It’s Time To Look At MFs Differently

The growth of mutual funds in India has been erratic. Though MFs have the potential to be the mainstay of every portfolio, they still haven’t become a mass investment vehicle in our country. Some of the reasons responsible for the present situation are misconceptions about MFs from time to time, erratic stock market behaviour, operational constraints faced by the industry, misselling and investors’ fancy for guaranteed return products. The fact, however, is that investors who do not have the time or the inclination to manage their portfolios actively would do well if they invest in mutual funds. MFs provide readymade solutions for investors who do not take too much trouble over details. Besides, MFs offer funds that have a long-term performance track record and hence can be relied upon for healthy returns over time. Investors also benefit from the fact that fund managers realign the portfolios on an ongoing basis in line with the stock market behaviour.

Today, it is possible for every investor to design a portfolio according to his risk profile and time horizon only with the help of mutual funds. Simply put, mutual funds are a complete investment vehicle that has something to offer to everyone.  Sadly, even existing investors have not realized the potential of mutual funds to the fullest. For example, in spite of being an ideal product for small investors to experience equity investing and to earn better returns while saving taxes, equity-linked savings schemes (ELSS) have failed to make a mark. Investors will do well to consider these schemes for at least a part of their tax savings investments. The right way for investors to move ahead would be to make ELSS a part of their overall equity investment strategy rather than following a haphazard approach. Then, there are investors who invest much larger amounts in an ELSS than what they are required to invest to save taxes thinking that being a closed ended fund it will provide better returns compared to open-ended funds. Though it is true that lock-in period of three years allows the fund manager the freedom to build portfolio for long term, it is wrong to assume that the closed ended structure alone can guarantee better returns. Therefore, ELSS should be considered only for investment to be made to save taxes.

Another fund category that gets lots of attention, especially when the markets do well, is Sector funds. Though these funds can help in increasing exposure to those industries that may be under-represented in an existing portfolio, many investors consider them to be a vehicle to make a quick buck. It is important for investors to know that due to their narrow focus, the NAVs of sector funds can be more volatile compared to those of diversified funds. Therefore, for a sector fund investor, it is important to have the ability to withstand the short-term fluctuations in order to enhance long-term returns.[PAGE BREAK]

Before adding a sector fund to a portfolio, one needs to assess certain key criteria that may be important to one’s profile. These are:
• Assess one’s risk-taking capacity and the temperament to tackle the volatile nature of sector funds.
• The capacity to hold a sector fund for the long-term if required and to curb the urge to switch frequently from one sector to another.
• To have realistic expectations from a sector fund.

As a thumb rule, for someone who has a decent exposure to equity funds and is conversant with the behavior of equity market, around 10 to 15 per cent can be invested in sector funds. One can adopt different strategies to reduce the risks generally associated with investing in sector funds. One such strategy could be to have small exposure in multiple industries rather than having huge exposure in one sector.

Being one of the most versatile investment vehicles, mutual funds deserve a better deal from investors. Therefore, those who haven’t experienced them should do it now. Even existing investors need to be consistent with their investment process. The key to success for both is to select options as per their needs rather than getting swayed by the market moods.