Busting The MF Myths

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Over the years, mutual funds (MFs) have emerged as one of the most efficient and transparent investment vehicles for investors. However, the growth of the MF industry in India has not been commensurate with its potential. Some of the reasons responsible for the inconsistent growth of the industry have been lack of knowledge about MFs and investors’ preference for traditional instruments like FDs, bonds and small savings’ instruments as well as their inability and unwillingness to look beyond them. Considering the ever-changing financial landscape, it’s time for investors to take initiative and include instruments like MFs in their portfolio to not only expand their options but also give their hard-earned money a chance to grow at a healthy rate.

Here is how you can tackle a few issues that may have either stopped you from investing in MFs.

MFs are an ideal investment vehicle for investors in different segments, i.e. retail, HNIs and corporates. That’s because they have the products to offer for investors with different investment objectives, time horizon and risk profiles. Therefore, it is wrong to assume that MFs are popular only because they offer tax-efficient returns to investors in higher tax brackets. While it is true that MFs are one of the most tax-efficient investment options, one can’t ignore other benefits such as flexibility, liquidity, variety, diversification, professional fund management and transparency offered by them. Besides, MFs allow investors to participate in equity and debt markets even with the small sums and benefit from their growth.

 

Many investors have suffered because of this myth and as a result often end up designing a portfolio that takes them beyond their risk-taking capacity and even have funds that may not suit their needs at all. Though performance can be an important consideration, it’s critical that one keeps performance in perspective. A fund’s successful track record can at best be a positive indicator, but not a guarantee that growth will continue at the same rate. While reviewing a fund’s performance, one needs to not only look at performance relative to funds with similar objectives over a period of at least 3-5 years but also the risk taken by the fund to deliver those returns.

Besides, it is equally important to match the investment objective of the fund with your own to confirm its suitability. A wrong selection can derail your investment programme and severely damage the chances of achieving investment goals. To be a successful mutual fund investor, it is necessary to have the right mix of funds in the portfolio. The right way is to decide the allocation to each asset class and then decide the funds for each one of them. By investing in a haphazard manner, one may end up having over exposure in an asset class and that may hamper the chances of success.

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Urge To Book Profits Every Now And Then

This is a situation which many equity fund investors face from time to time. Actually, this happens when one tries to time the market i.e. to sell before the market goes down and buy before it goes up. The urge to take advantage of the market movements makes investors forget that even the most experienced fund managers find it difficult to do so successfully on a consistent basis. No wonder, when a common investor tries to do this, he invariably finds the market moving in the opposite direction and that makes him lose faith in the investment vehicle itself.

While it is a fact that even a long-term investor needs to book profits, the key to success is to have a proper strategy in place. One such strategy is to rebalance the portfolio periodically. Rebalancing is a method by which the allocation to debt and equity are brought back to the original level. This is necessary as one asset class grows faster than another. Rebalancing becomes necessary because we make investments to achieve best results at an acceptable level of risk. By doing nothing, we violate this premise and get exposed to unacceptable level of risk.