11 Ps for Success in Mutual Fund Investment

11 Ps for  Success in Mutual Fund Investment

11 players make a cricket team or a football team. They play different roles yet blend together for the team to win. Let’s identify your 11 such players which will help you win the game of Investment in Mutual Fund. Yes, market has volatility and we do see snake and ladder scenario .You have to play the game of investment like Chess with clear strategy leading you to winner position.

These 11 Ps to be followed for effective result. 

1 Priority – Why you need to invest, why it is important and what will happen if you don’t invest. The first thing you should ask yourself is if you are sacrificing present consumption need for investment for future need how distant is that need? How important is that need i.e. if not able to fulfill that need what will be the impact? Have you measured the extent of emotional and peace of mind loss ? How much money you desire to fulfill that need. Since inflation will reduce the purchasing power of your money you need to be adequately compensated for that also. So it is a choice between – capital preservation for liquidity need a sudden requirement which can happen anytime ( up to 6 month ) or safe and regular income to meet well known expenses in short to mid-term ( 6 month to 3 year ) or return with growth so as to beat inflation and meet huge requirement in mid to long term ( beyond 3 years ). So you should be very much clear on your investment objective which should be matching with your financial goals.

2 Profile - All assets are good and all investment products are also good. Key is what is more suitable to you considering your profile and need. You need to know yourself . Each individual is unique in terms of net worth, mental strength and ability to withstand loss. Investment is a continuous process and every investment you make  may not give same result even in same scheme as each will be subject to different market condition and dynamics. Ability to understand the different impact and withstand the temporary windfall or upsets will be test of your mental endurance. Are you aware about the risks that the fund is facing? Are you aware how well the risks are being managed? Are you being properly compensated for excess risk if taken by fund manager ?  So you need to know your risk taking ability and my risk tolerance level.

 You need to understand what makes you happy, what upsets you. What can affect you momentarily and what cannot. You should also know how rational or irrational you are in accepting or rejecting short term abnormal gain or loss. You should not be perturbed by notional loss or gain and more concerned about real gain or loss. Stick to your basic risk profile while building the core part of your investment portfolio. Take risk only to that proportion which you can accept in case adverse result comes.

3 Propensity to save – Most people know why they need to invest but many still don’t invest. Many times either you keep spending more and not left with any money to save. Many times you say to yourself, will start investing from next month and that next month never comes. So one has to be tough to self, get discipline and has to generate surplus. Pl always remember whatever you are investing it’s for benefit for you and your family members. Simply ask what is more important – spending on going out regularly to restaurant, buying new apparels or higher education of child, own retirement planning ? So you need to differentiate between basic survival need, discretionary needs and financial goals needs. Analyze discretionary expenses , scope where it can be spent less . Be tough to yourself, generate surplus for investment.

4 Product – Once you are clear on priority(investment objective) you decide on investment horizon. This will give you which asset to go for. You have to see which asset and investment product within that asset class have historically met your priority criteria.

Generally when doing asset allocation it is more of a passive strategy i.e. ratio between safe asset (debt) and growing asset (equity,gold, real estate) to a large extent is decided as per profile of investor. Better not to take extra risk while deciding asset allocation. For example if your asset allocation is 60: 40 (Debt: Equity) you should not move to 20:80 i.e. large deviation from your suitability level. Yes there can be some shift but not a large percentage.  Younger , financially stable investor can opt more for equity asset whereas older and financially not so secured need to be more in debt .

The 2^nd stage is product selection. Within both debt funds and equity funds you have variety of products, each meant for different objective and so has the portfolio structure accordingly. Investor investment objective should match with scheme investment objective.

