While we all are smart at earning and saving but it seems like we are quite bad at ‘learning’ and investing.
Most of us think that there are people who specialize in this area and we would do well to outsource the investing part to them. However how many of us can really afford to have a Relationship Manager or a paid adviser for managing all our money and investments, when in the first place most of us have a grouse that we do not have much left at the end of each month, to “invest”?
“Investing” has to be stressed upon here because we as a society, believe in ‘savings’ only and like to park most of our money in banks-either in the form of Savings account, Fixed Deposits or in the form of Recurring Deposits.
While ‘saving’ is a very good habit and some people I know, do manage to save 30% of what they earn on a monthly basis, investing and multiplying wealth is a different ball game. Very few people actually invest in the best option available to individual investors- Mutual Funds.
Now much has been written about and a plethora of information is available about why and how investing in MFs is a very good option for retail investors. What few focus on,however, is making people “understand” the product.
While many fund houses, stock exchanges, business news channels, AMFI and even the regulators have been working on educating and creating awareness about the benefits of investing in MFs, there is still a long way to go. For a population of the size of India, there are only 42,778,001 accounts (account refers to a folio and an investor may have multiple accounts in a fund or across funds-AMFI).
In fact it would not make much of a difference unless we make an effort to understand the product. I will share a very simple example about how we have an eye for detail when we are buying a tangible product but when it comes to displaying financial prudence, we seem to lose our magical touch.
While purchasing a mobile, my cousin spent a few days in researching, sent a few mails to technology forums, consulted friends, colleagues and finally bought a phone of a known brand for INR 12999. What I liked about this was that at least he was trying to get the most out of his hard earned money. This for me was a step in the right direction and impressed upon me the fact that he managed his finances well .
However there was a surprise in store and came a few days later. He informed me that he had visited a financial adviser seeking advice for investing in Mutual Funds. The adviser suggested a few funds and explained to him what a MF was and gave him various options. He also made him read through the portfolios of a few MFs so that as a first timer he was satisfied with where his money was getting invested. I was under the impression that he will take this seriously and read more about MFs before taking the final investment call.
A month later he called me and informed that he had invested in a particular small and mid-cap fund which his colleague had invested in. The NAV was down by INR 2.30 from his purchase price and thus he was liquidating his entire investment of INR 25000. I was not happy with his choice, as I have been investing in MFs for over eight years now. So I called him over for having a discussion on his choice of fund and how it would impact his objective of wealth creation in the long term. This is when he had spent a few weeks for spending INR 12999 for the mobile and not even a few hours before spending INR 25000. So much for wealth creation!
Individual investors need to understand that MFs are investment vehicles and before investing they should make an effort to understand the product.
A Mutual Fund at a very basic level is like nutritious, well balanced diet which comprises of a variety of ingredients and nutrients. In contrast, a Savings Bank account or Fixed Deposit would be more like a staple diet – rice, roti and daal kind of stuff, enough for sustenance but not enough for long, healthy life as inflation constantly eats into our bank savings year on year. I am not going to write about inflation, FDs and absolute rate of returns etc.
Even if you do not understand equities, consider this- your Mutual Fund is buying you a PORTION or PART of –
Your local private/public bank
Your automobile company
Your car’s fuel company
Your TV/ fridge/AC manufacturing company
Your rice/oats/sauce/noodles or any other eatable brand’s company
Your telecom provider company
Your health supplement provider company and many more
Chances are that it might be buying a portion of the company you or your spouse is employed with!
(PORTION or PART here means stake in the listed company/ies)
In addition there would be some cash lying in the safe deposit of a bank earning fixed returns for your MF (all this is just for illustration purpose and would differ across MF categories)
Ninety percent of us invest in MFs only in the form of SIPs because it is easy and almost akin to a RD for us. We rarely make an effort to check the status every six months or even a year.
Now imagine how, as intelligent and well informed investors we can considerably enhance our wealth creation potential. For the past few days, our markets have tumbled quite drastically. Most of us, who do not understand the market cycles, stop our SIP in MFs and instead, opt for safer options like bank deposits.
