It is this need that is the primary force behind every purchase decision. Needs are of two kinds actual need and invented need. Allow me to elucidate with an example. Lets suppose you have been using a two-wheeler up until now. Now, you can afford a car and with a bigger family (youve just become a proud parent) you need a vehicle with more space. This classifies as an actual need for a car. Whether you then buy a sedan, SUV or a small car depends on other factors.
On the other hand, suppose you already have a nice well-functioning car. But then you see an ad for a swanky new one and you feel like you have to own one of those. This becomes an invented need. You don't really need the new car but you tell yourself you do, maybe by making up reasons like its cost-effective, it will enable you to negotiate traffic or better resale value for your old one.
It is quite apparent from these examples that a product should be bought to satisfy an actual need. And this couldn't be truer when it comes to buying mutual funds, or even other forms of investments. Unfortunately, like most products or services, we tend to buy mutual funds on the basis of invented needs.
Ideally, a fund investment would start with the need to save up for some specific requirement. This could be a vacation a year away, your childs education a decade later or your retirement. You recognize the need and decide to start investing now to satisfy it when its time comes. The next step would be to pick well-performing funds that best suit your time frame and invest in them in a systematic manner.
This is how fund investments should be made, but what often happens is that the invented need method takes over. You come across an ad or hear of a revolutionary new fund that has been launched. This fund has a completely new set of features. It probably boasts of a new theme that you werent even aware of. This new fund suddenly seems like the best investment avenue, and since you don't have any exposure to its said area of investment, you feel the need to buy that fund.
New funds are sold primarily on the basis of exploiting invented needs. When you buy a fund this way, you are not satisfying your need, you are satisfying some elses commercial purposes. Buying a consumer durable, even a car, on the basis of your invented need might be fine to a certain extent. But buying a fund that way is a big no-no. Any mutual fund investment should, and must, be made only after recognizing an actual specific need.
Author if the CEO of Value Research