Investment consultants in the country have yet to graduate to a level where they can offer investment solutions to their clients in a professional and unbiased manner. Sometimes a consultant has so many other 'considerations' that rarely does he offer the right product to his clientele. This is something that has hampered the growth of the mutual fund industry and hasn't allowed it to flourish to the extent it should have.
There are too many dissatisfied investors with too many duds in their mutual fund portfolios. The cynicism got accentuated post-2000 when high-risk tech funds dominated investor portfolios. It has taken a huge rally in equity markets for investors to forgive and forget their own misadventures on the advice of their investment consultants.
It is important for investors to appreciate that an investment consultant maybe more keen on selling schemes from a particular fund house because of the equation he enjoys with the latter. The incentives, brokerage, international trips/holidays constitute a part of the deal. Of course, the investor never learns of these 'details'. All he is told of is the return the scheme has generated over the last few months.
Even basic information like comparison with peers and benchmark indices is overlooked. Of course, how the scheme can fit into the investor's investment profile does not even come up for discussion. To throw light on the latter is the consultant's most critical duty. From the investor's perspective it is the most pertinent criterion that guides him to take an investment decision. Since this discussion is ignored by both the parties, financial disasters are scripted with distressing frequency.
Let us try to understand this with the help of some real life examples.
Does it match your investment profile?
| Diversified equity schemes | NAV (Rs) | 6-Mth | 1-Yr | 3-Yr | 5-Yr | Incep. | SD |
| HDFC EQUITY G | 47.81 | 78.9% | 117.8% | 34.6% | 40.2% | 19.9% | 5.75% |
| HDFC TOP 200 G | 36.35 | 71.1% | 116.0% | 32.0% | NA | 28.3% | 5.39% |
| SUNDARAM GROWTH G | 24.1 | 72.2% | 96.5% | 19.8% | 25.6% | 20.6% | 5.06% |
| ALLIANCE EQUITY G | 51.39 | 75.3% | 105.5% | 10.1% | 38.9% | 35.5% | 6.50% |
In the table, HDFC Equity Fund is easily the best performing fund. Its performance over the varying time frames has been impressive. At a contrast to HDFC Equity's impressive show is Sundaram Growth's steady performance. However, HDFC Equity outperforms Sundaram Growth only in NAV performance. In terms of volatility (SD standard deviation), Sundaram Growth has fared decidedly better.
If one had to interpret the above data more accurately it would go like this -- HDFC Equity's NAV has appreciated (across time frames) more than others in its peer group. However, the fund has not been able to curtail volatility in its performance vis-à-vis Sundaram Growth Fund. So investors who have an aggressive risk profile can opt for HDFC Equity Fund but must be prepared to see more volatility in the fund's performance. On the other hand if they do not have the stomach for it and would rather invest in an unspectacular but steady fund, they must select Sundaram Growth.
Ideally this is how an investment decision must be made. The consultant must spell it out to you analytically regardless of whether your choice 'suits' him or not. But, that is rarely the case. The additional risk one takes by investing in a particular fund is never highlighted to the investor.
For instance, equity markets have witnessed a very sharp runup over the past few months. Most consultants have been advising their clients to enter equity funds all along. In other words, consultants have been telling their clients to invest in equity funds even when the Sensex was at 3,000 points as well as at current levels (over 5,400 points).
The additional risk of entering at such a high level is not pointed out to the investor. Now contrast this with what Prashant Jain (Head - Equity, HDFC MF) has to say, 'From a longer term prospective, while the markets are not as attractive as they were six months back, it would be correct to say that there is reasonable upside for the medium to long term investor.'
Likewise we have a spate of some very aggressive MIPs (monthly income plans) being launched. Until now, MIPs were projected as a balanced fund with a predominant debt exposure with a 10-15% equity component to boost returns. The recent slew of MIPs allow the fund manager to go upto 20-25% in equities. Again this implies higher risk. Should there be a correction in equity markets, these funds could be hit harder than the conservative MIPs (with lower equity component). The advice to the investor needs to include this 'caveat'. Most investors aren't upset when their investments go wrong, they only get upset when the risk in the investment isn't outlined to them at the outset.
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