Yes you can take some risk when going for product selection if a short to mid term opportunity is there . Example – You can increase the proportion in mid cap or some sector fund. Also may be in debt can look for duration management fund or fund with diverse credit  quality but within investment grade debt securities to enhance the yield . There can be lateral movement between defensive strategy to aggressive strategy depending on situation. Always start building a portfolio with a strong base i.e. funds which are less volatile due to market risks and slowly add some risk in the portfolio with later on investments. Whenever you are investing subsequently you should see how your asset allocation and investment portfolio looks and then invest to fine balance between taking advantage of short term opportunity and long term stability as well. Pl always remember at no point of time your portfolio should look risky ( e.g. – extent of mid cap & sector fund, concentration in few schemes , high duration fund or long term fund , debt fund having other than investment grade debt securities etc. )  

You also have to see given the present economic situation how these products are going to perform in short term to mid-term. You need to have conviction before you move ahead else you will fall prey to short term impact but once you are aware of short term impact, its presence will not affect you as you are convinced on ultimate result . E.g. in 2009-10 when equity was down there even knowing that equity gives good return in long term the short term volatility and losses did not evoke confidence in many and they stayed away from investment. But if the same person knew that he was getting quality asset at a discount and needs to have conviction in long term real and true story he would have kept investing and now his money must have grown few multiple times .  

5 Performance -- How you want return to come – periodic (dividend) or capital gain form? It is again based on your cash flow need. As your major concern is return, you need to be aware of past and must have realistic expectation. Don’t go for product which has done very well in short term and have been average to poor most times.. Consistent good performance in long term and lesser volatile in short term should be the key for fund selection. Don’t go for fund with high beta, high standard deviation unless you are aggressive investor i.e. ready to take high risk for more return.

Consistent performance is an outcome of sound portfolio and better fund management. There can be improvement or deterioration in performance and you need to watch it. If that trend is followed for long time you need to know the reason and take corrective action . Even in case one gets very high return in short term one need to have a rational and logical view of that. A one-time aberration cannot be an appropriate benchmark.  

6 Post Tax return – Return from investment is not the return to investor. Certain investment products enjoy tax benefit and certain products are taxable when dividend paid or when the investment redeemed so the net return to investor is post tax return. Tax implication is must to understand before investing. Now the period of short term has changed for debt fund (up to 3 years) whereas in equity fund it remains the same (1 year) for capital gain. Taxation on periodic return i.e. dividend also varies for debt and equity schemes. Though dividend is tax free in the hand of investor for both debt and equity schemes but in case of debt fund there is div for both debt and equity schemes but in case of debt fund there is dividend distribution tax . You need to be aware of your net post tax return as each individual falls in different tax slabs.

7. Process – When you are investing you have to follow certain process and procedure. There are online and offline application filling, payment procedure, transaction process are both tech based and paper based. You need to understand which process to go considering the time it saves for you. Better to opt for direct credit, ECS, Nomination, e-statement etc. .Opt for less paper work if you can . There is now direct plan . To invest directly or through advisor again is a matter of trade off between some minor cost advantage vs benefit of advise , information , sales and after sales services which you will be getting .

8.  Pattern of Investment – Should you be investing lump sum or on regular basis? Nothing wrong in lump sum but that investment if going to equity should be for at least 5 years. Also what is that lump sum as percentage of your accumulated investment till date? If it is very high proportion and if in short term return goes low or volatile it might affect your mental perseverance so alternatively you can invest in safer asset (debt / liquid fund) and then through STP route move to targeted Equity fund.

Should one go for NFO or in Ongoing scheme with proven track record ? . If the fund manager is a proven one, NFO with good prospect can also be looked into.

Systematic Investment plan (SIP) is the best way as you are regular, investing at different market levels so averaging your overall cost of acquisition. As your investment base is growing power of compounding in growing scenario adds to more growth in return.

9.  People – This is very critical. They can be your guiding source or misguiding ones also at times. If you are being advised by someone that person should understand your priorities, profile and suggests you what is proper for you. Your advisor should have a fair understanding of market and economic condition of today and the positives and negatives which are likely to affect the present economic or market condition. His knowledge or information should not be just hearsay but from credible, reputed source. Whenever you are investing ask your advisor why you should be investing in that fund .His answer should be logical, practical and factually convincing. Pl also remember your advisor is also a human being whose judgment also at times can go wrong but what is more important is when he recommended you that fund there were enough logical reason for investing in the fund . Decision is made on present based on past performance and on future outlook .

Don’t follow blind advice just because it is coming from your close friend or relative. Do some cross checking .  As each individual is unique so could be experience or interpretation. What fits for one need not be fitting another.

