Expert advice

Mar 03, 2014,17.29 IST

Get into mutual funds to expand your investments

Hemant Rustagi
Wiseinvest Advisors

The retail participation in mutual funds has been quite low in India for a number of reasons. Most baffling is the fact that despite being an ideal investment vehicle for investors with varying risk profile and needs, mutual funds have not been able to find a permanent place in their investment universe. How else can one explain the fact that equity funds only have around 3 crore folios? Considering that most investors would have multiple folios across the industry, the number of investors could be just around 5-6 million. In fact, even for a category like liquid funds, which can be an ideal substitute to savings bank account, the retail participation is dismally low. 

The low retail participation in mutual funds has been a subject of debate for long now. Although the industry often gets blamed for the lack of effort in this direction, there are a number of factors that are responsible for the current situation. The apathy of retail investors can be largely attributed to issues like poor perception, erratic performance and lack of understanding about market related products. Needless to say, it will require focused and combined effort from all the stakeholders like MF industry, advisors and regulators to tackle these issues. It is heartening to see these entities making since efforts in this direction.

In the interim, a better understanding of the concept and knowing what to expect in terms of performance can go a long way in changing the perception of mutual funds in the eyes of investing public. It is important for investors to know that mutual funds themselves are not an asset class (like equity and debt). In reality, they provide a mechanism that allows investors to invest in different asset classes.

For example, when one invests in an equity fund, the mandate for the fund manager is to invest in the stock market as per the investment objective and the strategy of the fund. Therefore, the right way to analyze the performance of this fund would be to consider its relative performance i.e. difference between the absolute return achieved by the stock market and the return achieved by the fund.

If the fund generates higher than market returns during bull markets and succeeds in restricting the fall in the NAV to less than the markets during downturns, it would tantamount to outperformance. Unfortunately, even in such cases, the fund manager gets the blame for   fund’s poor performance. Investors must also remember that when they invest in equity funds, they have to contend with the risk of volatility. Mutual funds, being diversified by nature, reduce the risk of volatility considerably. 

Of course, every fund may not be able to outperform its benchmark on a consistent basis. That’s why, selection of funds based on parameters like suitability, performance, investment strategy and quality of the portfolio holds the key to long-term investment success.

Unfortunately, even those investors who begin investing in equity funds after careful planning and selection often lose their faith during the prolonged periods of volatility. They either exit from these funds or stop making fresh investments.  This is where most investors go wrong. By continuing their investment process through their defined time horizon in a disciplined manner, they can not only tackle volatility well but also earn much higher absolute return than what they can earn from traditional options like FDs and bonds. The best way for an investor to remain disciplined is to align equity investments to his long-term goals.

Another misconception about mutual funds is that they offer only equity and equity related funds. The truth, however, is that investors have an option to invest in a variety of debt funds such as liquid, ultra-short term, short term and medium and long term income funds. In the closed end category, there are Fixed Maturity Plans (FMPs) that are akin to FDs.

Liquid and ultra-short term funds deserve a special mention here. These are the options that invest in money market and other short term debt instruments. This combination allows these funds to deliver higher returns than what one usually gets from a savings bank account and that too without compromising much on liquidity and safety of capital. Although these funds have been around for many years, there is hardly any retail presence in them. This is clearly a  case of missed opportunity for investors.

Mutual funds have been taking initiatives to make liquid funds more investor friendly. For example, Reliance mutual fund offers Any Time Money “ATM” card to investors in its schemes like Reliance Liquid fund-Treasury Plan or Reliance Money Manager fund. The card allows investors to withdraw /spend against their own mutual fund investments by providing access to Visa-enabled ATMs and merchant outlets across the world.

SBI mutual fund offers “m-Easy” facility that enables investors (who have a registered folio with SBI Mutual Fund) to purchase/redeem/switch the units of a scheme by sending SMS from their mobile phone number registered with AMC. Although this facility is available for a number of schemes, using this facility for an option like a liquid fund can make it an excellent alternative to a savings bank account.

In the present financial environment, it is necessary for investors to expand their investment universe by including a dynamic option like mutual funds in their portfolio. It is for all the stakeholders to ensure that investors get guidance not only when they want to get started but through their time horizon. On their part, investors must make efforts to understand the concept and the process as that will enhance their comfort level with this wonderful investment vehicle.

The author is a CEO at Wiseinvest Advisors. He can be reached at

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