‘Mutual Fund Sahi Hai’: But Is It Right for Your Portfolio?
September 26, 2024 Mutual Fund
The ‘Mutual Fund Sahi Hai’ campaign, launched by the Association of Mutual Funds in India (AMFI) in 2017, has dramatically changed the way Indian investors perceive mutual funds. Aimed at promoting mutual fund investments, the campaign successfully simplified the investment process, making it more relatable and understandable for the masses.
The success of the campaign lies in its ability to demystify mutual funds and attract unprecedented inflows into the Indian mutual fund industry. In 2024, the industry is booming, with assets under management (AUM) reaching all-time highs. The AUM of the Indian MF Industry has skyrocketed from Rs 10.13 trillion as on August 31, 2014, to an impressive Rs 66.70 trillion as on August 31, 2024-making a remarkable 6-fold increase in a span of 10 years.
[Read: Adding New Mutual Funds for Better Gains? Here’s Why It Could Be a Risky Move]
The advent of direct plans, fintech apps facilitating SIPs, and a strong equity market performance have spurred this growth. By 2024, mutual funds have emerged as a preferred investment avenue, with many investors choosing them over traditional fixed-income options like Fixed Deposits (FDs).
However, while the slogan ‘Mutual Fund Sahi Hai’ suggests that mutual funds are inherently a good investment option, it does not mean that every mutual fund is suitable for every investor. As the mutual fund industry continues to evolve, it’s crucial to recognize that not all mutual funds are ‘Sahi’ (right/suitable) for every portfolio. Individual investors must assess mutual funds based on their specific investment horizon, risk tolerance, and financial goals to make informed decisions.
In this article, we will explore how the ‘Mutual Fund Sahi Hai’ campaign has spread awareness and how the mutual fund industry is evolving. We’ll also highlight how to determine whether a mutual fund is the right fit for you, addressing key factors such as risk, time horizon, and financial objectives.
Suitability Is Crucial: Not All Mutual Funds Are ‘Sahi’ for Everyone
1. Investment Horizon: Short-Term vs. Long-term Investments
Your investment horizon refers to the time frame within which you expect to meet your financial objectives. Whether you are saving for a house, retirement, or a child’s education, your time horizon plays a crucial role in selecting the right type of mutual fund.
-
Short-term Goals: Debt Funds
If your goal is short-term (1-3 years), it's essential to invest in mutual funds that offer stability and low risk. Debt mutual funds, such as liquid funds, short-duration funds, and ultra-short-duration funds, provide reasonable returns with minimal exposure to market volatility. These funds are suitable for investors looking for capital preservation with some appreciation rather than aggressive growth.
-
Long-term Goals: Equity and Hybrid Funds
For long-term goals (5-10 years or more), equity funds, hybrid funds, or thematic funds are generally recommended. Equity funds carry market risk, but the longer time horizon allows the investment to recover from short-term market volatility and deliver higher returns.
Hybrid funds, which combine both equity and debt components, offer a balanced approach for investors who are moderately risk-averse but still want exposure to equity markets.
If your time horizon aligns with the fund's strategy, it could potentially deliver significant wealth creation over time. However, selecting a long-term fund without considering your time horizon may lead to an underperforming portfolio.
[Read: What Is STP in Mutual Funds and Why It Makes Sense at a Market High?]
2. Risk Tolerance: Matching Mutual Funds with Your Risk Appetite
Risk tolerance refers to an individual’s ability to endure market fluctuations and volatility. Every mutual fund carries some degree of risk, and it’s crucial to align your risk appetite with the type of mutual fund you choose.
-
High Risk: Equity Funds (mid and small-cap) and Sectoral Funds
Equity funds, especially those focused on small-cap or mid-cap companies, are inherently high-risk but offer high-reward potential. Similarly, sectoral funds, which focus on specific industries like technology, pharmaceuticals, or infrastructure, are also high-risk investments, as they depend on the performance of one sector.
Investors with a higher risk appetite-those who are comfortable with market swings and potential short-term losses-are best suited for these types of funds. If you're a long-term investor and are able to stomach the volatility, these funds may yield significant returns.
