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The book 'Let's Talk Mutual Funds' follows 'Let's Talk Money'. What is the rationale behind addressing mutual funds in specific now?
The question of why now goes back to my previous book ‘Let’s Talk Money’. I remember, writing a chapter on mutual funds and leaving a line saying that since there is so much to say, mutual funds as a topic requires a full book. While I forgot about this, my readers left periodic reminders on my social media handles and enquired about the book. This is the primary reason behind writing ‘Let’s Talk Mutual Funds’.
Secondly, there is a lot of regulatory work done in the MF space and mutual fund as a product category has come out very well in terms of being retail-ready. Also, there are many resources available but a strategy-based book was missing. Thus, to introduce a process-based book, I wrote ‘Let’s Talk Mutual Funds’.
Can you tell us more about how did you identify and finalize the topics?
I have been dealing with the subject of mutual funds for many years now and hence I already had a clear idea of how the book should shape up. Also, I would like to say that keeping the investment journey in mind made the topics seamlessly flow one after the other. In terms of writing, it took me 2-3 months.
‘Let’s Talk Mutual Funds’ is a sequential book that takes you through the entire process-based money management system that begins with cash flows and then moves to other more complicated things. It also takes you through a structured journey right from investing to staying invested for achieving financial aspirations.
What are the common mistakes that investors make before investing in mutual funds? How can they reduce the likelihood of making these mistakes?
The biggest mistake is rushing to choose a fund without understanding whether or not it fits your money box but only because it has given high returns in the recent past.
Another mistake is not having a diversified portfolio. Unless there is a basic asset allocation that works for investors’ age, risk profile etc. they will not be able to decide how much risk they can take and how much equity or debt exposure they should have.
Also, there is a lack of diversification within the equity and debt portfolios as investors tend to move from one category to the other. For instance, today if they are investing in small caps, they may move next to mid caps, and so on. But it is all about having slices of a pie, for example, a half in a large diversified index fund, a quarter in a mid cap and a quarter in a small cap.
Investors can reduce the likelihood of such mistakes, by following process-based investing.
Is there any checklist or process that investors can refer to before investing or exiting from a mutual fund?
While ‘Let’s Talk Mutual Funds’ gives you the checklist, it is essentially about reducing choices. There are 37 categories of open-ended funds but every category is not equally important and only five or six of them should suffice.
Once you have shortlisted the category, from within that you need to identify the regularity of performance. For example, look out for the consistency of an equity fund in the last 10-15 years. It may not be a constant top performer but being in the first quartile is good enough.
Thus, it is a process-based approach and it has to be understood at each individual level, which is why the book does not give a model portfolio and the choice is left to the reader.
Also, exiting depends a lot on asset allocation. For instance, if the small cap slice has grown larger than desired, then that’s the category to reduce and within this you need to consider the relative performance of schemes that you have.
The other way to do this is to look at the portfolio periodically and see how the schemes are performing. If they are not performing regularly for 2-3 years, you should rethink about them being a part of the portfolio. However, do keep in mind that redemption has a cost and switching is subject to taxation.
Coming back to the book, what makes it different from other financial books?
While many financial books carry the DNA of foreign authors, this book is completely in the Indian context. Even the cultural subtext and examples that the book gives are Indian.
Secondly, instead of talking about complex topics like diversification and retirement planning from the start, the book gives very basic level information which talks about investment preparation through cash flow management and emergency funds among others. Also, it gives a process that everyone can personalize basis age and life stage rather than using a set formula.
How can the book help MFDs/RIAs simplify mutual fund investing for their clients?
A lot of MFDs and RIAs whom I know give their prospective clients a copy of the book.
They have given me feedback that this makes their work easier as the potential client comes back more informed since they have understood the concepts already. Thus, this becomes a tool for the distribution industry to make clients understand the need of having a structured approach rather than an arbitrary approach.
In the book, you have written that investors should work with MFDs/RIAs to invest money. Why do you think that MFDs/RIAs bring a lot of value to the table?
No matter how much I write in the book there will come a time when you will need professional advice. In both my books, 'Let's Talk Money' and 'Let's Talk Mutual Funds', I have said that many people will need help as these are complicated decisions.
My communication has been that investors have to understand the basics so that they are empowered to ask the right questions and understand what their MFD/RIA is doing.
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Monika Halan is a Delhi based personal finance writer, speaker and author who strives to help families get their money decisions right. Her 30-year career spans across media, public policy and financial education.