10. Patience -- Like any other decisions,  investment or redemption decision should not be done in haste but with cool mind .Don‘t rush for result to come early. Don’t panic if short term fluctuation or notional aberration. Once you have selected investment product after all due diligence backed by proven track record and historical trend don’t get swayed by short term impacts .There is a proverb – Patience always bear sweet fruit. But patience does not also mean to wait for eternity. Have regular portfolio evaluation and just don’t get influenced by short term temporary impacts. If cause is real and going to stay for long period then maybe you can have some moderation in asset allocation or lateral movement to safe fund but never stop investing. Investing should continue as habit.

11.  Precaution – It’s your money which is at risk. It you who is going to gain if taken right decision and lose if wrong decision. So you should have a list of clear dos and don’ts to be followed. This list you should have before you invest. That should act as a guiding principle to you . You should know what are the greed and fear and what has been the consequences when has fallen prey to it . You should refer to precautionary Do’s and Don’ts in case you feel at stressed due to notional loss or not able to take any decision or feeling tempted by greed or fear .

Investor Education

Last few years all MF related regulations and changes by SEBI and also some by IRDA for insurance have been for the benefit of clients and industry at large.  The regulators want better and quality advice to the investors from their distributors/ advisors. An industry exists because of clients only.

In spite of long term gain in reality, why there is just 4% of total investment in equity. If experience of most has been good then why short term losses and in some cases notional losses affects their long term investment decision?  Why retail investors are still averse of investing in equities? Yes today some are investing but frankly how many of them are doing with real conviction?

We all blame investor’s psychology – greed and fear in investment decision making. But who has created this greed and fear? They themselves or someone else. A strong conviction developed by correct understanding of risk can only counter the investor psychology.

How many know the real interpretation of risk? For most risk means only loss or chances of loss . We always talk risk of product or market but why not talk risk related to client also? Why not talk of risk of mismatching communication to client? Why not talk on risk due to too many communication to clients? Why not talk of changing communication pattern with changing situation to increase sale? The risk at best is expressed as, “ Mutual Fund investment is  subject to market risk pl read offer document before you invest “ but does any individual who is selling elaborates that when executing the deal?

Risk is capitulating to greed and fear at a wrong time . Risk is not understanding what you really want but opt for what influenced . Risk is in not understanding product sales communication properly and its suitability. Risk is straying from objectives and goals . Risk is not understanding own mental fortitude and preparedness in case of negative notional return or negative  realization in return from what expected .

The psychology of an individual keeps changing with changing situation and realization of notional or actual return on investment. Every individual is unique and so is his experience. Even the same amount of return on the same amount of investment can invoke different reactions.

Investor education is not only talking about inflation, financial planning and then positioning the product. Some add fund management concepts , explain market , economy etc. Yes these are good information for one to know . But more important is that these are changing dynamics and for a lay man understanding of change, various risks due to change and its impact on return on investment as also equally important .

In Investor education we have to make him aware of WHY, HOW AND WHEN to invest.  I would further extend it to WHY he should not be investing in ........., HOW he should not be investing in ......... and WHEN he should not be investing in .......... i.e care and caution also . So we have two extremes and between these two extremes the risk of losing money and risk of losing opportunity of making money lies and the whole needs to be explained to client . Asset risk has to explained in terms of withholding period .

Investor education objective should be creating right conviction and should be process oriented keeping the client more into focus . Yes it may be a long drawn one but the result will be there to stay and not short term one .

·         If the client has not made any investment till date why he has not done . Need to understand his psychology and ignorance level first . Remove small doubts and fear with logical and practical examples which he can correlate with his life easily.

·        Helping Client do some introspection of his own investment and disinvestment decision. Data are with the AMCs / Insurance Cos and they can help the client

·        Make them aware what right and what wrong they have done through analysis on return, product , time horizon.

·        Make the client feel what led to that decision. Was it a well thought one or impulsive .

·        End with learning for not to repeat some, be cautious from some and above all identify what is really wise and prudent.

I think SEBI , AMFI , AMCs , Insurance companies all have to play a vital role . We always learn better when we understand our mistakes. So the starting point for Investor Education is the one who are manufacturing the investment products. AMCs should not capitalise of investors ignorance for more sales. Any buy in has to have conviction of investor .They need to learn from the past from own actions and inactions. Use that learning a powerful tool for guiding investors and advisors. Investor education starting point should start with AMCs own education of Investors understanding of ............