Dec 19, 2012, 05.15 PM | Source: CNBC-TV18
In an interview to CNBC, Hemant Rustagi of Wiseinvest Advisors shared his outlook on investing in mutual funds (MFs).
Hemant Rustagi (more)
CEO, Wiseinvest Advisors | Capital Expertise: Mutual Funds
He sheds light on various myths associated with MFs. 'If investors can overcome the misconceptions about mutual funds then they can benefit a lot from mutual fund as an investment method," he told the channel.
Below is the edited transcript of his interview with CNBC-TV18's Latha Ventakesh and Reema Tendulkar
Q: There are a lot of myths which are associated with mutual funds (MF) particularly on the retail side because they always associate mutual funds related to equity. Could you take us through some of the common misconceptions that you have come across and even the alternatives to the same?
A: One of the reasons why mutual funds have failed to find a permanent place in the investment universe of Indian investor is the myths that you just mentioned. The fact is that mutual funds offer a variety of schemes under each of the assets classes like you have debt, you have gold, and you have equity. But the fact that mutual funds are still equated to equity is a clear example that there is lack of awareness about mutual fund as in investment option. The time has come for investors to realize that mutual funds are much more than just equity or equity fund.
Even on the debt side, mutual funds offer a variety of funds and investors can choose one depending on his time horizon. There are liquid funds, there are ultra short-term funds, there are short-term debt funds, income funds, and income hybrid funds. So there are a lot of income funds which are available. It is time for investors to look beyond traditional options like fixed deposits (FDs) and bonds and debentures and consider investing in these funds to give themselves a chance to earn higher real rate of return which is post tax return minus inflation.
In fact there are few other misconceptions that an investor needs to overcome, if they want to benefit from mutual fund as an investment vehicle. The first misconception is that mutual funds are meant mainly for investors who are tax payers. It is a fact that mutual fund is one of the most tax efficient investment vehicles available today, but it is wrong to assume that there is nothing in it for those who do not pay tax. The reality is that mutual fund offers a variety of funds today for investor with different time horizon, different risk profile and different investment goals.
Apart from this there are many other advantages of investing in mutual funds like, one can benefit from diversification. Even with a small sum of money, one can get access to well diversified portfolio or stocks or income securities depending on the kind of fund he is investing in. Two, there is complete liquidity. The open ended funds which allow investors to exit or enter at any time on Net asset value (NAV) base prices. There is a complete flexibility of realigning the portfolio and there are full time professionals who manage the money of investors.
Three, the mutual fund industry is a very well regulated industry which ensures that there is a complete transparency in the way investors’ money is managed and also how it is valued. So, it is important for investors to realize that mutual funds are meant for all kind of investors.
Second misconception that most investors have is that performance is the only criteria for investing in mutual funds. Performance is important, but relying on short-term performance can be quite risky. For example, in a rising market scenario, we see that funds like sector fund, thematic fund and specialty funds do better. But if one were to follow the strategy of relying only on the performance, one would end up investing predominantly in very aggressive funds which invariably will take him beyond his risk taking capacity.
Even on the debt side, at the beginning of reversal in the interest rate cycle, before the interest rates are going down, the performance of income fund will not look great. But then if one were to rely only on the performance, one would miss out the chance of investing in debt funds that make reasonably good money.
The third misconception that many investors have is that they need to book profits every now and then, especially when they invest in equity funds. In fact while doing that they exit from the asset class completely, this is not the right way. Investors who want to book profit or want to make sure that the portfolio remains within the risk profile should follow a strategy of rebalancing the portfolio.
Rebalancing is a process when equity markets are doing well take part of money out of equity funds and put some money into the debt funds. And when the equity markets are not doing well, take some money out of debt and put it into equity. This is the right way and doing this once in a year will ensure that not only are the returns tax efficient but one also gives enough time to the funds to perform.
So, if investors can overcome some of these misconceptions about mutual funds they can benefit a lot from mutual fund as an investment method.
Caller Q: I am a new investor and can I begin investing in mutual funds through the systematic investment plan (SIP) right away or should I wait for a dip?
A: One of the major advantages of investing through systematic investment plan, which is a disciplined way of investing in mutual funds, is that one can avoid committing too much money at a particular level. As we all know that volatility is a natural phenomenon in the stock market and that is why one benefits from averaging over a longer period. It is important for the caller to understand that investing through SIP is a process and not a one time activity. Therefore, the current level of the market is immaterial especially if you are investing for a long-term.
I would like the caller to remember three or four things before she starts her investment process, even if it is through SIP. One, she should choose the fund very wisely. That will depend on the time horizon. If she has money to be invested for a longer period, then she can look at equity funds, if it is for medium-term she can look at hybrid funds and if it if for short-term, then she can look at debt fund. It is very important to first decide the right asset class and then decide the fund.
Two, she should be looking at diversified investment vehicles like mutual funds to invest because even with a small sum of money she will be having access to a well diversified portfolio. If she is investing equity funds then she should avoid sector, thematic and those aggressive funds. These funds do have a place in the portfolio but they should be looked at only when one becomes more comfortable with asset class and also one has built up a reasonable sized portfolio.
Three, it is important to continue this investment process through the time horizon. Many times investors stop investing whenever there is a dip in the market or when the markets are doing well, exit completely. This kind of situation should be avoided.
Last but not the least, it is important for her to continue monitoring the funds performance. The commitment, especially for the long-term, is for the asset class and not for the fund that one is invested in. So, if the fund is not performing well vis-à-vis the peer group or the benchmark, over a period of 12 months or more. Then it will be time to exit from there and look at some other fund. These are important things one needs to look at or consider before investing through SIP.