It is no different in the world of investments. From multiple trading apps that allow you to invest in not just India but even the US to a plethora of investment options from insurance to mutual funds to banks, everyone is fighting for a share of your savings. The time between decision and action has been compressed dramatically and one just has to use one’s left thumb to invest. That’s the easier part. But is that the real issue that needs addressing?
The big problem from an investor’s perspective is that we all have finite income. Come to think of it, we don’t just buy dresses; we try them out or return them if they don’t fit well. The same goes for cars and a host of other products. There is a return policy or a warranty that guarantees performance for a period.
That, to me, is the big difference between investments and other categories. There is no way you can return and get your original sum back if the investment doesn’t perform. In fact, it is exactly the opposite. The entire mutual fund industry has been for years breathlessly (at least five seconds to be precise) highlighting that mutual fund investments are subject to market risks.
Investment is one area where experience matters. It is a field of risk management and not just returns management. It is as much a field of emotions as domain expertise. A person who has been through multiple boom and bust cycles is cherished and sought after within the fund management industry.
The mutual fund industry is now a force to reckon with and fast living up to its retail participation promise. In a span of two decades, the Assets Under Management (AUM) have grown 40 times at 17% CAGR, with the SIP book and investor base growing five times during the past five years. In addition, the industry reached a historic number of 14.11 crore total investor folios in December 2022. (Source: AMFI). Like a typical David vs Goliath battle, retail investors primarily through Systematic Investment Plans (SIPs) are effectively countering any Foreign Portfolio Investor (FPI) outflows.
When we examine Association of Mutual Funds in India (AMFI) data as of November 30, 2022, we do notice some signs of retail consumer behaviour of use and throw in MFs. Among equity mutual funds, only 51% of investments are held for longer than 24 months. Additionally, compared to 14% of regular plans, just 3% of direct plans are held for longer than five years. Investments are like children; they do get better with time. They need as much patience, advice and nourishment. Each of our investment needs is different as our end goals are different.
However, there is a tendency among investors, particularly newer investors, to make decisions solely based on immediate past performance. Such choices might lead to undesirable outcomes since the immediate past performance of a mutual fund scheme does not guarantee its future performance. In our opinion, time in the market is more important than timing the market.
Hence, we believe that providing investors with individualized guidance and relationship management has a lot to offer. Nowadays, gathering information and comparing various fund types online is simpler but may lead to investors making uninformed decisions. A financial advisor can help clients put things into perspective and make wise long-term investment decisions.
For, financial advisors play an important role in shaping an individual’s financial behaviour. They help individuals understand their financial situation, set financial goals, and create a plan to achieve those goals. They provide guidance on various financial topics, such as budgeting, saving, investing, tax planning, retirement planning, and insurance. By providing objective advice, financial advisors can help individuals make informed decisions about their finances, overcome obstacles, and avoid common mistakes.
These advisors can also help individuals identify and address behavioural biases that may be affecting their financial decisions. For example, investors may be prone to impulsive decision-making or procrastination. The advisors can help them recognize and overcome these tendencies. By working with advisors, individuals can achieve the ultimate end goal – financial independence.
(G Pradeepkumar is CEO of Union Asset Management)
