Recently, a well-established mutual fund house made it compulsory for its employees to invest in funds floated by the company itself, if at all they plan to invest in mutual funds. There is no compulsion on any of the employees to invest in-house but these internal guidelines severely restrict the options available to the employees. Some of you may feel that, it's a good move as it will show a sense of commitment to investors of the fund house. While, there might be some among you who would call this a regressive strategy as the employees should have put in money voluntarily if they believed the funds were performing well and had a potential to do well in future as well.

What builds trust?
Despite of trying hard, mutual funds are unable to penetrate beyond a limit. Still very low percentage of population invests in mutual funds and their reach is mainly restricted to a few large cities, although they are expanding beyond top 10-15 cities now. PersonalFN believes, if employees and management invests in funds floated by their own company, it might instil some confidence in the potential investor. Even so, that should be the only thing mutual funds can do to win over investors.

Are mutual funds learning from their past mistakes?
During last multi-year stock market boom that happened between 2002 and 2008, mutual funds witnessed huge rise in their Assets under Management (AUM). They launched multiple schemes and garnered fresh money. In a race of capturing market share and growing asset base, defying the age old logic of "buy low and sell high", mutual funds made investors do exactly opposite. They went to people with New Fund Offers (NFOs) when market indices were galloping and making new highs. In this process, many of their agents and brokers didn't make investors aware of risks associated with the funds and sold aggressively. They worked for commissions without caring about what investors expect. There have been many instances of mis-selling. Ban on entry load from August 2009 onwards put mis-selling under check yet it didn't deter mutual fund houses from launching similar schemes under new names.

There is another problem common across the board. A fund house may have a long list of funds on offer but only a handful of them usually perform. It has also been observed that, fund houses too focus on only those schemes which have done well in the recent past. Thematic and sectorial funds suddenly lose favour when macros become unattractive for the sector or the theme.

Analysis of recently launched equity oriented diversified funds suggests that, in most cases, there is nothing unique NFOs have to offer. New launches ensure that fund houses garner new business encashing the favourable macros and positive investors' sentiment.

'Focused equity funds', 'midcap focused funds', 'top 100' or 'top 200', 'opportunities funds' are among the common ones that have been launched in the recent past. Besides, theme based funds such as 'make in India funds' or 'India recovery funds' have also been launched.

It is obvious that these funds won't sit on cash for very long and may invest at a time when market valuations are expensive and recovery is under pressure for a number of factors. In case markets witness a deep correction in future and if it sustains for a relatively long time, those who have invested in these NFOs are likely to earn poor returns. Not all, but many mutual funds have adopted this approach, "tell a story and lure the investor". This has resulted in investors committing money without understanding the flipsides. Investors keep huge expectations from their investments and when funds perform miserably, they are disappointed. Their experience makes them believe that, mutual funds are very risk and not something they should invest in. Current regulatory environment also favours bigger fund houses believing them to be serious about their businesses.

PersonalFN is of the view that, not size, but the commitment of a fund house really matters. Fund houses may claim that "they put investors first" but repeated NFO launches hint at covert intentions. PersonalFN is of the views that, more the schemes mutual funds have in the same category, difficult it may become to do justice with all of them. While rating funds, PersonalFN rates fund houses low which launch similar schemes and have large allocation of schemes to one fund manager. PersonalFN doesn't focus only on returns generated in the recent past but assesses funds on a variety of quantitative and qualitative parameters.

Should you avoid investing in mutual funds?
No. PersonalFN believes, mutual funds are an excellent option for those who want to invest passively in capital markets. Only that, you should be aware of all aspects associated with mutual fund investing. Your investments should be in-line with your long term financial goals. PersonalFN offers unbiased mutual fund research services.

As far as mutual fund houses are concerned, it remains to be seen whether they learn from their mistakes and stop chasing investors with NFOs for expanding their asset base.

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