Of the almost 4 crore unique investors in Indian mutual funds currently, over 1.5 crore have invested for the first time only in the last five years. As an industry, it is now our responsibility to check if these new investors are likely to have a good investing experience in their first brush with mutual funds. Are they getting adequate information on the funds? Doing the necessary research? Making well-informed decisions? They will need all of the above to have confidence in their investments and stay invested for the long-term.
Undeniably, the Mutual Funds Sahi Hai campaign — an initiative to provide information on mutual funds investment and its basics, has contributed significantly to the growth of new investors in the industry. It has certainly raised awareness about this category of investments and brought in a wave of new investors. Many of these new investors tend to be self-directed; they typically leverage their current investment platforms and look at a few key features when deciding where to invest.
When I speak to such investors, the typical process they follow can be broadly summarised as; “...sort by AUM to get the largest funds, and then sort by their performance rating.” While this seems intuitive, there are some implicit assumptions involved here that must be checked for fallacies.
Sorting by AUM seems sensible — until you realise that fund size does not guarantee better performance. Larger funds typically find it more difficult to identify newer investment opportunities and deploy at scale as easily as smaller funds. Clearly, size of the fund is not necessarily a good indicator of future returns.
Let us now look at past performance. If a fund has performed very well in the last 3 years, it must be a truly exceptional one to also perform similarly in the coming three years. Past performance is not a guarantee of future returns, and this is particularly true in sectoral funds. Many retail investors buy into sectoral funds after seeing good 3 year returns. However, they fail to realise that they might be getting in when that sector’s cycle has already played out—they then ride the down cycle of the sectoral fund and are left bitterly disappointed with their returns.
So, what should an investor do? If AUM and past returns are not great indicators of whether a fund will do well in the future, how can investors decide which fund to invest in? This is where a fundamentally new approach to investing is required. In my view, investors (after carefully assessing their goals and risk tolerance) should craft their portfolio of funds keeping in mind the “future prospects” of the fund — like what they would do for equity investments.
In equity schemes, to determine the future prospects of the fund, investors should ask themselves and their advisors the following questions:
1.
What is the investment philosophy of the fund house that is bringing this fund to market?
2. Is there any differentiator that can lead to superior long-term performance?
3. What is the strategy with which this specific fund is investing?
4. Can this strategy outperform the underlying index? What is the rationale?
5. What are the capabilities of the fund manager responsible for the fund’s investments?
A capable, seasoned advisor who has the investor’s best interests at heart should be able to answer these questions for his/her investors. A conversation around these questions will also strengthen the investor’s confidence in the fund selection, and they are then more likely to stay invested, when compared to someone who has been given a “curated list” of funds to invest in.
Recent economic data and behavioural trends suggest that, by 2030, there could be more than 15 crore unique investors in Indian mutual funds. With public service campaigns like Mutual Funds Sahi Hai acting as a flagship for the industry, and significantly improving its popularity among Indians, it’s easy to visualise a future in which mutual funds become as commonplace as OTT platforms, or food delivery apps.
To ensure that these new investors stay invested for the long-term, it is vital that these investors have an agreeable investing experience and develop confidence in the product. The conversations outlined in this article are essential—not just to strengthen their conviction in investing, but also to help advisors/ distributors build deeper relationships with their clients; an excellent outcome for everyone involved.
—The author, Ganesh Mohan, is CEO at Bajaj Finserv AMC. The views are personal.
(Edited by : C H Unnikrishnan)
First Published: Mar 22, 2024 1:20 PM IST
