Did You know: There is more to mutual funds than equity, think gold and debt

This might sound a little strange to you, especially if you’ve been reading Mint for a long time. Many investors believe that mutual funds (MFs) are only about equity investing. Yes, this is a very common misperception. The fact is: MFs don’t invest only in equities. They invest in fixed-income instruments and gold as well.

THE PERCEPTION STARTS EARLY...

A Bengaluru-based financial planner frequently conducts workshops for companies that are looking to inculcate in their young (and sometimes not so young) employees the virtues of financial planning, investing and so on. He says that roughly 70% of his young audience (in their 20s and in the early phase of their careers) carry this perception about MFs.

Also, typically about 90% of this audience would not have started saving or investing for the future. The remaining 10% would have invested in equities directly, by buying shares.

There is another reason why investors believe that MFs are only about equities. A Mumbai-based distributor tells us that when investors go to MFs for the first time, they are already exposed to traditional fixed-income yielding instruments like bank fixed deposits, Public Provident Fund (PPF) and Post Office small saving instruments. So, they want returns that are better than their existing investments when they are exposed to MFs for the first time, and they look at them as a means of increasing their wealth, not just preserving it. Hence, they equate MFs with equity.

...AND CREATES PROBLEMS

This is a problem for the investors because they miss out on options like debt MFs, which can offer better than bank deposit returns, with minimal risks compared to equity investments. But the risk still exists.

And this can be an issue for new investors, especially in smaller cities like the Beyond Top 15 (B15) towns. A B15 distributor tells us that capital protection is very important for investors here. He is very selective about recommending debt funds to investors as taking a call on where the interest rates could be headed, could backfire badly. He says it is very difficult to explain capital loss in a debt fund to the lay investor. Losses in equity MFs are more easily explained. And this exacerbates the problem because most new investors drift (in general) to equity MFs only.

But things are changing. The Bengaluru-based financial planner told us that the misconception about MFs being only about equities is slowly dying down. Another Chennai-based distributor tells us that he uses a mix of balanced funds and debt funds in his investors’ portfolios to bring about the need to distribute wealth by regular dividends for, say a retired person. He adds, MFs already invest in debt, equity and gold and another asset class will be added to them when MFs will be allowed to invest in real estate in the future.

Clearly, there is more to the MFs than just equities.

—Kayezad E. Adajania