INVESTING IN MUTUAL FUNDS: TRUTH BEHIND THE GIMMICKS

Let’s clear one thing in the start. Mutual Funds is not the only gimmickry on offer in today’s pretentious times. Our problems are clouded by saturated solutions and our wants by an insurmountable greed.

For the uninitiated, Mutual Funds is one of those many financial vehicles that promises huge (or conservatively speaking ‘better’) returns than others. Simply put, it is a pool of funds collected from many investors to put in securities such as stocks, bonds, money market instruments, and other assets.

Now back to the gimmicks.
Of whom, many get a pass for the benefit-of-doubt. Others are wrapped in a ‘sunshine’ paper that lifts your spirits, and in the future, promises to do the same with your hard-earned money.
Why to bother, you say? They do give good, if not better, returns, you say? Well then read the opening lines once more.

Mutual Funds sahi he, they said.

Well, not entirely.

 

No Compounding, No fun

Mutual Funds have no real compounding benefit. Unlike a CAGR or XIRR that may direct your beliefs’ towards a quantifiable ‘selling point’ that’s built on largely qualitative factors which also happen to be hugely volatile, your gains will depend on timely luck and rudimentary know-how about the markets amongst other factors.

 

Dividends that misleads

Dividends are by no means a supplement to your already accumulating fund wealth but a part of that income.  Yes it’s like withdrawing your own money. Traditionally a company forgoes a part of their profits as dividends to reward their investors. An additional income, you may say. Not wrong. But with the new Dividend Distribution Tax (DDT), dividend plans no longer make sense. By withdrawing dividends, you are essentially depriving yourself of the interest as less money is put to work now.

 

The grass looks greener on the other side. Duh!

Jumping across ‘fund-wagons’ too many times too often may do you more harm than good. A stock with 40% rise over three months surely would entice you to ride on it. But that doesn’t mean you have to. A steep upward climb would require a correction in times to come and when it falls there will be disappointment. Also Capital Gains tax may further be a hurdle in your way. The only sane path that doesn’t tread the above pits is an investment that is driven by self risk appetite and time horizon, in a broader sense.

 

Going by NAV is naive

A psychology. A hard habit. A compulsive disorder. Okay a bit far, I get it! But lower prices do tingle Indian minds and dials their senses to zero.

Here, a low NAV doesn’t always have to be an indication to ‘cash in’ on the opportunity. NAVs are a function of time. An Rs.1000 NAV can still go higher whereas a Rs. 10 NAV may not climb up to your expectations. It purely depends on the underlying performance of that fund.

 

A growth that’s capped

Not long ago, SEBI tightened the noose of the Mutual Funds industry in the wake of a credit crisis. The new regulations like load-on-exit, net worth cap for promoters and more limit your fund growth and in some cases cripple your returns. While these are aimed to secure the investors’ money, in practice, they demand your expectations to be more grounded than before.