Investors should be very careful while making the choice of which and how many funds they need, says Nitesh Buddhadev, Founder, Nimit Consultancy.
In an interview with MintGenie, Buddhadev said thatinformation may not be easily accessible and analyzing all this information from an investor perspective may be difficult, so investors may consider taking professional help.
Edited Excerpts:
Q. While analyzing any product such as a mutual fund, it is very important to analyze the qualitative data, not just the quantitative data. How do you advise investors to do that?
Investing is an art as well as a science. Both the qualitative and quantitative data both should be analyzed for making investment decisions. To follow a scientific approach towards investments lot of data and information is available in the public domain but since investment is an art too qualitative information should be considered. Qualitative aspects of the leadership team such as expertise, team size, investment philosophy, risk management process, etc should be analyzed.
Investors may also consider investment process, reliance on sell-side research, internal research team, etc. The knowledge of qualitative aspects of leadership can be gained through reading, attending seminars, interviews, etc. Maintain a journal, keep a tab on the fund manager or AMC management commentary, and see whether the leadership practices what they preach. Investors should also look out for any corporate governance concerns.
Q. For quantitative data, you have numbers and various software. How do you gauge the quality of a mutual fund?
This is a very subjective matter. Qualitative information is not accessible easily in the public domain. Over and above the qualitative aspects mentioned above, one may consider the actual performance of the fund, fund disclosure, and transparency. We may also see if the fund manager is walking the talk. Is the active portfolio allocation matching the fund manager’s investment philosophy? Investors can also compare the investment of other funds being managed by the same fund manager.
We may also consider whether the fund is being managed by a single fund manager or multiple as more reliance on the fund manager’s performance in the case of a single fund manager. As much of this information may not be easily accessible and analyzing all this information from an investor perspective may be difficult, investors may consider taking professional help.
Q. Too many investors plan their investments based on their possible tax liability. How do you think investors must proceed while deciding their investments or rejigging their asset allocation?
Tax is one of the aspects investors must consider while making investment decisions because ultimately as an investor what matters is the money you take home which is net of cost and tax liability. However, tax shouldn’t be the only or the main criterion to make investment decisions. Investment decisions should be based on financial goals, risk profile, time horizon, etc.
In the calculations for return on investment, one should deduct estimated tax liability from the estimated returns on investment to make the calculations more realistic. However, the investment decisions should be purely made considering the financial goals and risk profile. Once the decision is made then the most tax-efficient manner of exiting or entering the investment should be used.
Q. Mutual fund houses are coming up with new fund offers in the leftover categories. Do you think investors should opt for investing in any one of them or prefer to put their money in existing funds?
As SEBI has restricted having more than one scheme in one category, mutual fund houses are coming up with new fund offers (NFO) in leftover or thematic categories. Mutual fund houses are manufacturers of the funds, they may offer all kinds of products, however, the investors should be cautious while making the choice of which and how many funds they need. Too much diversification may not be beneficial for the portfolio. Investors should look at NFO only if their portfolio requires it. In most cases, it’s not needed. It’s best to shy away from NFOs if your portfolio does not need such a kind of thematic investment.
Q. Indians are mostly cost-savvy. However, the same investors ignore the expense ratios of various mutual funds before deciding whether they are worth their choice. Why has the industry failed to educate investors about the importance of comparing expense ratios too?
I am of the opinion that when it comes to cost, one should have a “Value for Money” approach. Financial literacy is an important aspect that impacts investment decision-making. Financial literacy includes knowledge of the costs of an investment, determination of return on investments, which product is suitable, etc. This is required for any investment decision-making and not only mutual funds. Many efforts are being made by SEBI, AMFI, mutual fund distributors, advisors, and media houses to increase financial literacy and spread awareness of these aspects to consider while investment decision-making.
