Dussehra : The ten truths and myths about the Mutual Funds

In the occasion of Dussehra let us understand the ten truths and myths about mutual funds.

1.       It is too Complicated

Most of the people feel that mutual funds are complicated instruments and not meant for me. The truth is that mutual funds simply invest the money on debt, equity and gold or mix of these assets and there is nothing so much complicated on this.

2.       We need lot of money to invest in Mutual Funds

Many people feel that mutual funds are for riches and we need lot of money to invest in mutual funds. However the truth is that we can invest in monthly SIP for as low as Rs. 500 only. Mutual funds are for everyone how big are small the amount is, It can always be invested in mutual funds.

3.       We need a Demat Account to invest in Mutual Funds

There is misconception that Demat account is compulsory for mutual funds. The truth is that we can invest in mutual funds without any Demat account, although we can take the mutual fund units in Demat account also however it is not compulsory. Even without Demat account the investment and redemption is very east through online mode.

4.       Mutual Funds are for long term investment purpose only

We can invest in mutual funds for a week also as well as for years. There are various different type of schemes based on the investment horizon and risk appetite wherein we can invest for short medium or long term based on our specific requirements.

5.       High rating Schemes earn better

There are various portals/agencies which gives ratings to mutual fund schemes, We generally are under impression that higher rated scheme will be doing better as compared to lower rated schemes. However the truth is that rating and performance keeps on changing and there is no scheme which can always be at top rating or bottom rating. Therefore we may not be totally dependable on the ratings of the schemes.

6.       We should invest in Equity mutual funds only

Many investors feel and mutual fund means equities and we should invest only in equity schemes. However, even today more than 50% of the total mutual fund corpus is in debt /debt related funds. Mutual funds are best for diversification purpose. We should invest in debt/balanced and equity schemes based on our investment horizon and risk appetite.

7.       Investment in Mutual Funds is cumbersome

There is a common myth that we need lot of documentation to invest in mutual funds, KYC is required for every time we want to invest in mutual funds. Investment in mutual fund is actually very easy, we need to do basic formalities and KYC only one time and after that we can invest in any mutual funds. Nowadays there are various online platforms available through that we can invest in mutual funds from anywhere and anytime.

8.       Lower the NAV better to invest in

There is a general miss-conception that if a scheme’s NAV is lower than it is better to invest in. However the fact is that the price of NAV actually does not makes a difference. For example if a schemes NAV is Rs. 10 and we have invested Rs. 10,000 then we will get 1000 units. Another scheme NAV is Rs. 100 and if investment amount of Rs. 10,000 then we will get only 100 units. Now if the market goes up by 10% it means first scheme’s NAV will become Rs. 11 and our investment value will become Rs.11,000 (11X1000) and for second scheme NAV will become Rs. 110 still the total investment value will remain Rs. 11,000.  So it is more important to study the performance and portfolio of the schemes rather than the NAV of the schemes.

9.       Stop SIP when Market falls

Many people get scared when the market falls and stop there SIPs during that time. That time is to continue your investments as you will get more units at cheaper price reducing the average cost of investments. This will help to improve overall return when the market rises. It is always better to continue with your investments and not get over-influenced by the market movements.

10.   No need for an Expert

Every products has its unique features hence suitable for few people and not necessarily suit for other person. Experts are there to help a person to find out right product mix based on his own specific requirements/financial goals /risk appetite and family needs. It is always better to seek expert advice so as to select right schemes which is most suitable to achieve your own specific financial goals.

What should we learn from the Crisis?

We get panicked when we see that our whole life’s savings/investment reduces to half its value in a just a year. But yes this is also the reality and faced by many investors during 2008-09 crisis. The investors’ money reduced by almost 60% (assuming the money was invested in BSE Sensex) within January 2008 to March 2009 period.   It needs extra ordinary courage and patience to digest such kind of loss and remain invested. However those who continued for next two years they were back in profit  If we see the historical returns the market since has given approx. 10% average annual return if my holding period is more than five years. So what should we do where there is a bloodbath in the Dalal-Street and how to survive this kind of situations, lets us find it out.

  1.  The most important lesson we should learns from past crisis is that Stock Markets goes ups and down but will finally react to the underlying economic signals. It will recover back if the underlying economy grows. However the small retail investors typically buy when markets are high and sell when markets crash. We have seen it in 2008 crisis. The mantra is: Buy Right products and hold, don’t get into panic selling. Usually there is a sharp recovery after a crash which cannot be encashed by the immature investors except may be few experts and hence small investors are most likely to miss the recovery. Unless we are invested, we could not gain from the market recovery. The strategy should be holding a well-diversified portfolio (through diversified mutual funds) rather than just a few stocks.

  2.  The old saying “Never keep all the eggs in one basket” is always relevant especially in case of the investments.  In the past we have seen various themes like IT, Pharma, Infrastructure funds which have done exceptionally well for some time but also turned huge negative when the hype related to these sectors waned out. We need to diversify our assets in different asset class like equity, debt, gold, real estate etc., not just that within asset class also we need to diversify further like in case of equity we should spread our investments in Large, Mid & Small cap Diversified Funds, Sector funds have higher risk and should be limited to only a small portion of the total portfolio. Diversification is very important and while analysing the return part we should see the portfolio return rather than one particular class of the assets.

  3. Portfolio Rebalancing is another important thing need to be practiced in investments. Normally  when the market rises we get carried away with it and forget the prudence while increasing the allocation in that particular asset class, rebalancing has a purpose and should be practiced in a systematic way. First we should decide how much debt and equity we are comfortable with based on our risk appetite and financial goals.  Once it is decided it should be practiced and rebalancing should be done when one asset class goes up. For example if we have decided 50:50 as equity and debt and due to rise in equity market the portfolio moves to 65:35, in that situation we need to redeem the excess equity exposure and brought it back to originally decided allocation.  As we reach to our financial goals we should reduce exposure from high risk category to low risk category.  By rebalancing we also tend to book profits in between while reallocating the assets.

We have seen a very sharp growth in mutual fund investments in last two three years. These are those new investors who have not seen a long and deep market crash like in 2008-09. The points mentioned above are very important for those investor. If an investor has begun to invest just by looking at the past few years’ returns and don’t have a proper plan/strategy, he will panic and sell at the first whiff of a longer market crack. Panic selling and greed-based buying will costs much, not just money but also the trust in the markets. Hence it is always better to take proper guidance from an expert.