Ask the right questions before investing in mutual funds

March 06, 2021 10:48 AM

Where do you start? How do you know whom to trust? Too many overwhelming questions and not enough answers. Here are some guidelines on choosing the right financial product.

When you invest in mutual funds and other investment products, you have to ask questions about the product itself, not about the market conditions.

Think of any manufactured product you have bought recently. For example, a car. Do you want to know more about the car and its performance or are you more interested in the road condition, and the seasons? A car dealership or manufacturer will not be able to answer such questions, nor do we ask such absurd questions. Similarly, when you invest in mutual funds and other investment products, you have to ask questions about the product itself, not about the market conditions.

The right investment advisor will be knowledgeable about the products and can modify your portfolio to meet peak performance according to market conditions. Asking the right questions leads to productive answers. Vague answers are usually result from lack of investment knowledge or focusing on the wrong questions. When you buy an air conditioner, phone or a mixer, you ask about the product and its capabilities, not about the weather!

The same principles apply to investing. Focus your questions on your individual products in your portfolio not on the whole market and its conditions. The motor or engine optimizes to give you its best performance, based on weather and road conditions. The investment advisor’s engine a.k.a. brain will worry about the performance based on market conditions and bumpy roads to optimize your portfolio to best serve your needs.

What is the best scheme or product? How much should I invest? Is it a question of affordability or need?

Do you ask this question on all your purchases? Or do you instead ask if it is the best for me, best at a certain price and the best under certain conditions. It is a little bit like asking a vague question such as what is the best flight ticket or the best vacation destination? There is no right or correct answer. It depends on you, your needs, your budget, your goals, which differ from person to person. If you can get almost all features in a TV for Rs 70,000, should you spend Rs 3 lakh? Similarly, if saving 50k is enough via equities, then maybe the other surplus can be invested elsewhere.

What is a bigger risk? Risk of losing something or risk of doing something without knowing anything about it?

Marketing and sales aren’t what they used to be, the focus is more customer centric, rather than quantity of sales. Which is why, when it comes to investing in mutual funds, a financial professional who is vested in your success is important: basically, if you profit then they profit.

In theory, given the choice, you would naturally choose a 10% return on investment over a 5% return. In practice, the high risk associated with the 10% might make you choose the low risk 5%. I think a compromise between quality, risk and affordability is possible, and is a choice only you can make, but the right professional, and trustworthy person can guide you through these intricacies, and come to your own conclusions.

It is definitely important to ask right questions to get the right answers. In my opinion, the right questions are the questions we would normally ask ourselves. We identify a need followed by affordability, availability, and then we do our due diligence such as reviews and checking to see if the specifications fulfill our needs. If we can’t find the right answers or get confused during the process, we approach an advisor who can best put together a package or provide us piece meal advice.

In conclusion, knowing the right questions to ask an investment advisor is paramount to a successful relationship. A little introspection into your long-term or short-term goals, your budget, your needs, and your appetite for risk is required. Be honest with yourself, only you know yourself best and what works for you.

Happy Investing!

(By Deepak P Jain, Head – Sales, Edelweiss Asset Management Limited)

Disclaimer: Views expressed above are the author’s own.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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