Mutual funds were invented with the intention of making investing easy for the lay investor. The basic premise of mutual fund investments is that you invest in a fund because you don?t have either the time or the knowledge, or both, to make viable investment decisions. You give your money to a fund, wherein the money gathered from you and other investors like you is invested by a fund manager whose only job is to make sure that you earn decent returns. The fund company and fund manager have the knowledge, you have the money. They invest your money in the right channels and take a small percentage as fees. Mutual funds were supposed to be as simple as that. But like we often do with most things, mutual funds have been complicated as well.
Investing in a mutual fund was easy when all you had to do was pick a good fund that met your requirements. But now, the very task of picking a good fund has become a perplexing activity. There are so many funds and so many categories that they fall under. Selecting the right fund seems harder than finding a needle in a haystack. And before you even get down to analyzing individual funds, you?ll first have to analyze the fund categories to determine which one you should look into further. It?s an overwhelming task and I don?t blame most investors for getting it wrong.
Fund companies, investment experts, books, magazines and other mediums that carry information on investments have only made things tougher for investors. However, at Value Research, our analysis and data team has worked out a simplified system of classifying mutual funds that is sure to make things easier for investors. This is something that we have truly endeavored to do, and have been working on for quite a few months. We have developed this system on the basic assumption that a fund is ideal for an investor if it matches his return expectations and risk taking abilities. Different investors have different risk-return profiles and so do mutual funds. Hence, when funds are classified by dividing the entire risk-return continuum into groups of roughly equal risk and return expectations, identifying funds that match your requirements becomes much easier.
For example, if you are investing for the medium-long term, expecting average returns at moderate risk, then the first thing you need to do is get a list of funds that meet these requirements. Such funds will invariably be hybrid/balanced funds and all you then have to do is select the fund that has the best track record. Isn’t this easier than trying to go through categories like equity, debt, and hybrid and then further into their sub-categories? If you had taken the latter path then you would have to first choose one category. Had you chosen equity, you would straightaway be on the wrong track, which would only get murkier when you would come across equity fund sub-categories divided on the basis of market caps, themes, sectors, etc.
Adding to your confusion would be the categorization followed by fund companies. AMCs describe their funds in an attempt to make them seem unique. Funds that are exactly the same are classified differently as a marketing gimmick. Investors should be wary of such gimmicks. Investors should strive to keep things simple.
The fact, one that we almost always overlook, is that you would need only the simplest kind of funds to achieve almost any kind of investment objective. Always remember that when it comes to funds, the more unique offer will invariably be more dubious.
?Author is CEO of Value Research