Easy Mutual Fund Investing

Posted On Wednesday, Jul 30, 2014


Kelly Johnson, the noted aircraft design engineer known especially for his contributions to fighter plane designs, once gave his team of design engineers a few tools and posed the challenge that the jet aircraft they were designing must be repairable by an average mechanic in the field under combat conditions with only these tools. He asked them to “keep it simple stupid”. Actually stupid did not mean the engineers were stupid rather that their design ought to be simple and uncomplicated enough for it to be fixed with the limited tools available.

The crux of the phrase “keep it simple stupid” which has over time come to be adopted as a design principle applied in the US air force, software development, film animation, and business marketing worldwide is that systems work best when they are kept simple. Simple to learn, use and fix if broken. “Keep it simple and straightforward” is a variation derived from the above phrase. In fact we can’t help but observe that this principle is not more relevant anywhere than it is in investments and personal finance.

The penchant for complexity

For long the investment services industry has taken pleasure in building structures that encouraged fancy products, layers of expensive costs, and reams of verbal garbage. Jargonized product notes made the common investor feel financially confused and lost. The helpless investor was driven to think he must rely on a middleman, a distributor who automatically assumes the role of an advisor, to find financial success. This was the safe way to avoid getting trapped in bad products or sometimes good products that are not suited for him/her.

In short the industry had made finances and investment look like they are manageable or understandable by only some elite class of intellects while the rest must stay dependent on brokers and follow whatever recommendations they made, no questions asked. This has been true for most financial products – insurance, mutual funds, and stocks. Consumers were not encouraged to understand financial products, how they work and their useful features. The obvious effect of this was rampant mis-selling and consequently damaged trust and confidence of investors especially in case of market linked products.

However investors can be glad to note that some things are changing slowly. Insurance products can be bought online directly from insurers, for much lower premiums. Mutual fund schemes too can be invested in directly with fund houses and the expense ratio of these are lower. Regulators are emphasizing on investor education and are taking steps to unclutter the mess created by the launch of dozens of schemes by the same AMC with little differentiation in feature of scheme objective.

But for now we look at what can an investor do to simplify his/her investment life. As against what is popularly held, the truth is simple is smarter than complex. Keeping it simple does not indicate laziness or no application of mind. Rather it means the opposite. In reality keeping anything simple requires dedication and deep knowledge.

How to keep investments simple and straightforward

Follow these 3 steps to be organized with your investments and personal finance.

i. Have a clutter-free portfolio
Do not make the mistake of accumulating too many funds than can be monitored by you. While there is no magic number for the optimum number of funds to own most professionals agree that there is certainly no need to have as many as 25, 15 or even 10 equity funds in one’s portfolio.

Many people wrongly assume that to diversify investment they must diversify with several equity schemes. But too many schemes do not necessarily bring diversification. As the investment objective and benchmarks of these are identical there is bound to be a great deal of stocks overlap.

However it is natural to feel concern, especially when the amounts are large, to commit your money to a single fund however again too many is not ideal. We feel for individual investors a maximum of 5-6 equity funds chosen from different fund houses would do a decent job. An equity fund of funds is a convenient way of investing in several equity schemes while actually investing in a single scheme. Here the fund manager chooses a few best schemes using quantitative filters; and in case of Quantum’s fund of funds scheme some qualitative filters too.

Additionally for your asset allocation needs a liquid fund, bond fundgold fund may be required. In fact more attention is to be given for proper allocation among the different assets than for allocation among the different funds within an asset class.

ii. Understand the product before investing
Whether it is a mutual fund scheme or a stock that somebody recommended or you casually came across endeavour to understand how it makes money before deciding to invest in it. Get a basic idea of what are the circumstances that can affect your returns from that investment and what are the factors that can help returns.

Knowing this will prepare you to handle the investment well. Too many mutual fund investors lose money even while investing in well performing funds because they time markets, and do so wrongly!

The mechanics of how various types of mutual funds work and how they generate returns is simple enough to be understood by average persons. However if you do not understand how a particular scheme works (possibly because the product literatures are very confusing or the relationship manager did a poor job) or are not convinced it is suitable for your personal investment goal it might be a better idea to avoid it never mind if its performance is appealing.

It is best to be not overly dependent on distributors selling products for commission while selecting investments in order to avoid conflicts of interest regardless of whether you may buy through them. Invest time in knowledge, in getting financial education. You could subscribe to useful financial literatures and attend workshops offered by knowledgeable, experienced professionals. However prudence must be exercised before implementing any knowledge you receive.

Quantum conducts investor awareness camps from time to time in various locations where attendees often have the opportunity to interact with our fund managers. Watch out for upcoming Path to Profit events in your location.

iii. Organize documents and online investment accounts
Keep a separate folder where all your investment, personal finance documents are kept and share this information with a family member. These days a lot of our investment accounts are online. It is wise to share credentials of all such accounts or at least folio numbers with the family member. It is important for your immediately family to be aware of the schemes you have investments in. This information is generally not required in regular daily affairs but the ease of retrieving it in time of an emergency or in case of your absence will go a long way in saving from stress.

Simplicity at Quantum Mutual Fund

What is Quantum doing to make investments simple? Along with transparency and integrity, simplicity is a core value at Quantum as a fund house. The vision statement reads, “To stay focused on the needs of our investors… by adhering to the principles of simplicity, transparency and integrity...”

Here are two things that demonstrate how we pursue simplicity for our investors

i. Simple products
We have always believed in limiting our product offering to that which can add value to investors’ portfolio without adding clutter or confusion. No new product launches to capture the best of investor euphoria around popular events, no launching fancy schemes with fancy names each time a particular theme is popularized by the financial media.

Among the equity products in Quantum’s offerings is a diversified equity fund, an ELSS, an index fund and a fund of funds. Each of these serves a different purpose; none of them is a replica of another differing only in scheme name. None of them could serve as a substitute for another.

Besides these there is a multi asset fund, a liquid fund, a gold ETF and a gold savings fund for those who’d like to invest in gold but do not have a demat account.

ii. Simple, paperless investment process
In this era when we are used to buying everything online – from clothes to computers – why should mutual fund investments be an exception? Quantum pioneered the online, totally paperless way of mutual fund investing in India. KYC compliant investors can transact online the first time itself via the Invest Online portal, a unique procedure. (With other AMCs one needs to undergo certain offline procedures before online transactions can be done).

Once an investor, it gets even simpler to transact! A simple email is all it takes to make additional investments in any of Quantum schemes. To know more call us on 1800-209-3863 / 1800-22-3863 or drop a contact me request.

Therefore go on ahead, keep investments as simple as possible but not simpler. Get the assistance of a financial advisor for your investment related queries.

Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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