Not A Panacea For All Your Ills

Updated: Nov 16 2003, 05:30am hrs
In early 2000, when the charm of capital market became irresistible for Ambreesh Dutta (name changed), 27, he decided to dabble with investments in mutual funds since he did not have the expertise nor the time to take a plunge in the equities despite his passion. Due to the IT boom, Mr Dutta finally decided on the UTI Nifty Index Fund, the SBI Magnum IT fund and the Kotak Mahindra K Tech fund. Mr Dutta invested his entire savings, a sum of Rs 25,000 Rs 10,000 in the UTI Nifty Index, Rs 10,000 in SBI Magnum and Rs 5,000 in the Kotak Mahindra Tech fund.

But, soon Mr Duttas brief alliance with the capital markets went sour. Forget making more money, Mr Dutta was not even been able to recover the amount that he had earlier invested. With the net asset value (NAV) of the funds dropping, Mr Dutta soon realised he now had to worry about Return of Capital instead of return on capital as his capital had shrunk to about Rs 15,500.

Says Mr Dutta: I did not have much knowledge about mutual funds and markets and therefore I got in touch with an agent who advised me to invest in particular funds. Mr Dutta ruefully adds: I did not know that agents normally advise investors to invest in funds from which they get maximum benefits in the form of margins.

This is not a case in isolation, there are many around like Mr Dutta who invested in mutual funds without actually studying the market and have burnt their fingers. Many investors have, on the basis of the advice given by agents of mutual funds, invested in particular funds only to realise later that they had made a wrong decision.

Says a fund manager requesting anonymity: First, Mr Dutta was given a wrong advice of investing all his savings in three funds all of which had investments in IT stocks. Second, Mr Dutta invested through mutual funds during the IT boom, due to which the NAVs of the funds were higher. What goes up has to come down and, therefore, Mr Dutta suffered losses.

Then take the case of Mr Sachin Sharma, 30, a manager with a multinational company who is totally against investing through mutual funds. Mr Sharma invests on a regular basis with the goal of financing higher education of his three-year old daughter. Mr Sharma has put his money in instruments other than mutual funds like provident fund, insurance and the equity markets (only IPOs).

Says Mr Sharma: For a professional like me who has some understanding of the market, investing through mutual funds does not make much sense. Moreover, historically, mutual funds have not done well in India and returns have been good only during bull runs.

Mr Sharma further says that currently, equity funds are doing well due to the bull run witnessed on the domestic bourses and, therefore, people are quite happy. As for debt funds, the past two years have seen investors get decent returns due to a falling interest rate regime.

However, says JM Mutual Fund CEO Krishnamurthy Vijayan: It makes sense for an investor with a small corpus to invest through mutual funds, as he can have access to a larger portfolio of stocks. It is more cost-effective as the fees are marginal at 1-1.25 per cent and there is the freedom to entry and exit leading to liquidity of the investors assets.

Mr Vijayan further says: Some mutual funds have not fared very well, but due to the steps taken by the Securities and Exchange Board of India (Sebi) and the Association of Mutual Funds in India (Amfi), investing in mutual funds has become much safer now.

Therefore, if an investor invests prudently weighing the pros and cons, there is no need to worry at least regarding regulatory and safety aspects. The Indian mutual fund industry has a plethora of funds and schemes to suit every individuals needs. There are equity funds, debt, liquid, gilt and balanced funds. Further, funds can be divided on the basis of their structure ie, open-ended schemes, close-ended schemes and interval schemes. An investor can also invest with an investment objective in growth schemes, income schemes, balanced schemes or money market schemes. Then there are other schemes like tax saving schemes, special schemes, index schemes and sector specific schemes.

Therefore, prior to making any investments in mutual funds it is better to study the mutual fund industry and then invest. According to most fund managers, there are some golden rules, which investors should follow who wish to invest through mutual funds.

