Home > Mutual Fund Articles > Conversations with a MF non-believer

Conversations with a MF non-believer

‘MFs are for the rich’
‘No, they for the dumb’
‘And they hardly give any decent returns’
‘Infact I can make more money from investing directly in stocks’

Presumptions about MFs always seem to outnumber the facts.   It took a 13-hour train ride to finally let go of my distrust of MF investing and emerge a believer.

There is a warm smell of chhole bathura as the young lady seated next to me meticulously opens the plastic wrapped boxes for her children. The old woman on berth 48 looks on indulgently while I’m trying hard to control my hunger pangs. We are on the 1019 UP Konark Express to Bhubaneshwar and I know I will have to deal with more delectable smelling food, restless children and an unending stream of chaiwallahs over the next 13 hours.

To take my mind off the food, I decide to start a conversation with a bright looking young man seated across me. He’s reading the Economic Times’ stock pages; Perfect. Just the kind of person I can share notes with on the recent market upswing.

Me: So you invest in stocks, eh? It definitely is a good time for people like you and me, what with the stock market on a roll.

BrightLad (BL): I don’t invest in stocks, Sir. I have all my savings in mutual funds with a good mix across equity, debt and liquid funds. I was just going through some of the NAVs

Me: Mutual funds? That’s surprising. You are a smart young man. Why would you invest in insipid mutual funds when there are much better returns to be made by investing directly in stocks? I’ve never known a man to make the kind of money in MFs that one can make in stocks directly.

BL: (laughing) Or lose that kind of money either… Investing in stocks is far riskier, Sir. It entails a lot of research, constant monitoring and most times a lot of money too in order to ensure that I have enough diversity in my investment portfolio. There is just too much risk investing the little surplus I have each month in 1-2 stocks. If they do badly, my savings are at stake.

Me: But the returns are so much more. I invested 40,000 in Vien Systems and now it’s worth Rs 1.1 lakh in just 6 months. You would never be able to make that kind of money in a MF.

BL: Maybe. But the risk attached with it is also far higher than that of a MF. When I say risk, I mean that these smaller company stocks which rise that fast can also fall as rapidly and then you might get far less returns or even have your capital wiped out.  People only talk about the money they make in stocks but not the money they lose. For every stock that gives you 300% returns, you would have 3 others in your portfolio which might be losing money.

With a mutual fund, you know that your funds are being managed by fund managers who are trained and whose job is to research companies and track markets on a full–time basis. It’s almost impossible for a lay person with a day job to replicate that kind of thoroughness or information about companies, industries or markets. Which basically means that the decision we common people on the street make about shares will be less informed than them and hence higher risk.  And if you would still prefer to invest in small cap stocks, MFs offer a  variety of schemes which invest largely in these stocks so that you can derive the benefit of value-investing.

Me: Ok so forget Vien. Even if I invest in a blue-chip stock I think I’ll make more money than say a MF which invests in blue chip companies; the reason being that MFs charge annual expense fees for the funds they manage.

BL: But you pay brokerage on your stock market transactions too, each time you buy and sell shares.  Moreover that brokerage is paid merely for executing the transaction whereas annual expense fees charged by MFs include the research that goes into picking stocks, managing the scheme’s risk-return across market conditions and executing all transactions required to maintain the portfolio in line with the scheme’s investment objectives. And to make sure that MFs do not charge any random fee, SEBI has prescribed stringent limits for MFs.

Our conversation is now drawing interested glances from a middle-aged man on the side berth and the old woman. Finally the man cannot resist:

Middle Aged man (MAM): Ok, so a mutual fund gives me the benefit of a well-diversified portfolio and hence better returns for the level of risk taken. It also allows me to achieve market related returns for small sums of money, since MFs accept investments as low as Rs 1,000 and still give you the benefit of investing in the stock markets.

Old Woman (OW): All that’s fine, but I’d rather invest my money in bonds than MFs. At my age, there is no place for any risk element in my investments.

BL: I agree. You would probably be better served by debt or liquid funds, since they give you the double benefit of investing in fixed income instruments as well as the flexibility of withdrawing your funds whenever you need it.

OW: But I thought  MFs invested only in stocks.

BL: That is a common misconception. There are several MF schemes which invest essentially in bonds, debentures and fixed deposits of banks and corporates. These are called debt  or income funds and are tailored to people who prefer low risk investments. The advantage an individual investor like you and me have here is that we are not tied down by a bond’s maturity period and can withdraw our money whenever we have the need for it. So we get the benefits of a steady income instrument without losing out on the ability to take our money when we need it.

Me: So basically what you’re telling us is people can choose lower-risk schemes like income funds or higher risk equity schemes depending on one’s risk appetite and return aspiration. And that since people have different needs at various points in their lives, MFs have devised schemes which suit those specific investment requirements.

MAM: (laughing) Probably also explains why there seem to be hundreds of schemes all over the place. People’s needs are not going to reduce any time soon, so MFs will continue to launch schemes I guess.

BL: Yes, but SEBI has also realised that this plethora of schemes can get confusing for the ordinary man and hence has issued strict instructions that MFs cant launch new funds unless they are fundamentally different from their existing schemes.The train rolls into Bhusaval and I take the opportunity to step out and buy myself some chai at the station. A while later, the whistle sounds. I run alongside the train a bit before jumping on. As I amble into my compartment, I see a new face in our midst. There’s an old man trying hard to squeeze his bag alongside all ours.

As the train gains momentum, I see the old gentleman pull out his mobile phone  and tell the person at the other end, most likely his son or daughter,  that he’s boarded the train and will call them once he reaches Bhubaneshwar. I’m trying hard not to eavesdrop but like the rest of us, the old man believes that long-distance conversations have to be conducted loudly. Suddenly he starts talking about SWP s and how he’s forgotten to deposit the cheques he’s received. The bright young lad looks at me and smiles; Another mutual fund investor, his face seems to be saying. I roll my eyes heavenwards and smile back.

The old man finishes his conversation and apologises for being loud. The bright lad smiles warmly at him: ‘You seem to have chosen your compartment well, Sir.  We have been having this interesting conversation on mutual funds and investing over the past few hours. I’m happy to see that we have another seasoned investor onboard now.’

OG: You embarrass me young man. I can hardly be called seasoned. I started investing after much prodding from my daughter. Initially I would berate her often when I had problems with either the process of investing or when the fund didn’t do as well as I expected it to. But now after nearly 2 years I’m glad I took her advice.

Me: But isn’t investing in MFs all too complicated? I mean everywhere I look I can see MF ads but none of them tell me what I really need to know. Where do I start from?

OG: (Smiling) You sound just like I did two years earlier, when investing in MFs was an alien concept for me. I had no clue either. I saw all these long articles about the virtues of MFs but absolutely nothing on the basics needed to get me started; Till a friend of mine guided me to his advisor. And that’s what I would recommend to you too.

Categories: Mutual Fund Articles
  1. bhagwati
    November 2, 2011 at 1:35 pm

    congratulations. very nice presentation. even common people can understand and follow.

    • November 2, 2011 at 5:39 pm

      Thanks. Thats why i posted this so that a layman may benefit. For further details i am always there.

  2. November 8, 2011 at 12:12 pm

    Hi I really find interesting your blog. I linked to your articles on my homepage about the PSP 3000 so my readers will visit your blog also.

  3. November 9, 2011 at 4:22 am

    Hi I really find interesting your site. I linked to your website on my main site about the PSP3000 so my followers will check out your site hopefully.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: