Inside the head of a first-time mutual fund investor

At some point I decided that to get a real flavour of what a mutual fund investor goes through, I need to stop using my agent and begin on my own. That was some time back, but the lessons from then still are sharp. And each time I facilitate somebody into using the mutual fund do-it-yourself (DIY) route to investing, the journey is repeated. Those proficient in the art of mutual fund buying should ignore this piece. It is for the first-time investor who is ready to take the leap of faith from fixed deposits and insurance into this new territory and is just a bit skittish.

Whatever prompted the decision to invest in funds, before you buy one unit of a fund, you need to overcome several hurdles—both procedural and behavioural. Our aim is agent-free DIY online mutual fund investing—linking one bank account to the transaction platform (like a bank-owned site, a third-party site like ICICI Direct or stand alone newcomers like fundsindia and fundsupermart). You want your laptop to connect your money in the bank to move into funds and out of them back to the bank. The idea is to set up a plan that, once in place, does not need to be monitored every week or every month. Once set, the grid will work and money will keep moving seamlessly. But we need to get there.

Once you push that account opening door and understand the interface of the transaction platform, the moment of truth arrives—this is when you actually commit money to a couple of mutual fund schemes and here’s when the next hurdle appears. The choice set is so large that, not just entry level, but even older investors get flummoxed. I tried buying a liquid fund last week and faced an intimidating six page downs of fund choices. You have to narrow choices down to a point where the decision set does not have more than five to seven options. Research shows that our brains pack up with more than this number and fewer than this, we think is too few. Take a look at Columbia professor Sheena Iyengar’s book The Art of Choosing to understand how too much choice really kills decisions. You have to narrow down choice. Look at only four or five-star rated funds from rating agencies such as Value Research and Morningstar. This is the point at which the head will have to tell the heart to not go after the top-ranked fund on the list. You have to be OK about not getting the best product out there. Two reasons for that. One, the best fund changes year after year. Look at mutual fund rankings to see that few funds consistently stay at No.1 all their lives. You are safe if you look at the four or five star ratings as a filter to remove noise. Two, the “best” fund may not be sold by your vendor. Finding a fund you want to buy and discovering that your transaction platform does not sell that fund house is the time that you are closest to junking this project. Remember, most large vendors will have most large fund houses. If they don’t have a particular one, it could be for good reason. Stick to the larger fund houses with well-established reputations. Next, scan the five-, seven- and 10-year performance history and look at fund ranking. Your fund should remain in the top quartile. This means that the fund should be in the top 25% of funds each year give or take a year or two when a specific strategy may not work momentarily. When you’re down to the top five-seven, invest some time in reading up about each. Remember an equity fund is a long-term commitment. You could also just look at the Mint50, the curated list of investment-worthy funds that Mint Money publishes. Invest time before you choose rather than bouncing around from fund to fund.

Now you’re all set. Don’t wait for the market to fall further or for some macro event to play out. Commit the money and experiment with the site. It will still take a few tries to get the portfolio in a space that you are happy with. Six months later you’re giving gyaan to friends. Enjoy!

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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