Dilemmas that mutual fund investors face

Vivek Sharma

Mutual fund schemes are often pitched as the financial product which an investor should use for sustainable wealth creation. But mutual funds are not panacea for all investment requirements of an investor. Any investor having invested in mutual fund schemes would have got mixed experience. Since most of the mutual funds mirror market performance though not essentially in a linear way, the returns from mutual fund tend to vary as the market changes. Not only this, some mutual fund schemes fail even in a rising market as the fund manager fails to find the right investment algorithm required to make a scheme work successfully. So what does all this result into? Looking at past performance of mutual funds in India, particularly last six years of experience of equity mutual fund performance in India, any investor would typically undergo the following dilemma:

Which is the most suited fund for me?  When markets are on the rise, almost every fund performs. It is like swimming with the tide. Some schemes which fail to perform during this period do not even get noticed because return generated by them, though low compared to the market, are still good enough to keep an investor stick to the fund. But the real challenge arises when the market stops performing or starts behaving the way we have seen in India in recent times. Selecting one fund from a given list of 300 odd equity mutual fund schemes become a big challenge. What should an investor do? Should he go with star rated funds or look at last one year performance. But here also a dilemma engulfs him. After all, past performance cannot be sustained in future. If he goes with the best performing fund at the time of investment based on one, two or three years return, won’t he get surprised in the future? There is every possibility of surprise and a potential disappointment.

If the scheme selected by me fails to perform:  The next important dilemma that comes after this is what if the scheme of mutual fund selected by an investor fails to perform. Should the investor exit the fund, stay invested so that tide turns in his favor or just ignores such events as the loyal long term investor? This is not an easy question to answer even if help of behavioral finance is taken. The best practice here is to analyse the performance periodically but that does not help much. It is very much possible that the day on which you have decided to abandon a fund, it starts performing and then you have no option but to repent.