How can you develop trust on Mutual Fund investments?

Everyone may know that investing in mutual funds is one of the most convenient and excellent investment vehicles to build wealth. We also understand that long-term equity SIPs are right financial product to achieve our financial dreams. Unfortunately, however, investors at the retail level by and large do not really trust mutual funds and avoid putting their money into the mutual fund. With the stock market being volatile like a tsunami hit ocean and weak equity market returns over the last several years have made the retail investor wary about mutual funds. A typical conservative retail investor entrusts his money to post office, fixed deposits, insurance policy etc. for short term as well as long term needs. He wants to get calculated return, because of safety and without too much volatility.  Beyond this, investors want a FD plus calculated return but industry sells them expectations of FD multiplied return. When they got FD divided return, they are now minus from the industry. Then, there comes wide gap between indicated investment return and actual investor return.  And this gap creates distrust about the mutual fund product and hence, investors start distrusting their financial advisor. If you believe that mutual funds should have a place in your overall portfolio, you have to first create an environment of trust and confidence in yourselves and then in the mutual fund product. This is what you should start thinking to boost your confidence in mutual funds. To develop your trust on mutual funds, you may follow this reoriented holistic approach to achieve your long-term financial goals through equity mutual fund SIPs.

Focusing on Short-term Goals

In goal based investment approach, you should firstly concentrate on your short-term goals for which you are saving money rather than getting straight to your big long term financial goals like children’s higher education or retirement. Though these goals are most important but fulfillment is many years away. In fact, in addition to these long term goals, you may be saving money to collect the down payment for a house, you may be saving for a new car, and you may be saving for a big annual vacation. Naturally, you tend to invest in safe bank deposits etc. to fulfill their short-term needs. But this time, you would have to shift your focus from saving in bank FDs to a range of good accrual based debt funds which are less volatile than equity but more than bank FDs which can help you much better than just accumulating balances in your saving account. Very few investors are really aware of these products – because they continue to believe that mutual funds are associated with all about equity. Start investing in debt funds seems to be a logical approach that you can learn the natural way of investing in mutual funds product.

Start savings in ‘Liquid Funds’

If you were the most well informed, experienced, sophisticated investor and asked you to get into mutual funds with a long-term view, the answer that you invariably would give is “Equity SIP”. But if you were the least informed, least experienced investor who never invested before in equity market, you would hard to believe in investing for long-term equity SIPs even to achieve your big long-term goals, which are several years down the road. At this juncture, you may not be ready to pour your hard-core savings into equity fund in first instance. Though you are regularly saving up for that goals, you could not see your savings amount erode due to market fluctuations.  You always see on the one hand your bank deposits are safe and secure while your equity SIPs have lost value.  So , the smart way is to save first very small amount in ‘Liquid Funds’ for your short term needs and gradually, you can park a substantial amount of your liquidity in these funds.  By now, you can develop your some confidence on these funds and stay on course when your savings for medium term goals go through fluctuations due to market volatility. Then you would be willing to try out accrual based debt funds for short and medium term surpluses.

SIP in Debt Mutual Funds

Debt Mutual Funds are those which invest all your money in debt instruments like Government Bonds and fixed income investments to ensure you fixed rate of returns to an extent. It is less volatile than equity mutual funds and has less risk. But then again with less risk comes less returns like bank FDs. Since Indians love to save regularly and that is quite visible with the success of all recurring plans by banks, post office or even insurance policy, SIP in debt mutual fund would be the next logical step to cater their short-term needs. You should, then choose and start monthly SIP in short-term debt funds for the same. Soon, you can start lump sum investment in accrual based debt products such as dynamic bond funds or long term bond funds. Though these funds could not able to get high return, that give you consistency and much needed confidence.

Step-up in Equity SIP

Now, you have been investing regularly in liquid and debt funds through SMS messages and can see your monthly portfolio statements which show how you accrual funds are performing. Even you can redeem your amount after a year and check your MF account statement and verify your bank statement to see evidence of the return in a year. I am sure you can see clearly that a liquid fund made your idle funds work harder in a year. You should re-invest through an SMS and get a redemption done again through an SMS. By now, you have been fully convinced about the product as well as the convenience of the product. Very importantly, you can see that this approach have added value, you have made a difference. You have now developed a confidence in debt funds and can see the upside potential of equity as well as the volatility aspect. It is at this stage that you can, now begin to think about your long-term savings, say 10-15 years. You look at your goals, you make goal based plans and you can step up to start your equity SIPs for long term plans. You would be realized soon that this journey will help you achieve your long-term goals. You are now a lot more willing to take risk and commit to these long-term plans, in products that have volatility that you may not have experienced earlier.

Discipline creates Wealth

Remember, running a SIP for 15 years is not as simple as it looks like. The road to success is long and full of twists and turns and hence you need to be disciplined to travel it. You can easily see a statically  showcase 15 year returns of SIP but statistics hardly showcase investors’ return who have run their SIP’s for 15 years. You should recognize yourself that you are not running into long-term SIP for making profits but for creating wealth in the long-run which is sustainable and long lasting. You are, now in the business of sustainable your wealth rather than making profits with the portfolio in a bull market. Since mutual funds or market linked investment it’s always exciting for investors, keep hold your emotions and stay put your money in long-lasting funds irrespective of any market tsunamis. Discipline is the key to success and helps you understand the actual value that it adds in helping you create wealth.

Simplify your Personal Finances

The world’s greatest investor Warren Buffet says, “I don’t try to make returns in markets, all I try is not to commit mistakes”. What holds good for Warren Buffet is equally true for each investor?  When it comes to manage your personal finances, many investors presume that a lot needs to be done to manage the money well and hence they want to be in action every time. This leads to a search for the best products of the season. Each time an investor attempts this, and he is creating a potential pitfall which can derail his long term objectives. The fact is that if it was so simple to find the best product, then all the investors would have been rich and you would have seen a lot many folio-returns than just fact-sheet returns. But the reality is way different. The fact is that with even such stellar track records of schemes, not many investors have made money. The reason is not the bad markets or bad schemes; it’s the way an investor behaves. Chasing returns, getting swayed by the fear and greed factor and liquidating the assets before the defined time frame are some of the biggest mistakes that an investor makes.

Every investor should try to adopt simple strategies to manage the portfolios as its simplicity which prevails in the long run. But in today’s world simplicity is the real challenge. For want of better returns investors often complicate their finances and forget that it’s easy to complicate but difficult to uncomplicated. As even Peter Lynch said “The simpler it is, the better it is….”. Stay simple and Keep it Simple.

This article got published at Hindi Dainik Bhaskar on 22-12-2015

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