-
Moderate Risk: Balanced Funds and Multi-Cap Funds
Balanced or hybrid funds, along with multi-cap funds, offer a mix of equity and debt, reducing the risk while still aiming for growth. These are ideal for investors with moderate risk tolerance who want a diversified portfolio but aren't comfortable going all-in on equities.
[Read: Flexi Cap Funds v/s Multi Cap Funds: Which Is Better at a Market High?]
-
Low Risk: Debt Funds and Large-Cap Equity Funds
For those with a low-risk tolerance, debt funds (which invest in government securities) or large cap funds (which invest a majority of its assets in Bluechip stocks) are considered to be a prudent option. They offer steady returns but don't participate in the high-growth potential of the stock market. Low-risk investors should steer clear of aggressive equity funds, as such investments may not align with their risk appetite.
3. Financial Goals: Tailoring Mutual Funds to Your Life Objectives
Every investor has unique financial goals-retirement, buying a home, funding education, or achieving financial independence. Your financial goals should guide your mutual fund choices.
-
Retirement Planning: Equity or Hybrid Funds
For long-term goals like retirement, equity funds or hybrid funds are recommended due to their higher return potential over time. Additionally, the power of compounding in mutual funds can significantly enhance your retirement corpus, provided you remain invested for the long term.
-
Short-term Goals: Capital Preservation
If you have short-term goals, such as planning a vacation or buying a car, debt funds or short-duration funds can help preserve capital while offering modest returns. It's crucial not to invest in high-risk equity funds for such goals, as the market volatility could erode your capital when you need it.
Taking a Prudent Approach to the ‘Mutual Fund Sahi Hai’ Philosophy
Given the market’s rising performance alongside heightened volatility, the slogan ‘Mutual Fund Sahi Hai’ must be approached with caution. The campaign is not a one-size-fits-all solution, and in the current environment, choosing the right mutual fund becomes even more critical.
Note: In my previous article, I have covered how one should approach mutual funds amidst a rising market scenario. You may consider reading – ‘How to Choose Mutual Funds at a Market High’.
-
High Market Valuations May Not Favor All Mutual Funds
With markets at an all-time high, valuations of many stocks are stretched, making some equity mutual funds, especially those focused on mid-cap and small-cap stocks, more vulnerable to corrections. Investors who jump into such funds without understanding the risks may face losses during market pullbacks.
-
Volatility Increases the Risk for Aggressive Funds
Mutual funds that invest heavily in equities, such as sectoral funds or small-cap funds, may offer high returns in a rising market, but they are also highly exposed to market volatility. For example, a sectoral fund that focuses on technology stocks might perform well when the sector is booming, but a small negative trigger in global tech sentiment could lead to significant losses.
Not every investor is equipped to handle this volatility. If an investor with low-risk tolerance invests in a high-risk equity fund during a market high, they may panic during a market downturn and redeem their investment at a loss.
[Read: Which Is the Best SIP Investment: HDFC Top 100 Fund vs Nippon India Large Cap Fund]
-
Need for Diversification
In a volatile market, diversification is key. Funds that offer a balanced approach, like hybrid funds or those that allocate assets across different sectors and asset classes, tend to provide a buffer against market fluctuations. However, some investors may be tempted to chase high returns by focusing exclusively on equity funds without considering their risk tolerance or the need for diversification.
While the 'Mutual Fund Sahi Hai' campaign has been instrumental in spreading financial literacy and encouraging mutual fund investments, it's important to approach this with a degree of caution, especially in the current market conditions.
Rising markets may tempt investors to rush into mutual funds, hoping for quick gains, but the associated volatility presents significant risks.
To conclude…
Investors should avoid making impulsive decisions based solely on market performance or the allure of high returns. Instead, they need to carefully evaluate the suitability of a mutual fund in the context of their investment horizon, risk tolerance, and financial goals.
By adopting a prudent, well-thought-out approach to mutual fund investments and by choosing funds that align with their individual financial needs, investors can maximise their potential returns while minimising risks. The essence of ‘Mutual Fund Sahi Hai’ lies not just in awareness but in making the right, informed choices tailored to your financial journey.
This article first appeared on PersonalFN here
