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What to expect when investing in MFs
What to expect when investing in MFs
What do you expect your mutual fund to do? It is worth asking and answering this question as we carry out Mint Money’s biannual exercise of examining Mint50—the portfolio of investment-worthy funds that the Mint Money team curates. A quick word on why we do this. Indian households have a high savings rate but most of this lies in inflation-unfriendly deposits and traditional insurance plans. A gradual move up the risk scale would benefit the investors but that has not happened and fewer than 15% of Indians expose their money to equity, either directly or through funds. Similar looking products promising to do the same thing—long-term corpus building that come from three different regulators—seem to be confusing investors.
In the absence of trusted advice and a cluttered and untidy marketplace, people make a rational choice and keep their money in products they know. I believe the appetite is there for mutual funds and by creating Mint50, a list of funds with a consistent track record, we hope to provide a shortlist out of which investors can choose. Since fund net asset values do not depend on the number of investors buying it, unlike that of a stock, we find no conflict of interest in constructing a portfolio. How do we choose funds? The same way any investor should—by making sure that a fund does three things at a minimum. Our process, of course, is more rigorous, but this is the base level of due diligence that any investor must do.
Two, it should beat the benchmark. What is the biggest reason for leaving the security of a fixed deposit to invest in a mutual fund and take on some risk? To get a better return, of course. What kind of return should you expect from a fund? While we’d all like to double our money every year, we need to manage expectations. It is reasonable to ask a fund to beat the benchmark it tracks, consistently over time. The do-nothing approach is to invest in an index fund, or an exchange-traded fund, and stay with the return the index delivers. But for those who seek a higher return, we choose managed funds. The fund manager’s implicit premise in this is that he will deliver returns that are benchmark-plus. How’d Mint50 do over the past two years? Over 75% of the equity-oriented Mint50 funds beat their benchmarks over a five-year period and almost 90% did this over a three-year period.
Three, it should keep costs low and transparent. Luckily for mutual fund investors in India, the product structure is simple and costs streamlined that make it easy to understand where the costs are buried. The product structure also makes comparisons possible to facilitate the investment decision. Expect younger funds to charge more because of smaller assets under management (AUM) and expect fatter AUM funds to reduce costs as they grow. The maximum you pay each year in an equity fund is 2.5% of your corpus; the number for a debt fund is 2.25%.
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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First Published:25 Jan 2012, 01:15 AM IST
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