The Feeling is Mutual

Investment Planning - Seniors Today
Mutual funds can play a vital role in investment planning, at any stage, writes Deepak Gagrani

Thanks to the efforts of market players (Asset Managers, AMFI & Advisors), there is an increase in awareness amongst investors that Mutual Funds (MFs) can play a vital role to help them plan their investments at any stage of the life cycle. The tagline of ‘Mutual Funds Sahi Hain’ has been able to bring in the right connect with investors. MFs play an even more important role for elderly investors, as they offer professional management of funds at lower costs, thereby allowing them to passively manage their investments.

However, a common investor still continues to struggle on how to effectively use MFs for their financial planning. While SEBI has been working tirelessly to simplify the nature of Mutual Funds, there is still some distance to be covered for a common investor to be able to comprehend ‘Kaunsa Mutual Fund Sahi Hai’. Presented below are some important factors which should help set the right recipe for building an appropriate Mutual Fund portfolio according to their goals and objectives.

Wealth Creation v/s Wealth Management

While both the terms are interchangeably used, there is a material difference between both the concepts. Understanding the core difference can help achieve the desired objectives in a seamless manner.

Wealth Management is essentially an activity that focuses on the preservation of capital and generating returns to exceed the relevant benchmarks in the short term.

Wealth Creation is a long-term activity, where one invests in growth assets and continues to stay put until the time the investment thesis is broken. It ignores short-term volatilities; in fact promotes increasing exposure at times of fear, assuming the original rationale of investments remains good.

An investor’s time horizon and intended end use of money will decide on the approach to be adopted. If the time horizon is long typically in excess of 5-7 years and money is not needed in the intermediate period, one can look at wealth creating strategies as against focusing on wealth managing tools.

Choose the Right Mutual Fund

Selecting a right MF is of utmost importance. Selection lapses can derail the entire financial journey. With more than 2000 MF schemes offered by 42 AMCs, selecting a mutual fund may seem like a daunting task. A typical shopping of MFs is based on the most obvious factors such as higher past returns, popular brand and higher star rating. Typically MF rankings focus on past performance for few quarters, hence keeps changing frequently.

One should remember that one cannot control returns. However, one can control the process adopted to select the right MF. Choosing an appropriate MF requires focusing on a combination of multiple parameters jointly, summarised as follows.

Management Team (including Fund Manager)

Avoid AMCs undergoing any major corporate restructuring or witnessing major staff turnover, especially for critical positions. Always prefer funds from stable management.

Avoid AMCs where only a couple of funds are performing well and are managed by a sole star fund manager. As seen often in past, performance of funds suffer with the exit of such star fund managers.

Consistent Performance

It is important to check the performance of the fund over a period of three years, five years and a since-inception basis. It will highlight the funds’ performance across different phases of the market. Consistent performance over the long term is preferred to funds generating short-term returns in spurts.

Size of the Fund / Assets Under Management (AUM)

Avoid smaller funds, especially in case of debt funds with AUM less than INR 500 crores. The exit of any big investor out of such an MF scheme may impact its overall performance.

Avoid funds with very high AUM, especially if they are not in the large-cap category.

Portfolio Composition & Diversification

Ensure that there is no material overlapping of stocks & sectoral allocation between multiple funds that forms part of an investor’s portfolio. Overlapping will not help in adequate diversification, in spite of investing in more than one fund offered by different AMCs.

Expense Ratios

Expense ratios should be closer to the median averages rather than extreme ends of the range. Similarly, expense ratios should show a declining trend as the asset size increases.

Ongoing Review of Portfolio

Just like physical fitness needs continues evaluation of the body, similarly it is extremely important to review your MF portfolio at defined intervals (ideally on a quarterly basis). This is perhaps one of the most neglected activities in the journey of wealth creation and hence does not lead to desired results. An investor should actively review the MF portfolio at defined intervals to reconfirm that the thesis basis in which the original investment was made holds good. If there is a material change to the thesis and it remains consistent over a period of time (say 3-4 quarters), one should evaluate to exit the MF scheme. If the thesis remains intact and yet the fund underperforms over a couple of quarters, one should stay put.

Role of Advisor

One of the most common reasons for inadequate due-diligence of funds at the time of MF selection or review of the portfolio is lack of time/activity being a non-core activity for the investor’s routine. In such a case, it is recommended to connect with a good advisor who clearly understands the true meaning of wealth creation. In one of the analyses conducted by Vanguard, the world’s largest asset managers, it was found that an advisor managed portfolio can add about 3% annual returns to the client’s overall portfolio. An advisor, who follows an uncomplicated and transparent approach of investing along the lines narrated above, can immensely contribute in your story of riches and fortune.

Happy Investing!

About Deepak Gagrani

Deepak Gagrani is a Chartered Accountant by qualification and has set up Money Mint Mantras Solutions, a niche financial services firm (www.moneymintmantras.com). He can be reached at deepak@moneymintmantras.com and via telephone at +919820153269

View all posts by Deepak Gagrani

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