This may sound like a question whose time is long past… most
invest in Mutual fund schemes and it is known that, for the normal investor,
this is definitely a very good investment option.
There are several things going for Mutual fund schemes. One
of them is that you get professional oversight for a small fund management fee
( which is about 1%). You get unparalleled diversification, which is possible
for as low an investment amount as Rs.5,000/-.
Thirdly, liquidity is assured as the counter party is the Mutual fund
and they will redeem the unit at the prevailing NAV. You will not have a
situation like in the case of some penny stock, where there is no one to buy
the clutch of shares you own. Fourthly, the investment amount is pretty low.
There are different flavours of funds to suit every investment type and risk
profile. What’s more, the equity funds
enjoy nil capital gains tax, after one year of investments and debt funds
provide far more benign capital gains tax treatment as compared to other fixed
income products. All in all, it seems like a winner.
Now, if you get all these served up in a Mutual Fund scheme,
what are the costs? In any product that
we procure, including financial products, there are costs involved. If it is a
soap, the costs involved are raw material, manufacturing & overhead costs,
the company’s profit and the cost of sales, advertising, marketing and
distribution. The cost of the raw material, overhead & manufacturing may
just be 50% of the final price. All the rest of the costs come in later.
In case of farm products, it is worse. The final price the
customer pays is 4-10 times the farm-gate
prices! This is a well-documented fact and we pay these prices as there is no
other alternative, for the moment. So,
in every industry, there would be costs involved in reaching the product to the
end customer.
In case of Mutual funds, for all the convenience it confers,
the costs are recovered by way of an expense that the fund charges. Currently,
it is capped at a maximum of 2.5%pa of schemes net assets, for equity assets. This
is the only revenue for a MF fund house, with which to run the show. This is expected to go up now by 0.25%.
This means that out of your income, you would be forgoing
2.5%. Is it worth it? That is the debate. Let us examine.
Margin
of outperformance - A good fund can outperform the index by a wide margin. As
an example, the top 20 MF large-cap schemes have offered one year returns of
between 1.28% and -3.99%. Whereas the corresponding indices have given one year
performances of -6.5% to -8.17%. In this
case, there is a clear outperformance enough to justify the expenses. However,
if one had invested in the next 20, their one year performance were between
-4.2% to -7.07%, which do not fully cover the expenses paid. Hence, to fully recover the expenses, one
must invest in good, performing funds. But, performance keeps changing on a
monthly, quarterly basis.
It’s
not always about expenses, though - We
need to understand a key aspect. It is not always about expenses. In life too,
we spend on petrol and car for convenience. Similarly, there are major
advantages discussed earlier in a MF scheme, due to which the expenses are
justified. Out performance is one of
them. There is just no point in obsessing over this alone, like a lot of people
do.
Portfolio
review - That does not mean that one should be oblivious to fund
performance. Fund performance is very important indeed. It is necessary to keep track of what is
happening in the scheme one has invested. A review from time to time is vital. Such a
review & investigation will reveal,
if there are fundamental changes that needs to be factored in. Fund manager change
is a fundamental change, irrespective of what processes a fund house may have.
When a fund is being revamped or repositioned, there can be sweeping changes.
Changes can also be in terms of sectoral allocations, cash calls and moving
substantially from the core objective of the scheme. In such cases, changes may
be required. For this, one needs to keep track. If that is difficult, one needs
to take help of an investment advisor.
Asset
allocation – Each person’s need is different. The portfolio that works for
one, need not be suitable for another. Hence, don’t just look at five star funds and
make the portfolio. One might end up
with a sectoral or small cap fund portfolio, which may not be what would be suitable.
Having assets across categories brings down the risk, though it may be tempting
to put everything in what seems to be performing today ( it was Gold sometime
back !).
In conclusion, Mutual fund schemes offer a
lot of advantages like assured liquidity, amazing diversification, professional
expertise, ease of management etc. There
are expenses, but it confers several benefits we have discussed about. Also, if the fund manager is able to beat the
performance of the corresponding index and offer that monetary incentive to
invest in a MF scheme, so much the better. Many of them do. One will need to do
a bit of homework or take help.
Lastly, MF is a longterm investment. Stay
with it & it will be rewarding.
Article by
Suresh Sadagopan, Founder, www.ladder7.co.in Published in Moneycontrol.com on 20/7/2012
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