We have definitely come across the advertisements, where top celebrities endorse mutual funds, just calling them the right choice. Over the last few years, mutual funds have gone from being ‘too risky for the Indian appetite’ to ‘the “sahi” (right) choice for any investor’.
With ads on TV playing left and right, they are certainly popular now. But the big question everyone’s forgetting to ask is are mutual funds (MF) mutual funds really “sahi” or a good investment choice?
You may have come across people and websites trying to explain what mutual funds are and how a mutual operate, and MF’s are supposed to be wisest and safest choice for any investor, who wants their money to grow steadily and substantially. You would have most likely been advised to go for a systematic investment plan, popularly known as SIP, which is one of the best ways to invest in mutual funds.
In this article I will talk about, why mutual funds may not be as lucrative a choice for an investor, and how they may benefit mutual funds themselves more than their investors.
What are Mutual Funds
To put it simply, mutual funds are regular stocks & debt instruments. Like bonds that are available in stock & money market, these instruments that have been re-packaged for retail sales are known as mutual funds.
It’s obvious that when a company i.e. financial institution, opens its shop and sets up a mutual fund, there are recurring expenses that need to be borne like capital, talent, operations, marketing, etc. These companies then sell their MF units at retail price, where there’s an obvious markup for a retail customer. As someone has to pays for these extensive ‘Mutual Fund Sahi Hai campaigns!’, it’s obviously the retail mutual fund buyer who pays for it.
It’s Difficult to Find a Person Who Says ill about Mutual Funds
People rarely talk bad about mutual fund investments, as people who have already invested would want others to join in. People want other to participate in their purchase, to have some reaffirmation of their investment. In true sense, in case they fail, they would want others to fail too.
Often when people don’t get the desired returns from their mutual funds, mutual fund investors, mutual fund agents and media put doubts in their heads like:
- They didn’t invest long enough or aren’t patient enough.
- They didn’t invest in the right mutual funds.
- They did not exit at the right time.
- They should have invested more when the markets were down.
By the time you are sulking upon your mutual fund investments, and clouded with doubts and resentment, you start staying away from advising anyone on investment matters. Since your own confidence is low, you are unlikely going to advise anyone against it.
Why Don’t We Get the Desired Return from Mutual Fund?
Is mutual funds a good investment? Well, it may be good for those who want to really put their money and forget about it, however please note that you won’t be getting a fair price, and compared to actually working to maximize return on your investments, it’s not as good an investment as some other plans (which we’ll discuss below).
As I mentioned in the beginning a mutual fund is re-packaged stock for the showroom retail sales. And you rarely get a fair price at a premium retail outlet for the simple reasons being:
Cost of Retail Display
Retail merchandise is expensive to maintain. In case of mutual funds these costs can be defined as management fee, administrative costs, distribution fee, entry load, transaction charges, exit loads, etc. and these are not insignificant costs, they can go as high as 2.5% or more. They may not sound much, but it is, when the overall year on year return is around 10% is supposed to be good.
India is a risk-averse market where people want to put their saving sin a safe place, especially what their family and friends recommend. This is especially true because most of the salaried people have little knowledge of finance & investment returns.
SIP is a Raw Deal
People will try to sell you SIP (a.k.a Systematic Investment Plan) as if it’s the best thing that you can ever do in your life. SIP is constant deduction from your income, straight into the hand of mutual fund manager on a monthly basis. So, simplistically speaking, what you have done is that you have told a retailer that you would be coming to make retail purchase, on certain date every month.
If you are smart you would get my point. In case you haven’t read on. Any retail seller wants to maximize their profits, they want to sell you their merchandise at the maximum possible price. So in doing a SIP, you have given all the required information to the seller so that they can rip you off and the right time. Create a SIP and forget, that what any mutual fund wants from their investors.
Market Ups and Downs
When you are invested in a mutual fund for long and have consistently and predictably buying mutual fund “retail” units by SIP. Other also buys mutual fund units. Financial institution buy when the markets and mutual funds are doing badly. So they get a better deal as they wait for the right opportunity.
Now one may ask, how it affects the existing mutual fund investors? However, it does, you can do that math. If you have share in a mutual fund, and someone buy’s the same cheaper by being invested for lesser duration, your returns or dividends will get affected. The wholesale buyers like FII & DII eat into the profits of retail mutual fund buyers or common folks like us who think they are buying MF’s directly, without any commission agents being involved.
How to Buy Mutual Funds
In my opinion mutual funds are not as lucrative an investment medium as they are portrayed to be. Mutual funds are run by professional, who have some idea about the stock market, just like most people. If they had really been that good they would have been managing their own fund or portfolio like Rakesh Jhunjhunwala or Warren Buffett.
Which mutual fund is best? Those with least management fee, and more flexibility on when you can purchase would be better. You cannot rely on the past performance of any mutual fund. Can you lose money in mutual funds? Absolutely – if your rate of interest is lower than what you’re getting in a fixed deposit, and if it’s not guaranteed to give you year on year increase, you’re losing money on your mutual fund. Yes, even if it’s profitable in the longer run, you’re losing on cost of opportunity.
Mutual funds are derivative of the stock market, their performance more or less is dependent upon the stock market’s performance or NAV. NAV of a mutual fund is calculated as follows –
NAV = (Assets – Liabilities) / Total number of units or shares
How do you make money in mutual funds? The simplest advice would be buy mutual funds when their NAV (Net Asset Value) has crashed when the stock market is doing poorly, and sell then the NAV is high, which is most likely when the stock markets are soaring.
This might sound like an obvious strategy, but if one is serious about their money, one need to keep track of the markets, and invest significantly when things are looking grim for the stock exchange and make hay when stocks are through the charts. Of course, not all stocks are worth investing in, and that’s why the better strategy is time consuming.
Alternatively, one could simply invest in some good stocks, but it’s a slightly riskier ball game compared to mutual funds, but you are highly likely to make much more money, if –
- You have the guts to buy when the stock market has plummeted.
- You are patient enough to hold when your portfolio is in the red (when your stocks are at a low).
- And bold enough to sell when markets are doing good.
Abhishek Sareen is a marketing professional with over 16 years of experience. He started his career as a management consultant and currently works in international business. He has set up businesses like Track & Trail, BrooksBicycles.com and created consumer brands like Montra, Machcity and Roadeo. He’s is a passionate cyclist and participated in several endurance competitive events like MTB Himalaya. His interests are in behavioral psychology, economics and chess. He is a graduate in Computer Science and an MBA in Marketing. He completed his executive education from IIM-A in 2016 focusing on business strategy.