Investment Advise in the current Indian Economic Scenario:

The current economic scenario is gloomy and full of ups and downs:

- Equity Markets are highly volatile with last 5 year returns almost negligible.
- Bond yields have moved up drastically by almost 100 basis points compared to what they were 1 to 1.5 month back leading to Mark to Market losses on Mutual Funds and direct security holdings:
 - High level of political instability.
- Policy paralysis and inaction by Government.
- Rupee depreciation to all time high of 61.43 vis a vis, the dollar.

The list can continue but some of the points mentioned above are sufficient to justify that we are economically going through a difficult phase. Of course measures are on by the Government and RBI to control the same, however this may take its own course and time to get things in order.

So what should a retail investor do to make money out of his Mutual Fund investments in the current scenario.

Simple Rules: 1.) Be disciplined
                        2.) Maintain horizons
                        3.) Do not Panic

Equity Exposure: Ideal for a minimum horizon of 7 to 10 years with Systematic Investment Plans being the ideal route. Diversify through Small and Mid Cap Funds and Large & Multi Cap Funds.

Debt: With 10 year G Secs hovering between 8.4 to 8.5% levels it is an excellent time to invest in Income funds with a Horizon of 1.5 to 2 years. Staggered approach is best. Buy in small amounts on every rise in G Sec Yields. Given the high yield scenario in Debt Market Investment in Income Funds make a strong sense at this point in time. Lumpsum investment strongly advised. 

Hybrid Funds and ETF's: In case you have Liquidity in hand I will advise to take small exposure with a horizon of 3 to 5 years.

Liquid and Ultra Short Term Funds: Keep investing in case you have liquidity for short tenures.  Best bets for short tenures. Horizon 1 day to 12 months

In case you have invested before this Liquidity Tightening carnage by RBI and the market fallback, I suggest you should hold on to these  & Stay invested patiently till the time things get in line and your investment starts making money.

Remember horizon and discipline are the key.  

Mutual Funds: Fundamentally superb but Fundamentals misunderstood

Mutual Funds are fundamentally a superb product but unfortunately the fundamentals of this product have not been understood or I should say misunderstood by a majority of investors.

Time and again AMFI, SEBI, AMC’s have been coming out with investor awareness and education campaigns for promoting investment culture in Mutual Funds.  Huge budgets are allocated to the campaigns and every campaign reads out loud about benefits of Investing in Mutual Funds.  

SEBI off late has been hard on AMC’s and has come out with regulations giving huge benefits to investors.

Even if we look at Fund performances at large with respect to horizons the respective fund categories have performed up to the mark (barring certain bad patches) and made money for investors.

The benefits are many if I have to list them down one by one.

Still the retail inflows into MF’s are limited. Why?

According to me the Problem may be divided into two broad areas:

1    1.)    Distribution Front

2    2.)    Education & Awareness Front

1.)    Distribution Front

·         -  Low Revenues and Inactive distributors: Distribution has been the key to growth for any industry and Mutual Funds are no different. It was one of the preferred financial products till Aug 2009 when SEBI abolished the entry load in Mutual Funds. After entry loads were abolished revenues for MF’s have been extremely low. AMC’s have been running on tight pockets as they need to manage everything out of the expenses charged to the fund. Distributor commissions were reduced across the industry and it led to MF’s taking a backseat in the selling priority of distributors. The distributors sell MF’s on a pick and choose basis wrt the commission offered by the AMC’s. As such awareness about MF’s is low and inactivity of distributors adds to the woes.

·        -  Improper Advisory and Misseslling:  Mutual Funds have traditionally been push products and also carry some degree of risk and volatility. Hence they need a proper advisory when it comes to investment. However MF sales have been low on advisory many a times and mis selling has been rampant in the past with many issues coming to the highlight. Investors were sold Equity products (ULIP’s, Equity Funds etc) without explaining them the horizons and the embedded volatility.  Improper horizons led to untimely redemptions and ultimately a negative perception of MF’s among the investors.  Right advisory has a long term impact. Mutual Funds are fundamentally right products and if sold with right advise even with low revenues they shall create a better value and revenue proposition for advisor and the client.

2.)    Education and Awareness Front

·         -  Mutual Funds always invest in Equity Markets: An extension to the above point on advisory. Because of improper advisory a lot of investors still have the perception that MF’s invest only in Equity Markets. They are not aware about Debt funds and its various categories. Moreover compared to the good times of a bull run bearish phases in markets are publicised in media more with a panic leading to negative perceptions. Financial awareness campaigns have to speak out these clarifications loudly so as to clear these negative perceptions. Also Education distribution on this front has to be strong so as to make the awareness stronger and inroads.

·         -  Advisory Fees, Financial Planning and Wealth Management: The concept of advisory Fees and Financial Planning is in initial stages and yet to take off in a big way. It will take some time before investors realize the value of paid advisory. This should felicitate the investor awareness and weed away the negative perception about Mutual Funds.    

·        - Penchant for Fixed Returns: Fixed return syndrome has been widespread among most of Indian investors. FD’s, PPF’s have always been hot favourites of Investors as they can regularly see their money growing. Well I won’t get too much into the arithmetic but calculations have proved that FD’s, PPF’s or for that matter any traditional fixed return product are not always the best source of investment. MF’s do not offer fixed returns but always find a place when it comes to a certain investment horizon along with certain tax benefits. However a very small percentage of investors are able to come out of their shell of Fixed return syndrome.  

Conclusion: I believe Mutual Funds are a poor victim of Negative perception and half knowledge of investors coupled with the inactivity of distributors. Both the sides i.e. Investors are distributors are negative about Mutual Funds with their own reasons. Recession, Global environment, etc are smaller factors. Any MF Sales person has more to fight with the Negativity than anything else in selling Mutual Funds. The strategy requires some brainstorming to get things back in order. Initiatives are on at many levels but implementation strategy shall be the key for things to take off in Mutual Fund Industry.

Being an optimist and a well wisher of Mutual Fund Industry I look forward to see good times for the industry in near future.