Expert advice

Nov 12, 2013,16.01 IST

Investor feedback - is mutual fund industry listening?

Dr. Renu Pothen

Some weeks back, an article in a leading Daily, titled “Chit Funds safer than MFs”, came as a rude shock to people associated with the Mutual Fund (MF) Industry. The contents of this article should actually lead to introspection among the industry experts, as mutual funds are considered to be one of the safest instruments in the market and being in a well regulated environment, it should be a cause of concern if our investors think otherwise about MF investments.

The article captured results from a survey conducted by Cafemutual and the target audience were people from cities and towns beyond the top 15 metros and large cities (B-15).The main gist of the above article was as follows:

  • 83% of the respondents graded mutual funds as high risk investment vehicles and only 4% were of the opinion that that they carried a low level of risk. On the other hand, 30% of the respondents were of the opinion that chit funds are high risk investments while 52% think that they carry moderate level of risk.
  • Majority of the people who have not been introduced to mutual funds prefer life insurance policies and bank FDs to meet their financial goals.
  • 61% of mutual fund investors review their investments after every 3 months or more while only 11% of them review it on a weekly basis.
  • 60% of MF investors say that their investment experience has been good or even better while 40% rate their experience as average or bad.
  • 35% of the investors use the SIP route to invest into funds.

Source: The Times of India-October 18, 2013.

The intention of this column is to put forward certain points which should give some confidence to our investors to take an exposure into mutual funds and certain observations about the mutual fund industry which definitely call for change.

Mutual Funds are instruments wherein investor’s resources are pooled together and is given to an expert fund management team who then allocates it among different equities or fixed income instruments. Here the investor needs to be aware of initiating his / her investments based on their risk profile and the time horizon and goals that they need to achieve. The investor shouldn’t blindly put his / her hard earned money into any mutual fund but should carefully select the funds to be included in his/her portfolio depending on the above considerations.

A quick glance through many of the already existing portfolios shows that a good number of investors have around 4-5 funds from the same category. For instance, during 2007-08, when the hottest product in the mutual fund industry was infrastructure funds, a lot of investor portfolios were cluttered with infrastructure funds from different fund houses. We can always play the blame game here by either pointing fingers at the fund houses or the distributors, but in the end the investors have to do their homework before blindly constructing a portfolio.

An important concern that has been raised in the survey is that investors don’t think that mutual funds will enable them to achieve their financial goals. I had raised this issue around 2 years back in the same column and had urged mutual fund investors to have goal-based schemes in their portfolios. The reason behind this thinking was that if we create portfolios for investors to achieve a specific goal, then the general tendency is that the moment the markets behave randomly investors will press the panic button without even thinking about long term purpose of constructing such a portfolio.

There is also a wrong impression among investors that funds which are managed by star fund managers and have the highest corpus, are the funds that will be able to deliver better performance. Here I would want the numbers to do the talking for me. For instance, if an investor has been doing an SIP into the two largest equity funds in the industry, i.e.HDFC Top 200 Fund and HDFC Equity Fund, over a period of 5 years, then these funds would have delivered a return of 7.93% and 8% whereas some of the late entrants in the industry like ICICI Prudential Focused Bluechip Equity Fund and Mirae Asset India Opportunities Fund have delivered 12.91% and 12.65% respectively.

Mutual Fund Industry:
The biggest learning for all of us from this survey is that mutual fund penetration should be the biggest priority for the all players in the mutual fund industry.

Some of the concerns that need to be addressed by the industry:
Investor awareness should be given the highest priority. Here what I mean is that investors should be made aware about the pros and cons of a particular fund, so that they can take a wise decision before investing in the same. For instance, very recently the industry started promoting Debt Funds as a substitute for Fixed Deposits. However, investors were not aware about the risk involved in these funds and the negative performance seen in the safest of debt funds like liquid and ultra short term funds made the investors lose faith in what we were actually doing.

Fund Houses should bring in some sanity as far as the categorization of funds are concerned. Here I am referring to the fact that if we look at a particular category then several fund houses have more than 3 funds in the same category with similar investment strategies. This creates confusion for the investors.

Fund Houses should stick to the mandate as mentioned in their offer document and whenever undue risk is being taken in the portfolios, it should be communicated to the investors so that they can enter into that particular scheme only if they have the required risk appetite.

To conclude, these are only a few pointers for the investors and mutual fund industry players, which, if addressed properly can help to resolve the issues highlighted in the survey.

The author is a Research Head at India.

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