If you ask us, investing in a mutual fund can be a huge burden off the investor's back. Why? Because if it weren't for the mutual fund, the investor would have been investing directly in the equity/debt markets on his own. That is why at Personalfn, we find it surprising when mutual fund investors begin questioning their fund manager's investment decisions as if they know a thing or two about investing that their fund manager doesn't.
The merits of mutual fund investing have found mention in several books of finance and investment, as also on Personalfn; it's time to revisit them, to remind the investor why he invested in a mutual fund in the first place. As an investor you have probably invested in a mutual fund for one (or all) of these reasons:
1) You want to grow your money through investments in equity/debt markets but do not have the time and expertise to do it on your own.
2) You want to invest in equity/debt markets; you have the time and expertise to make the investments but aren't sure if you will be able to do so over the long-term.
3) Regardless of whether you have the time or expertise, you prefer mutual funds for the sheer breadth of investment options like equity funds, debt funds, tax-saving funds (equity-linked saving schemes ELSS) and hybrid funds (balanced funds, monthly income plans MIPs) among others. The convenience of investing offered by mutual funds through options like systematic investment plans (SIPs) only enhances the investment experience.
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Notice that most investors prefer mutual funds because they face serious constraints on their time. They have either little or no inclination to research their investments and even when they have the inclination, they aren't sure how long they can keep up with the demands of investing.
Investors who invest directly in equity/debt markets will vouch for the demands of investing that we are referring to over here. To be a successful investor:
a) You have to research and then form a view on among other areas the economy, markets and interest rates at a global and domestic level.
b) Having understood this, you have to identify sectors and companies that are best placed to generate above-average growth over the long-term.
c) Having identified these sectors and companies you have to keep on researching/tracking them on a regular basis to test your original premise of investing in these sectors and companies.
It is apparent that researching/investing is 'exclusive' in the sense that not everyone can claim to be good at it or even have the time for it. This is because of the sheer volume of research and analysis that must be done before arriving at a 'simple' investment decision. Fund houses recognise the gravity of the situation, which is why they have a team of analysts that assist the fund manager. Put together, there are a lot of people working to ensure that the investor's money is invested in the right avenues.
A lot of investors must be wondering why we are saying this because they probably know it already. We are wondering the same thing -- if investors already know this, why do they question the fund manager's investment decisions despite knowing that he knows more about investing and finance than them; and that is the reason why he is managing their money and not the other way round.
For some time now, at Personalfn, we have seen investors question their fund manager's decision to invest in software/technology companies despite the rising rupee. We think we should give some credit to fund managers; if the lay investor can see the impact of the rising rupee on the profitability of software companies, then the fund manager probably saw this even earlier. If despite this the fund manager chooses to invest/remain invested in software companies it's probably because unlike the lay investor he can foresee some events (based on his research) that are not foreseen by the investor (due to lack of research). In such a situation, the investor must trust his fund manager with his investment decisions instead of second-guessing him. If the investor doesn't trust his fund manager with his investment calls, then he either needs to learn to trust him or exit the mutual fund completely.
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We are not saying that investors must trust their fund managers blindly, however, once they have identified a mutual fund for investment, they need to have a certain level of confidence in their fund manager's investment decisions. Of course, the decision to invest in a mutual fund must never be taken frivolously. It's a decision that must be taken after consulting an honest and competent financial planner, who will shortlist the mutual funds that are best suited for the investor. Once that is done, it's the fund manager's job to take care of the investments and the financial planner's job to track the performance and investment decisions of the mutual fund. The investor on his part should refrain from 'backseat' fund management.
By Personalfn.com, a financial planning initiative
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