21 May, 2011

Simple pointers to MF investing

Mutual Fund investing is not very exciting. It is probably marginally better than investing in Post office schemes. It’s certainly no patch on direct stock market investments, where there is unbounded excitement – the rush of adrenalin and the frenzy one could experience when the stock markets soar…

Though stock markets are exciting places if you are looking for the thrills, Mutual Funds continues to be an excellent option, for normal investors. The most important criteria while investing - it should offer a reasonably good return commensurate with the risk. In Mutual funds, there is a fund manager, an expert who manages the investments, which is a positive… as most investors do not have the time or the expertise in the investment area.

While choosing Mutual fund schemes, there is a certain bit of diligence, which is required. Let’s look at them in turn.

Following the stars : Lots of investors follow the stars assigned to a scheme by various firms who rate the performance of the schemes. The rating criteria of different agencies would be different and the number of stars may be different for the same scheme, from different agencies. That would result in confusion. Also, a four or five star rated scheme may not be performing well now and may still retain the rating as the agency may have looked at the long-term performance primarily, for assigning the rating. So, if the short-term performance has taken a hit because the fund manager has changed or the scheme has started invested in non-performing sectors or has retained a lot in cash when the markets soar, that does not get factored in the rating. Investing in such a scheme may not be a great idea.

As an investor, it is hence better to do a bit of reading to find out if the scheme in question is indeed as good as the stars behind them. It is easy today to get all kinds of information on a scheme on the net, which will highlight other aspects that you would need to know before investing – like fund manager change, scheme merging with another scheme, company takeover or more mundane reasons like wrong timing, cash calls going wrong, investment theme being out of flavor etc. Look at the stars, but scan the cosmos before putting you money!

Timing the market : There is an urge among investors to time the market to a nicety! It happens in books – not in real life. Fund managers would give their right arm to get this ability! Even they do not get this right – several fund managers missed the rally that started in March 2009 and got on board much later in June/ july 2009. But still, some investors retain their cockiness – they assume they can time the market. Once, twice maybe. It’s just not possible on a consistent basis. It is far better to invest regularly on a monthly basis, through SIPs, which will help even out these fluctuations and infact help in taking advantage of the whip-saw movements. Big onetime investments can be done through Systematic Transfer to Equity funds after investing in an appropriate debt scheme. Spend time in the market instead of timing the market.

Despairing after investing : Many investors suffer from bouts of self-doubt after they have invested – especially if the market has corrected and their returns have come down or entered the negative territory. They wonder if they were much better off staying with the FD, like their bank manager keeps repeating. Maybe, the amount in SIPs could have been lower. Maybe, they should have invested in equity directly… The last bit is even more confounding as many people assume that the fund manager is goofing up big time and that is why they see poor returns and feel they could have done a better job!

The basic point is that MF investments are subject to market fluctuations, which certainly does not mean that they will not be able to deliver good returns. They will, over time. Sensex has delivered about 18% returns since inception, though there have been periods of poor to massive negative returns. After investing, one needs to give time. There is also no sense in panicking and withdrawing the money or switching to other schemes. Faith and patience are the watch words here.

Investing blindly : There are fads and sensational themes at different points. Some of these fads may actually be good and may even be worthy of investments. Some may just be a lot of hot air. Pursing all fads would only end in grief.

Also, many investors have the “strategy” of investing in all NFOs that come into the market as the NAV will be 10. NFOs start their life with a disadvantage in that they do not have a performance history and many times may be run by a brand new fund manager and may also follow a new theme. These in itself are significant negatives. But, investors chase NFOs, like cats after mice.

Friends and colleagues are credible source for investment information for investors. It does not matter that their friends and colleagues invested based on information from their other friends. In short, many times, investors seek short cuts to making an investment choice and end up with ones, wholly unsuited to them. Copy paste investments seldom work. There is no substitute to a bit of work before investing.

With a bit of spade work, one would end up choosing schemes that work well. It’s not difficult. It’s most certainly rewarding. It may not be as exciting as stock investing. But then, you could always bungee jump or do white water rafting for the adrenaline rush. Why put your money on the line?

Article by Suresh Sadagopan; Published in moneycontrol.com on 8/4/2011

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