Home / Money / Personal Finance /  Too many options are confusing new investors

With over 2,500 mutual fund schemes, a multitude of insurance plans and over 5,000 stocks, besides stock baskets, PMS, AIF, etc., investors have never had so much variety in investments. Variety is the spice of life but too many options are confounding investors.

Take the case of the National Pension Scheme (NPS). It is a brilliant retirement planning scheme which has a slow uptake due to the decisions to be made while investing. Making the pension fund manager choice is not so difficult as deciding which investment option to choose and the allocation. Most lay investors do not even understand the difference between government and corporate bonds and are just not able to decide how much to allocate to equity and bonds. Compare this with pension schemes from insurance companies where the only decision the customer makes is on the scheme provider. Essentially, the complexity in choices is getting investors to either opt for pension schemes promoted by insurance companies that give lower returns or choose auto option in NPS, which tapers the equity allocation significantly as the person ages and thereby affects the chances of building a higher retirement corpus.

A recent study by Axis MF indicated that investor returns were significantly worse than fund returns for equity, hybrid and debt funds due to frequent churning. This is because investors are chasing short-term trends and impulsively investing based on hearsay. The vast choice among MFs is getting investors to exit even if the six-month performance of their funds is not at the top of the table and switch to other funds which have already delivered 15-20% returns. No wonder then that investor returns trail fund returns by 20%. The problem with choice overload is that investors:

Do nothing: The harder it is to make decisions, the more the tendency to put off decision-making or fall back on products like insurance plans, which one is comfortable with but may not tie in with financial goals or beat inflation.

Follow whatever is in vogue: In this era of social media, it is easy to gravitate towards investments in the news or those that are being talked about on various forums. Stock baskets, covered bonds, cryptocurrencies are being chosen by investors without understanding how they work, the risk involved and cost implications.

Overdiversify: Investors tend to add on funds without pruning their portfolio, and end up with more than the number of funds required. This diversification is not adding to returns. The lack of understanding also makes them take the easy route of passive funds.

With a plethora of schemes being launched, the choice overload is only getting worse. Investors can bring in few checks to evaluate any investment.

• Is the product regulated? Investment schemes from jewellers or fractional property are not regulated. Without regulatory oversight, investors do not have a grievance mechanism and it is best to stay away from such products.

• What is the risk in the product? A P2P or a A- bond may give high returns but carries the risk of default. Always gauge products in comparison to a low-risk product in that category and understand the reason for higher returns.

• What are the direct and indirect costs in any product? Due to rebalancing, the tax adds on to the costs in stock baskets. While buying international stocks, various charges add up to 2-4%. Investors should determine if they are willing to bear such high costs when lower cost options are available.

• What is the involvement required in managing the investment? Investors should assess if they have the time and mind space to constantly track their investments. Stocks require active management and not taking timely action can impact returns. If investors do not have the bandwidth, they should go with MFs.

Keeping it simple and staying away from trending narratives helps. A combination of index funds, actively managed flexicap and midcap funds is good enough for equity allocation. The Mint 20 list of best mutual funds is a well-researched list of consistently performing funds, which can be looked up while choosing specific schemes. Apart from this, investing in NPS Active Equity option is recommended for retirement. On the debt side, investors can stick with ultra-short duration and short duration funds.

Mrin Agarwal is founder director at Finsafe India.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout