Are All Mutual Funds ‘Sahi Hai’? Find Out Here…
Jun 12, 2017

Author: PersonalFN Content & Research Team

Over the past few months, it has been hard to miss advertisements promoting the tagline—“Mutual Funds Sahi Hai” (mutual funds are cool). These adverts are on billboards at bus stops, publications, and TV. The infomercials talk about the different aspects and benefits of mutual funds. The advertisements are simple and to the point, eliciting the viewers’ curiosity about investing in mutual fund schemes.

However, there is a disconnect.

The ads do not lead the viewers to understand how mutual fund investments actually work. The website—mutualfundssahihai.com—only elaborates about the features of mutual funds. The website’s FAQ page misses an important aspect of the risk associated with mutual funds or even something simple and actionable such as how to invest in mutual funds or even the first step of getting KYC compliant. When you click on the button positioned on the website - ‘I am ready to invest’, AMFI passes on this work to a list of distributors or AMCs.

Clearly, the Association of Mutual Funds in India (AMFI), with over a Rs 150 crore in its kitty towards investor education, has fallen short in their efforts to handhold those interested in mutual funds; especially, on how to choose the right scheme for their financial goals or even how to go about transacting in these investment instruments.

Mutual fund schemes are definitely an apt choice for savers and investors from short-term savings to long-term wealth creation. Mutual funds offer diversification, professional management, low entry level, economies of scale, and innovative plans/services for investors. These come under stringent regulations and the protection of investors is a priority. But along with the benefits, there are several risks too. Hence, not all mutual funds are sahi hai.

Apart from the inherent risk of mutual funds such as market risk, liquidity risk, credit risk, macroeconomic risk etc., there is also the risk of not choosing the right mutual fund schemes for your current financial position.

You need to pick schemes as per your risk profile and investment goals.

To put it simply, equity mutual funds are suitable for high-risk investors with long-term goals. As a first-time investor, you could choose to invest in large-cap funds or balanced funds as these are less volatile. Alternatively, you may want to skip sector funds such as Infrastructure Funds, Banking Funds, FMCG Funds, Pharma Funds etc. or foreign fund-of-funds. These are suitable for investors who are familiar with the risk associated with such investments. Hence, it is essential to take a closer look at the investment allocation and strategy adopted by the mutual fund house before you invest in it.

For a conservative investor, opting for debt-oriented funds such as liquid funds or short-term funds may prove worthwhile.

Choosing the appropriate mutual fund category is just the first step. You need to carefully analyse the performance of schemes within a specific category as well.

Even under the same category, mutual fund schemes can vary widely in performance. The underlying cause of this effect lies in the investment objective of the scheme, the investment process, risk management, and fund manager’s skill level. Thus, when it comes to selecting the right mutual fund scheme, you need to look much deeper.

Take, for example, the returns of large-cap equity mutual fund schemes over the past five years as on June 9, 2017. The top 10 schemes in the category delivered an average compounded return of 20.64%, while the bottom 10 schemes delivered a return of 12.86%, a difference of 7 percentage points. An investment of Rs 1 lakh spread equally over the top 10 schemes would be worth Rs 2.56 lakh over the 5-year period. The same investment would have grown to just Rs 1.83 lakh if invested in the bottom 10 schemes. That’s a difference of over Rs 70,000!!

Of the 55 large-cap schemes, 8 schemes underperformed the Nifty 50, which delivered a return of 13.86% over the same period.

Hence, you need to evaluate mutual fund scheme based on the below parameters:

Returns across multiple rolling periods
Returns across different market cycles
Risk or Standard deviation of the scheme
Risk-adjusted returns or Sharpe Ratio
Portfolio concentration
Fund management
Costs

To know more on these different parameters, read — How to select a mutual fund?

When it comes to mutual fund investing, you need to have a sound plan in place. This will help you focus on the broader picture—the reasons why you are investing in mutual funds in the first place. So if investing for your child’s future or buying a car, it is imperative that a plan is chalked out with optimal asset allocation and a key focus on the important concepts of financial planning.

Therefore, as a newbie investor, adopt a holistic approach that covers the key steps below:

To know more about these financial planning basics, read — 10 Basics First-time Mutual Fund Investors Need To Know .

If all this seems too much of a task to do, it would be prudent to consult with an expert. After all, you do not want to end up saying, “mutual funds bekaar hai” (mutual funds are useless) due to your own negligence.

Hire a financial planner who is ethical and devoid of any biases. Choose a Certified Financial Guardian (CFG) who will safeguard your financial interests. A financial guardian is trustworthy; an advisor who puts your interest before their own. Distributors and other financial advisors, who earn a commission on the products they sell, may not always keep your needs first as they may have a bias due to a conflict of interest.

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