant Mutual Fund going under the scanner of detailed investigation to ensure fairness and transparency in the markets.
Alternative Investment: ETFs vs. Mutual Funds
Definition: Understanding ETF
ETFs are mutual funds that pool the finances of several investors and invest in a diversified portfolio which further buys securities. With mutual funds the pooled investors’ finances, like in mutual funds, this can be traded on a stock exchange, which can be purchased at any trading level, that is, exchange-traded funds.
Advantages of ETFs
- Real-Time Trading: ETFs allow investors to trade throughout the day at current market prices, providing more control and flexibility.
- Lower Expense Ratios: On average, ETFs have far lower expense ratios than mutual funds, which makes them cost efficient.
- Transparency: ETF prices are real-time, making the fluctuations in NAV less of an unknown element compared to mutual funds.
- No Exit Load: Unlike mutual funds, ETFs generally do not charge any exit load, so investors can pull their money out without incurring any further charges.
When to Choose an ETF Over a Mutual Fund
As such, they will be a better alternative in case a person is seeking to make lump-sum investments or desperately looking for controlled trades. It is this transparency, real-time pricing, and lower costs that make ETFs a quite attractive option for people who are cautious of the limitations and probable issues linked to mutual funds.
Solving Concerns
Case 1: Allegations of Front Running
The charges collected against Quant Mutual Fund have only rekindled various valid concerns regarding the practice integrity entailed in fund management. Granted, SEBI has initiated an investigation; however, the learning for investors remains to get educated and bring to the forefront the track record and transparency of fund managers before investment.
Case 2: Online Platform Accountability
The case of the Groww app illustrates the need for investors to use good and responsible platforms in making investments. Investors need to ensure that the platforms they are using demonstrate strong in-built mechanisms for smooth and transparent transactions of their spendings. Secondly, it would be a good idea to diversify investments through multiple platforms to mitigate the risk of platform-specific glitches.
Case 3: NAV Mismatches
Mutual fund investors have to understand how NAV is computed and the timings of their transactions. Though this has resulted in the potential for unwanted outcomes in terms of NAV discrepancy, investors get an opportunity to leverage investment prices linked with the ETFs by purchasing them in either case. In so doing, funds whose prices fluctuate real-time would save investors from the vagueness of the NAV-created uncertainty.
Are Mutual Funds A Scam?
The question “Is the mutual fund a scam?” All really just rages based upon a combination of misunderstandings, recent incidents, and market dynamics. There have been problems, but it is also true that mutual funds exist as a regulated investment vehicle started, in essence, to offer long-term financial growth.
Long-Term Benefits of Mutual Funds
- Professional Management: Mutual funds are invested, handled, and managed by professional and experienced managers who make wise and worthwhile investment choices on the part of the investors.
- Diversification: Mutual funds offer a diversified portfolio, which takes away the risk associated with sticking in money in individual stock investments.
- Accessibility: Mutual funds are an avenue open to a larger and more heterogeneous clientele, enabling these otherwise excluded clients to have access to investment, even from small amounts.
Thus, investors need to make detailed inquiries about any mutual fund they wish to invest in. Some of the rather critical areas to look into for an informed investment decision include checking the history of a fund, assessing expense ratios, and getting to know the reputation of the fund manager.
Conclusion
While recent incidents have raised doubts and questions on mutual fund credibility, tagging them as a scam is going too far. Mutual funds continue to be a practicable, regulated mode of investment to reap long-term benefits in financial growth. However, investors still should be informed, choose better platforms, and prefer alternative options like ETFs for control and transparency.
Once educated on the detailed workings of mutual funds and the traps or alternatives available, an investor can make an informed decision regarding the boundless and varied number of options corresponding with personal financial goals—an ongoing process of staying vigilant, doing due diligence, and being adaptable within the market.