However, those of us, who understand the dynamics of markets actually wait for such opportunities and invest small or large amounts (taking into account the risk appetite and availability of investible surplus) during such falls in the market. As a thumb rule, I always invest some amount whenever the NIFTY is down by 50 points in a single day. Thus your responsibility does not end merely by initiating SIP in MFs. Why is this important? Let us illustrate this with an example-
We eagerly wait for “End of season sale” towards the end of winters, for purchasing those jackets, pullovers and sweat shirts at mouth watering discounts of 40-50 % knowing that we would be able to wear them only in the next season. We know it quite well that the brown leather jacket or the fur coat would never go out of fashion and thus buying these at a discount of 40- 50% would be a very good deal.
Similarly, we wait for festive offers for purchasing consumer durables or weekly bargains for local grocery shopping .When we are so particular about bargains and buying at the right price or getting maximum out of our money, then what happens when it comes to investing? Once we have educated ourselves, we would start spotting bargains and would wait for specific timelines as well. The inherent issue is that of understanding- we would definitely buy more during lean periods in the market if we are aware, confident and well informed.
The most common statement that one gets to hear is “there is bloodbath in the markets, I have stopped all SIPs and will park my money only in FDs now. Will never look for opportunities in the market”
What is quite thought provoking and unfortunate is that when it is the best time for investing, people get scared and miss the chance of getting wonderful returns.
The regulators need to ensure that more than advertising and carrying out features in news papers/magazines on the virtues of investing in Mutual Funds and the inherent risks involved, there is focus on teaching the concept of equities at all levels, starting from the elementary level .We need to build a culture where the focus is on inculcating the practical aspects. I am sure our bright students can easily understand the concepts of markets from an early age.
Simplification of documentation and the jargon involved would be another great step. Imagine a customer going through a multi page SID, SAI, Offer Document, KIM (don’t even know how many of the readers understand these) – it would not make much sense and in fact would add to the mystery. An important step in this direction would be to create a one or maximum 2 page document which would enable the customer to understand the objective and risk associated with the investment in MFs.
In rural areas, people started visiting banks and post offices for getting accounts opened because they saw offices being set up and real people working there. In fact literate rural people are more cautious and make an extra effort in safe guarding and multiplying wealth. The need is to teach and create awareness-they keep their pass books or cheque books in the safest corner of the house and would definitely make a lot of effort in understanding and investing in Indian equity markets- a reflection of the growth story of the nation. Creating visibility at the grass root level in these areas will make a difference.
The scenario is different in urban areas- if a person is operating a bank account online, he or she will get numerous options for investing online and getting maximum returns. With so much information and free advice available, the income class often makes uninformed and unintelligent choices, only to get low, or at times, negative returns.
As intelligent men and women, we need to take charge of our financial decisions. Just sit back and think about it-we take on so many responsibilities at both a personal and professional level. Our daily short term and long term decisions are backed by sound logic-whether emotional or financial.
I was drawn into the world of MFs a few years back when the markets were doing well and MFs were posting high double digit returns. The huge pile of pages that came along, (they still do) made it difficult to understand the product. But over time and with changing market cycles I have evolved as an investor.
As a start, read about the basics of financial markets-chances are that if you spend a few hours focusing on the end objective, you would develop a good understanding of MFs and other financial products.
If this is difficult, gift yourself an online or classroom course – some financial entities offer it for free while others would charge a fee- but it would be worth the effort.
You would like to check these websites for greater insight:
Individual websites of Mutual Funds in India
The reason for focusing on “Understanding” and then investing is to give control of your investments to you.
Investing in MFs is no rocket science-Just the basic framework needs to be understood, no friend or adviser would be able to make you understand the concept till you take charge and read and learn about it yourself.
So this Sunday (if you are occupied for the rest of the week), set aside two hours and subsequently, one hour each, Monday on wards to read about Indian equity markets and specifically Mutual Funds.
I understand, in the first instance you would not understand the concepts and most of the terms used would not make sense. However search the internet for certain terms and it would look easy- this would be time well spent.
As per AMFI, the value of assets held by individual investors in MFs at the end of July 2015 stood at INR 5.93 lakh crores-and the total assets managed by the Mutual Fund industry in India stood at INR 13.19 trillion- this is a huge amount by any standards and we should be a part of this wealth creation process.
As an individual investor, investing in a Mutual Fund is the closest you can get at multiplying your wealth – making some really serious money without actually making an effort in the process itself !