Why mutual funds score over several other investment avenues
Investors behave differently when it comes to their finances. Some approach investments like a task that needs to be done. They have limited knowledge and hence take help from friends and colleagues before investing their money.
There are others who hate money and finances. They just go lock-step with what their friends/ colleagues do with their money.
Another set of investors are very interested in money, want to be hands-on, are always on the lookout for products that offer great returns and believe in timing the markets and maximising returns. These are the investors who watch business TV channels, follow finfluencers, read business papers, and look out for tips all around so that they can invest where they can maximise their return. These people would invest in stocks and keep churning portfolios based on market cycles, news flow, what they hear and read, etc.
But this requires a lot of time and energy. And the results are not always pretty… which brings us to something that is pretty simple when it comes to investments – mutual funds.
Mutual funds are on everybody’s lips, thanks to the Mutual Fund Sahi hai campaign. The investors have taken to MFs, and the assets under advice have gone up manifold. However, there are several misconceptions that still linger.
Also read: March SIP inflow cools off marginally, but stays strong at Rs 25,926 crore
MFs are all about equity
Most people think that MF schemes are equity investments only. That, of course, is not the truth. MFs invest in various asset classes, including equity. MFs invest in equity, debt, commodities, and real estate, etc.
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Only now, investors are slowly becoming aware of this. But still this misperception persists. There are many other misconceptions.
Direct investment in equity is better
Many people hold the notion that they can make much better returns when they invest in equity directly.
When someone invests in equities by themselves, they should have enough knowledge about the economy, sectors, companies, business dynamics, geopolitical aspects, etc, to make sense of the area enough to make informed decisions.
However, most investors put their money in equities based on hunches, tips, recommendations of “experts,” etc, and not based on any solid study or analysis. Portfolios built like this tend to be quite scattered, lack proper diversification, and have a lot of momentum stocks resulting in a lacklustre portfolio.
Direct investment in equity works for a very small segment of investors who have the time, are willing to put in the prodigious efforts needed and are willing to invest the money needed to access professional research, specialised software, reports, advice, etc.
For all the rest, direct investment in equity is best done through managed funds.
Also read: Equity mutual fund inflows hit 11-month low of Rs 25,082 crore in March: AMFI
Professional expertise matters
Professional fund managers are qualified, have experience, and possess expertise in putting together a portfolio and managing it. Many of these fund managers have a team of analysts who research sectors and companies and aid the fund managers with their decision-making.
Mutual Funds (MF), Portfolio Management Services (PMS), and Alternate Investment Funds (AIF) are some examples of managed funds.
Asset management companies are professional organisations that manage money collected from investors through their team of fund managers, supported by analysts and other supporting departments and charge a fee for that.
The good part of a managed fund is that it is managed as per defined fund management objectives. They have clear rules and systems in place while deciding on buying and selling underlying assets. Since these are professionals, the emotional biases are removed to a major extent and the fund management tends to be clinical. This results in a well-managed, diversified portfolio.
Mutual funds as an investment option
Mutual fund schemes have become quite popular these days. There are several broad categories of MFs – equity, debt, commodity, international investment etc and several sub-categories like flexi-cap, hybrid, sectoral, thematic, multi-asset funds, etc. MFs straddle the entire spectrum of asset classes and hence putting together a good, diversified, well-managed portfolio becomes easy.
Since these are managed funds, investors need not have deep knowledge about the economy, markets or even the asset class itself.
Why financial advisors choose managed funds
MFs especially suit all categories of investors, unlike PMS or AIF which are suited only for high networth investors. The schemes are managed very broadly based on an overall mandate for the portfolio. The fund manager is not aware of the personal position of an investor, their goals, their current investments etc. That is what a financial advisor is concerned with.
A financial advisor, who should be a Registered Investment Adviser (RIA) with the Securities and Exchange Board of India (SEBI), creates a financial plan for the client based on their specific needs, personal situation, commitments, income needs, etc.
The advisor plays the role of a financial architect and creates a blueprint to meet all their future goals while taking into account the specific requirements and nuances pertaining to their client. It is exactly like a civil contractor who uses bricks, panels, tiles and other building materials to construct an edifice and sees no need to make these foundational materials himself.
Not just for the masses
While some may view MFs with disdain as products meant for the masses, MFs have clearly proved themselves across the board as a diversified, well-managed product offering. They have managed to deliver credible returns at relatively low charges.
Managed products like MFs are suitable for most. Managing money is vital for meeting goals and fulfilling expectations. There is no sense in gambling away one’s future.
When there is an easy way, why make investing hard?