Few would dispute the utility that mutual funds as investment avenues can add to investors' portfolios. Similarly, in recent times, the greater acceptance of mutual funds and their impressive showing in the domestic context has been chronicled in detail. There is also a huge amount of information available on how to invest in mutual funds and make the most of them.
Sadly, little is being done to remove the several misconceptions doing the rounds. Thanks to these misconceptions, investors end up making incorrect investment decisions. In this article, we expose three common mutual fund misconceptions.
SIP is an investment avenue
SIP (systematic investment plan) is a buzzword of sorts in the mutual fund industry. Fund houses have done their bit to spread the gospel of SIP among investors. Advertisement campaigns exhorting investors to invest via an SIP are common place. However, many investors have been led to believe that SIP is an investment avenue. It is not uncommon to find investors who want to invest in an 'SIP fund' (incidentally, there was even a mutual fund launched with that name).
The fact: SIP is a mode of investment, not an investment avenue. The conventional method of mutual fund investing entails making one-time lump sum investments. SIP investing involves making regular investments in a staggered manner. By spreading the investments over longer time frames (at least 12-24 months), investors stand to gain by lowering the average purchase cost vis-à-vis lump sum investments. This is most evident when equity markets experience prolonged bouts of turbulence. Also, SIP investing tends to be lighter on the wallet as opposed to lump sum investing.
'Since inception' numbers are comparable
It is a common practice to evaluate equity-oriented funds by comparing their performances over longer time frames like three and five years. At times, investors are known to draw conclusions based on 'since inception' performances. 'Since inception' refers to the growth clocked by a fund since its origin.
The fact: 'Since inception' performances are not comparable, simply because not all funds have the same inception date. For example, a diversified equity fund launched in 1995 can be compared with another fund launched in 2002 over the 3-Yr and 5-Yr time frames. However comparing their 'since inception' performances would be inappropriate because the first fund has a 13-Yr track record while the latter has been in existence for 6 years. A fund's performance since its inception can at best be considered for drawing comparisons vis-à-vis the benchmark index (i.e. by considering a corresponding period) to evaluate its relative performance.
Thematic funds make good investments
This is likely to be the most disputed misconception. After all, most thematic funds have delivered superlative performances over the last 18-24 months. Let's not forget that just about every fund house worth its salt is launching thematic NFOs (new fund offers) and that includes fund houses like HDFC Mutual Fund which were always averse to the idea. Clearly, the worthiness of thematic funds cannot be doubted.
The fact: All the hype surrounding thematic funds doesn't change the fact that they are high risk-high return investment propositions. Furthermore, such funds can deliver only so long as the underlying theme does well; once the theme runs out of steam (every theme does at some point in time), so does the fund. And given the restrictive investment mandate of a thematic fund, the fund manager has no option but to stay invested even in the aforementioned scenario.
Conversely, there are diversified equity funds that invest in an unrestricted manner. By not being tied down to any specific theme, they are free to seek attractive investment opportunities across the investment universe. Statistics reveal that over longer time frames (more than 5 years) well-managed diversified equity funds are known to score over their thematic peers. More importantly, diversified equity funds are known to outscore their thematic peers on the risk parameters i.e. they expose investors to lower risk levels.
At best, thematic funds are suited for informed investors who can time their entry into and exit from the fund. Retail investors should stick to diversified equity funds with proven track records over longer time frames and across market phases.
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