Over the last 10-12 years — since I became a mentor on personal finance and investments — I have been asked one question a million number of times, "Which are the best mutual funds to invest in?"
Whether it's the friends or relatives or colleagues or at the social gatherings or through emails or at Quora, this question has repeatedly haunted me ever since.
My answer, of course, has been one and simple, "None. There is no such thing as the best mutual fund(s)."
And this seemingly strange answer has confused many people:
Their typical reaction has been, "Well, if there are 'no best' mutual funds, then why should we invest in the mutual funds at all?"
Fine. Let's look at it from a different perspective (in my opinion, the 'right' perspective).
What do you do when you consult a doctor? Do you ask him to prescribe the "best-selling" medicines? Do you ask him to prescribe the "cheapest" medicines? Do you ask him to prescribe the "most-effective" medicines?
Of course not!
Because if you do so, you could end up being dead from the wrong medication.
Instead, you tell him your symptoms and let him use his expertise to advise you the medicines that are "right" for your disease or ailment. In other words, the choice of medicines is dependent on your 'health-profile', not on their sales or price or curing ability.
And that's what you should be doing when you consult a financial advisor too. Do not ask him to recommend the "best selling" mutual funds. Do not ask him to recommend the cheapest "lowest NAV" mutual funds. Do not ask him to recommend the mutual funds with "best or highest returns".
Because if you do so, you could end up with huge losses from wrong investments.
Instead tell him about your objectives, income, assets, liabilities, investment time-frame, etc. and let him use his expertise to advise you on the mutual funds that are "right" for achieving your goals. In other words, the choice of mutual funds is dependent on your 'financial-profile', not on its' sales or NAV or returns.
In fact, this is pretty obvious.
If you are a 60-year old retired investor and dependent on your portfolio for regular income, naturally you cannot buy equity-based mutual funds. These funds are good for growth and not for earning monthly income. These funds are highly volatile, whereas a retired investor is looking for stability. He cannot afford even a temporary fall in his corpus, as he has no 'additional' avenues to support himself in the interim.
So even if some equity funds can deliver the "best" 15%+ returns, it is simply NOT the right fund for him.
Likewise, even for a 25-year old young professional, having too much exposure to equity may be a bad idea. Not because he has low risk-appetite. But because he may have critical needs in the near term. He may be intending to buy a house in the next 2-3 years, for which he needs to build up a corpus for down-payment. And 2-3 years is too short a time to invest in equity funds. Hybrid or debt funds would be more 'appropriate' for him.
But if he has no near term needs, he can target growth and go all out for equity funds.
Or, a person in the higher tax bracket and looking for steady income, will do well to invest in the 'tax-efficient' debt funds. His tax liability on the returns will be much lower, compared to the other regular income products like bank fixed deposits or post office schemes.
But if he is in the nil or lower tax bracket, the tax efficiency of debt funds has no role to play in his investments. He can very well choose to invest in bank fixed deposits or post office schemes.
These are some of the many examples that prove that one's financial profile is the key determinant in choosing the 'right' or the 'most appropriate' or the 'most suitable' mutual funds.
A few responses to this argument were, "Fine, we are not interested in debt funds or hybrid funds. Tell us some of the best equity-based funds."
Well, even within equity funds, there is a wide variety e.g. index funds, large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, ELSS funds, thematic funds and some more. Each has its pros and cons.
So again the choice will depend on the investor's financial profile. For example, for a near-term 3 to 5 years' time horizon or relatively low risk-appetite, it would be prudent to avoid mid-cap, small-cap or thematic funds. If the objective is tax saving, then the choice would have to be among ELSS funds. If the investment size is small say around Rs.5000 to Rs.15000 per month, 2-3 funds will serve the purpose; but for say Rs.1 lakh per month, a diversified portfolio of 6-8 funds would be advisable.
In other words, even if the investment is limited to equity funds, some knowledge of the investor is a key and necessary input to choosing the 'most appropriate' funds.
That's why I mentioned at the beginning that this is the 'right' perspective of looking at mutual funds.
Yet 'most surprisingly' people continue to chase the so-called "best funds", without sharing their financial profile with the advisor. They continue to ask the same question, "Which are the best mutual funds?" They are simply unaware that they are taking a huge financial risk by asking for generic advice.
There are no best mutual funds. There are only right (or wrong) mutual funds.
In short: Ask for the 'right' funds, not the 'best' funds.
One more point:
I am sure you never ask your doctor for free advice. You have no problem with paying his fees.
But you are always looking for free financial advice. You have a big problem in paying his fees.
Beware! This is nothing but being 'penny wise pound foolish'. All that you achieve by this is to force the advisor to switch from a transparent mode of compensation to a non-transparent mode with hidden charges.
Let me ask you a simple question here, "Do you share your expertise or knowledge free of cost? Will you work for free? If you don't pay the advisor his fees and instead seek free advice, he will have to look for other options to earn his bread and butter. And this may not be in your best interest. If you are not taking care of his interest, you can't expect him to take care of your interest. The 'free' advise may turn out to be 'very expensive' for you.
