scorecardresearchMutual funds: Investing secrets that every investor must know

Mutual funds: Investing secrets that every investor must know

Updated: 16 May 2023, 01:37 PM IST

To gain long term returns from mutual funds, investors should have correct expectations, understand the interplay of risk and reward, and invest with the help of a qualified advisor using a goal-based, collaborative approach.

Investing secrets every mutual fund investor must know

Investing secrets every mutual fund investor must know

Industry data looks promising, past returns look enticing, and everyone seems to be talking about how mutual funds are the best tool for long term wealth creation but you just don’t seem to be making money off them! If this sounds familiar, you’re not alone.

Every year, tens of thousands of mutual fund investors end up disappointed with their experiences and trudge back to the familiar (and unprofitable) realm of traditional investments.

Obviously, this is a misstep – and it’s not long before bullish headlines and tempting billboard ads draw them back in the fold, but the same patterns inevitably play out over and over. Why does this cycle repeat like clockwork? And how can you be different?

Unfortunately, the widespread efforts to commoditize mutual fund investing has contributed to the trend. Ironically, making mutual funds more easily accessible via direct plans and DIY apps has backfired to a large extent, because a lot of retail investors have jumped into them unassisted and with unclear objectives and misplaced expectations.

Over the past 5-7 years, the entire ecosystem has almost singularly focused on making it “easy to invest”, while paying scant attention to the long and tumultuous journey that lies ahead thereafter! So, while the process of completing your KYC formalities and setting up an investment account have become by and large frictionless, earning long term returns is just as difficult as it was back in the early 2000s.

Or perhaps, with all the information overload and unqualified “finfluencers” floating about these days, one could argue that it’s even tougher! Somebody rightfully said that “investing is easy, creating wealth is not”.

Which brings us to the next (and more important question) – how can you be different?

The first step to successful mutual fund investing would be to set correct expectations right off the bat. Mutual Fund returns are not going to be linear. In fact, the higher the fund’s wealth creation potential (for instance, small cap funds), the higher the volatility – meaning that you’ll need to see through some deeply frustrating low-return phases or nerve-wracking negative return phases to achieve long term returns from them.

Also, you will not be able to “predict” the best performing fund by studiously observing past returns or lagging indicators like alpha, beta or standard deviation- and neither is it important in the long run. What you want is a fund that delivers stable returns within its risk profile, without any rude shocks. Sometimes, short term outperformance comes at the cost of taking undue risks or deviating from the fund’s mandate, and chasing returns is a race that you’ll never win!

Gaining a thorough understanding of the interplay of risk and reward will not guarantee investing success because you’ll still feel a whole lot of emotions when your portfolio fluctuates (or stands still for long!), but it will definitely improve your chances of generating long term wealth, so start there.

And that brings us onto the next question: is there a proven, effective, and time-tested way to keep your emotions out of your mutual fund investments? Or at the very least, take the edge off them so that your chances of succumbing to greed and fear diminish? The answer is, yes – by working with a qualified advisor to invest based on clear financial goals, and by following correct investing practices.

Trouble is, the typical financial planning exercise is a boring and cumbersome process. There’s a lengthy Q&A session where the advisor asks questions and the client answers. These answers are then collated in a fancy looking PDF report and sent across to the client like a prescription of sorts.

Investments begin, but the “prescription” itself is conveniently forgotten in a couple of weeks! There’s a complete absence of collaboration, customization and joint decision making, and so the seeds of failure are planted at the beginning. These investments are “goal based” only in theory.

The need of the hour is the coming together of people and technology – technology to help set up and track goals jointly, visualise impact, gamify investing scenarios, and repeatedly bring the investor back to the financial plan for ongoing portfolio actions. And people - to help manage the human side of investing by acting as a coach, a guide – someone whouses the technology as an enabler to shine a light on your goals and show you the way.

Also, someone who guides you on the right portfolio actions like when to rebalance and de-risk, or how to invest systematically without timing the market. The result would be a much more aware investor who doesn’t frantically chase returns, doesn’t check their portfolio obsessively – but instead calmly rides the waves while keeping the bigger picture in mind.

Mutual Funds will continue to create wealth for patient, systematic, disciplined, process-oriented and goal-based investors. And they will continue to disappoint those who “buy” funds off the shelf from financial supermarkets, without clear objectives and with an incomplete understanding of how they work in the long run. Make sure you’re on the right side!

Harsh Gahlaut is the CEO of FinEdge


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First Published: 16 May 2023, 01:37 PM IST