Before Investing
Self assessment and assessment of the fund: An investor wanting to invest must first assess his needs, have a fairly clear idea about what to expect and know his degree of risk bearing capacity. It is very important to understand where the money is being invested and whether the profile of the fund suits the profile of the investor. For instance, in the case of Mr Dutta he put his money only in IT funds which may have not suited his profile. Before, deciding on a fund, it is best to read the offer document of a fund and fact sheets to get an idea, as to where the money is being invested.

Decide on the goal to be achieved: An investor first has to decide for what he wants the money realised from the investment for and this investment goal should be the guiding light for all investments done. It is thus important to know the risks associated with the fund and align it with the quantum of risk one is willing to take. An investor should take a look at the portfolio of the funds for the purpose and avoid an excessive exposure to any specific sector, as this will add to the risk of the entire portfolio.

Select the right funds: Selecting the right funds in terms of their investment strategy and also in terms of their fees is important. The fees that funds charge is over and above what an investor invests and goes from his pocket. Funds that charge more fees will reduce the yield to the investor from that particular fund. Also, an investor should keep in mind how much a fund is tax-efficient. In case of equity funds, all dividends are currently tax-free in India and, therefore, an investor can reduce his tax liabilities, if he uses the dividend payout option. In the case of debt funds, there is a tax charged on the dividend distribution.

All eggs in one basket: Never, never put all your money in one fund. It is best to diverse investments, in order to reduce the risks associated with the investments. Putting ones money in different asset classes is generally the best option as it averages the risks in each category. Therefore, investors of equity funds should be prudent and invest some portion of their investment in debt funds. Diversification may reduce the maximum returns possible, but it will also reduce the risk factor.

... And After Investing
Concentrate on research and invest on a regular basis: Nobody can really beat the market or time the performance of the market. And therefore, an investor should invest regularly to get the utmost benefit. An investor should be regular and systematic with his investments. It is extremely important to research the performance of a fund and the other avenues before planning to invest.

Little knowledge can be dangerous especially when it involves your own hard-earned money. An ignorant investor will not be able to make a good investment decision while an informed investor will be able to take better decisions as he will be cued on to the subject.

Avoid speculation: Take calculated risks and avoid undue speculation. An investor should give ample thought to the investments that he makes and the time period required to realise the investment. Jumping funds ie; withdrawing money from one fund and investing in another just to make quick money should be avoided. Once, a fund has being chosen by doing research and applying ample though, an investor should stick to the same fund and wait for his investments to bear fruits.

Keeping track of investments: Just investing in the right fund is not enough. An investor needs to keep a tab on his investments in order to get maximum benefits. If the market is entering into a bearish phase, then it will do good for an investor to switch to debt funds.

Similarly, if the market is entering into a bullish phase, then an investor should consider entering into equity funds.

Knowing when to call it a day: An investor must know when its pack up time. Its important to book profits immediately when an investor has earned enough from a fund, instead of waiting and waiting to earn more. Other reasons could be a change in the fund manager, non-performance and hike in fees.

However, even after following these common-sensical rules, there are chances that an investor still may lose money through his investments in mutual funds. At times, if an investor comes across a foul play, then he can get in touch with organisations such as the Investor Grievances Forum (IGF), which takes up the cause of small investors on such issues.

Says the secretary of the IGF, Vipul Modi: Around 6-8 months back, we had received many complaints of investors who had lost money, but right now with the new regulatory measures and the markets doing well, there are practically no complaints at the moment.

Mr Modi also says that in the current scenario, it is advisable for an investor to take the mutual fund route as it is very difficult for an individual to independently track stocks on a day-to-day basis. It is better to invest through a mutual fund with a fund manager who has the experience and the expertise to handle the money, Mr Modi adds.

Even the market regulator Sebis chairman GN Bajpai has been quoted saying: Ideally, small investors should route their investments through mutual funds. Coming from the market regulator, the statement perhaps should comfort investors and speaks a lot about the regulatory measures that have been put into place to safeguard investor interest.