In short: Ask for the 'right' advice, not the 'free' consultation.
Whether it's the friends or relatives or colleagues or at the social gatherings or through emails or at Quora, this question has repeatedly haunted me ever since.
My answer, of course, has been one and simple, "None. There is no such thing as the best mutual fund(s)."
And this seemingly strange answer has confused many people:
Their typical reaction has been, "Well, if there are 'no best' mutual funds, then why should we invest in the mutual funds at all?"
Fine. Let's look at it from a different perspective (in my opinion, the 'right' perspective).
What do you do when you consult a doctor? Do you ask him to prescribe the "best-selling" medicines? Do you ask him to prescribe the "cheapest" medicines? Do you ask him to prescribe the "most-effective" medicines?
Of course not!
Because if you do so, you could end up being dead from the wrong medication.
Instead, you tell him your symptoms and let him use his expertise to advise you the medicines that are "right" for your disease or ailment. In other words, the choice of medicines is dependent on your 'health-profile', not on their sales or price or curing ability.
And that's what you should be doing when you consult a financial advisor too. Do not ask him to recommend the "best selling" mutual funds. Do not ask him to recommend the cheapest "lowest NAV" mutual funds. Do not ask him to recommend the mutual funds with "best or highest returns".
Because if you do so, you could end up with huge losses from wrong investments.
Instead tell him about your objectives, income, assets, liabilities, investment time-frame, etc. and let him use his expertise to advise you on the mutual funds that are "right" for achieving your goals. In other words, the choice of mutual funds is dependent on your 'financial-profile', not on its' sales or NAV or returns.
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| Have the 'right' perspective on your mutual fund investment. |
In fact, this is pretty obvious.
If you are a 60-year old retired investor and dependent on your portfolio for regular income, naturally you cannot buy equity-based mutual funds. These funds are good for growth and not for earning monthly income. These funds are highly volatile, whereas a retired investor is looking for stability. He cannot afford even a temporary fall in his corpus, as he has no 'additional' avenues to support himself in the interim.
So even if some equity funds can deliver the "best" 15%+ returns, it is simply NOT the right fund for him.
Likewise, even for a 25-year old young professional, having too much exposure to equity may be a bad idea. Not because he has low risk-appetite. But because he may have critical needs in the near term. He may be intending to buy a house in the next 2-3 years, for which he needs to build up a corpus for down-payment. And 2-3 years is too short a time to invest in equity funds. Hybrid or debt funds would be more 'appropriate' for him.
But if he has no near term needs, he can target growth and go all out for equity funds.
Or, a person in the higher tax bracket and looking for steady income, will do well to invest in the 'tax-efficient' debt funds. His tax liability on the returns will be much lower, compared to the other regular income products like bank fixed deposits or post office schemes.
But if he is in the nil or lower tax bracket, the tax efficiency of debt funds has no role to play in his investments. He can very well choose to invest in bank fixed deposits or post office schemes.
These are some of the many examples that prove that one's financial profile is the key determinant in choosing the 'right' or the 'most appropriate' or the 'most suitable' mutual funds.
A few responses to this argument were, "Fine, we are not interested in debt funds or hybrid funds. Tell us some of the best equity-based funds."
Well, even within equity funds, there is a wide variety e.g. index funds, large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, ELSS funds, thematic funds and some more. Each has its pros and cons.
So again the choice will depend on the investor's financial profile. For example, for a near-term 3 to 5 years' time horizon or relatively low risk-appetite, it would be prudent to avoid mid-cap, small-cap or thematic funds. If the objective is tax saving, then the choice would have to be among ELSS funds. If the investment size is small say around Rs.5000 to Rs.15000 per month, 2-3 funds will serve the purpose; but for say Rs.1 lakh per month, a diversified portfolio of 6-8 funds would be advisable.
In other words, even if the investment is limited to equity funds, some knowledge of the investor is a key and necessary input to choosing the 'most appropriate' funds.
That's why I mentioned at the beginning that this is the 'right' perspective of looking at mutual funds.
Yet 'most surprisingly' people continue to chase the so-called "best funds", without sharing their financial profile with the advisor. They continue to ask the same question, "Which are the best mutual funds?" They are simply unaware that they are taking a huge financial risk by asking for generic advice.
There are no best mutual funds. There are only right (or wrong) mutual funds.
In short: Ask for the 'right' funds, not the 'best' funds.
One more point:
I am sure you never ask your doctor for free advice. You have no problem with paying his fees.
But you are always looking for free financial advice. You have a big problem in paying his fees.
Beware! This is nothing but being 'penny wise pound foolish'. All that you achieve by this is to force the advisor to switch from a transparent mode of compensation to a non-transparent mode with hidden charges.
Let me ask you a simple question here, "Do you share your expertise or knowledge free of cost? Will you work for free? If you don't pay the advisor his fees and instead seek free advice, he will have to look for other options to earn his bread and butter. And this may not be in your best interest. If you are not taking care of his interest, you can't expect him to take care of your interest. The 'free' advise may turn out to be 'very expensive' for you.
In short: Ask for the 'right' advice, not the 'free' consultation.