Mutual fund investments are subject to market risk. This disclaimer is unique to mutual funds and sets them apart from all other investment categories.
Being open end products, entry and exit from schemes are always subject to market valuation of assets being held in MF schemes on the date of transaction. Market valuation of assets are usually volatile due to the influence of a number of factors. Theoretically, return in equities should mirror corporate earnings but due to liquidity, events and sentiments, valuations of stocks very often vary from their fair and expected valuations. In such a situation, we see the emotions of fear and greed at full play. However, in the long run, the market valuations fall in line with corporate earnings only.
In spite of the fact that in a growing economy equity is one of the best asset classes, emotional behavior does not allow investors to reap the full benefit of returns. For instance, equity funds having delivered 18-20% tax-free CAGR in the last 25 years, still remain push products and the participation of people in the Indian growth story is woefully insignificant.
Fund managers are doing a good job of capturing the returns in markets but unfortunately these returns are not actually delivered to investors. Thus, as IFAs, it becomes our duty to handhold investors to stay put so that our investors convert these returns in to wealth.
When it comes to mutual funds, the general perception among investors is that debt funds are safe and equity funds are risky. However, in reality, in the debt segment too, only liquid funds and FMP are stable and are thus ‘pull products’. Income funds and gilt funds are volatile and do not enjoy that status.
Thus, we see that real concern of the investors is stability and volatility and not fund selection. Hence, to increase their confidence in MFs, we have to manage volatility. Once that is done, there will be no other reason for investors to stay away from MFs. Having said that, let’s accept the fact that we can’t eliminate volatility completely but what we can do is bring it to an acceptable level which can help overcome the fear and greed of investors.
Bringing volatility in control will help us draw investors towards equities.
S. K. Bagaria is the President of Kolkata based IFA Association Ask Circle.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
