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It goes without saying that the a mutual fund is an excellent vehicle to invest our hard earned money in different asset classes, for varying time periods. However, there are over 4,000 schemes to choose from—right from liquid funds to international funds. Within these are options such as dividend/growth, open-ended/closed-end, direct/regular plans, and so on. And the much advertised new fund offers (NFOs) make our lives even more complicated. This goes to show that it is not very easy to navigate this maze that is the Indian mutual fund industry. And often investors tend to lose their way trying to get the ‘best’ returns.

I know of an investor who had 175 funds, which he had accumulated since 2004. Every new fund launched till the NFO mania ended in 2009 was present in his portfolio. Asset management companies are more than happy to have such investors. What surprises me is that he wants to invest in more. When I recommended that he invest in the existing funds, he shot back, “Naya kya hai? (what is new?)” The existing funds have given good returns, but he wants to try different funds each time we meet.

Why do investors keep lapping up new funds? Most of the times, an average investor has many sources to gets financial advice from—media channels, advertisements, colleagues, gym friends, father-in-law, discussions during marriage functions, Internet, distributor in the garb of an adviser, and more. The gullible investor takes each source’s advice seriously and because of this her portfolio bloats up.

Talking about returns, I am often asked with this question: Which is the best equity fund to invest in for a 5- or 10-year period? Honestly, I do not have an answer, and I am guessing that neither does anyone else. Fundamentals suggest that the fund should have a long-term consistent track record, a reputed fund manager/fund house, lower expense ratio, and so on. But many a times the investor wants an easy answer and that, too, a reassuring one. So, the easy way to sell a scheme is to show the investor the immediate past performance—which is what most agents or relationship managers of large firms do. This makes life easier for both. The relationship manager can keep visiting the investor every six months, showing the new pecking order and extracting money for an infinite period. The ‘beauty’ here is that the mutual fund portfolio becomes large enough to confuse the investor and thus gets away with an average performance.

Here is another anecdote. Recently, I received a call from a retail investor who wanted to invest Rs.5,000 in five different diversified equity funds. I told him that one fund is good enough as each scheme invests into a diversified portfolio of its own. However, he was not willing to budge as he felt that investing in one fund could be very risky. He then mailed me a list of five-star rated funds, out of which he himself chose five names that sounded “good”. I wondered if he needed an adviser at all. What he definitely needed was an assistant to manage his paper work.

So, how should an investor navigate this maze? The saying, less is more, or the KISS (keep it simple, stupid) principle is apt when it comes to managing investment portfolio. Investors could follow the one goal, one fund principle. This will make one’s financial life clutter-free. Assuming that an investor has five-six goals—contingency funding, children’s education, children’s marriage, retirement planning, and so on—one-two funds is more than adequate for each of these goals. This is how an investment portfolio should look like. One liquid fund for emergency requirements, one-two debt funds for short-term goals of one-three years, one-two balanced funds for medium-term goals of three-five years, and couple of diversified equity funds for very long-term goals. This will keep the investor focused. Each time there is any surplus money, all she has to do is open the goal sheet and invest according to the priority of the goals.

And by the way, the investor who had 175 mutual fund schemes, also has around 60 fixed deposits, 45 insurance policies, 210 stocks, six bank accounts, 3-4 properties, 110 National Savings Certificates/Kisan Vikas Patras, a Public Provident Fund account and few more instruments that I just cannot remember. He is still trying to consolidate his investments.

Gajendra Kothari, managing director and chief executive officer, Ética Wealth Management Pvt. Ltd.

Original Source – Livemint

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