Allow MFs To Make A Difference To Your Portfolio

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

Allow MFs To Make A Difference To Your Portfolio to the mystique surrounding the stock market. The fact, however, is that mutual funds offer a variety of debt funds as well hybrid funds. There are debt funds like liquid and ultra short term funds that can be a great alternative to savings bank account with the potential of higher returns and that too without compromising on safety. Then, there are tend to perform well. Hence, any investor following this strategy may end up investing majority of his money in funds that are inherently risky. No doubt, they have the potential to perform very well during rising markets, but the key is to have exposure to them in the right proportion so that there is right balance between risk and reward.

Mutual funds have proved to be one of the best investment options for investors the world over. Even in India, mutual funds are finding favour with investors slowly and steadily. It is encouraging to see the number of investors investing through SIP growing at a remarkable rate. Mutual funds mobilize around `4300 crore every month through SIP from 1.3 crore folios. However, it is also true that despite this growth, the level of penetration of this wonderful investment option in our country is still very low. On the one hand, certain myths have kept investors away from mutual funds, on the other hand, the level of participation from existing investors has remained low due to their failure in following the right strategies. Let us analyze these myths and see why investors need to shed these to benefit from the true potential of mutual funds.

 MFS ARE MEANT ONLY FOR EQUITY INVESTORS

 One of the hallmarks of mutual funds is that they offer a variety of funds allowing investors to invest in different asset classes. However, there is still a belief among investors that mutual funds are meant only for those investors who want to invest in equities. It is mainly because equity funds remain in the limelight due income funds wherein fund manager follows different strategies like duration, income opportunity and dynamic allocation to generate attractive returns for investors. Of course, the key is to select the right fund according to one's time horizon and need for liquidity during this period. Hybrid funds invest in a mix of equity and debt in varying proportions, allowing investors to restrict exposure to different asset classes according to their risk profile and time horizon. As is evident, mutual funds alone allow investors to build a portfolio suitable for risk profile and time horizon.

 MF INVESTING IS JUST ABOUT INVESTING IN THE TOP PERFORMING FUNDS 

There is a common myth that one can get handsome returns by investing in top performing funds. In other words, investors get impressed with short-term performance of funds and end up investing in "flavour of the month" type of funds without realizing that they expose themselves to greater risk by doing so. While past performance is an important parameter in the selection process, relying on short term performance alone can backfire. For example, in a rising market, mid and small-cap, sector and thematic funds Similarly, investors following this strategy during falling interest rate scenario usually end up investing at the fag end of the rally, thus either getting very low returns or losing a part of their investment when interest rates start climbing up. 

NEGATIVE RETURNS FROM A FUND MEANS NONPERFORMANCE 

While it is quite natural for investors to feel disappointed when they see negative returns, they need to realize that the right way to measure performance of a mutual fund scheme is to look at relative performance vis-a-vis its benchmark and not the absolute returns alone. For example, for a fund that has BSE Sensex as its benchmark, the key is to see how the fund has performed in its comparison. If Sensex is down, say, 10 per cent, and the fund is down 6 per cent, the fund manager has done his job. Moreover, short term performance should not be the basis of making any important decision. Every investor who invests in equity funds must realize that, as an asset class, equity has the potential to outperform other asset classes in the long run. Therefore. relative performance allows you to analyze the ability of the fund manager to tackle rough times and protect your money.