POSTED BY January 27, 2017 COMMENTS (103)ON
Are you investing in equity mutual funds or planning to invest?
While you might have done your research and reading about investing in a mutual fund, but I am sure you still do not have 100% clear idea about what does it mean to invest in a mutual fund. In this article, my attempt is to make you understand what exactly you should be expecting out of your investments in equity mutual funds.
A lot of investors are approached by advisors and agents who sell equity mutual funds to them in the name of “high returns”. But investors are not informed about the risks associated with it. Because of this most of the investors redeem their investments if markets fall or if the returns are not that great after a year or so and hence lose out on getting the benefits of mutual funds over the long term.
This happens because in investors’ mind a mutual fund is all about “getting high returns”.
So it’s very important to clear all the wrong notions about equity mutual funds and set a clear understanding of them in your mind so that you get the best out of your mutual fund’s investments.
This article is all about “Equity Mutual Funds” and not any kind of mutual fund. One of the biggest myths is that
Mutual Funds = Stock Market
There is various kind of mutual funds, ranging from super safe mutual funds (like liquid mutual funds or debt mutual funds) to high risky funds (like mid-cap funds and equity mutual funds). Below is a
3 important points to know before you invest in equity mutual funds
So in this article, I am listing various important points you should know if you are investing in equity mutual funds or planning to do the same.
Investing in an equity mutual fund is not like putting money in a fixed deposit or real estate. When you invest in an equity mutual fund, it invests your money in a portfolio of companies.
Equity Mutual funds are a way to invest in a number of stocks using one single investment and get it managed by an experienced and well-qualified fund manager.
For example, Birla Sun Life Frontline Equity had 80 stocks in its portfolio as on 30th Dec 2016, as per the money control website. This means that if you are investing in these mutual funds, you are actually investing in 80 companies.
You own 80 businesses
Your returns or loss depends on 80 different company’s performance over time. Think about it.
Below is a partial list of companies in the fund.
Now when you know that you are actually invested in 80 different companies, it’s important to know that returns from your mutual funds actually come from the returns from these companies stocks performance over time, it’s the average of these companies.
Below is a very good video, where it’s explained how business create wealth over the long term in Indian context
No business earns exceptional returns over the short term. Now as you know that you are actually investing in a business when you are investing in equity mutual funds, that too in multiple companies, the great returns will come over the long term.
Some companies will not do great, some of them will do average and some of them will grow exceptionally. And when you do the average, you will get very good returns.
The best part is that the chances of great returns are much higher because you are diversified across various sectors, companies, management, and size.
76 times return in 20 yrs period
Let’s talk about a Franklin India Bluechip Fund which started in 1993. It’s been 23 yrs now since inception.
Over the first 20 yrs (from 1993 to 2014) the fund has given 76 times return. It turns out to be 24% CAGR return and by any standard its mind-boggling returns, especially because it’s for 20 yrs compounded.
10 lacs invested became 7.6 crores.
If this same 10 lacs was invested in Fixed Deposits, then in 20 yrs it would have grown to 67 lacs.
So its 67 lacs vs 760 lacs.
Sadly, investors don’t wait in mutual funds
Sadly, this 76 times returns do not reflect in most of the investor’s portfolios because investors don’t think long term and think short term. If for some years, the fund does not perform well, they want to move to something else which gives them awesome returns.
Businesses go through various cycles (success and failure, good and bad). So you need to wait for a very long term to see some amazing returns.
If you are right now invested in equity mutual funds, it’s very important to understand that you will not get great returns over the short term (2-5 yrs). Trust your mutual funds and keep investing and over time you will reap the benefits.
There are various mutual funds that are 10+ yrs old and most of them have created big wealth for their dedicated and committed investors.
“Mutual Funds investments are subject to market risk, please read the offer document carefully before investing”
You will hear this line often in the mutual fund’s advertisements on TV. A lot of first-time investors who do not understand equity investments think that “Market Risk” here means that their money is at risk and they can lose all their money by investing in the stock market or mutual funds.
Mutual Funds are Volatile
That might be true with one particular low-quality stock. But with mutual funds, it’s far from truth. Dozens of quality stocks portfolio which is monitored regularly can bring in some ups and downs in the short term, but your money will not be lost at all.
All you can expect is VOLATILITY with your mutual fund’s investments. Your investment value can go up one day and then down one day, and then again down another day and again down 2nd day and then boom… UP on the third day and then again down and again up and up and up …
I hope you got the point.
But you need to understand a very important thing. Volatility is an inherent part of mutual funds investments as it’s investing in stocks, but it’s more of short term phenomena. You need to sit tight and look at the long term trend and how it moves.
Example of HDFC Top 200 fund
HDFC top 200 is one of the most well-known equity mutual funds which has created great wealth for its investors. Its NAV rose from Rs 10 to Rs 372 in 20 yrs.
It’s a great return over the long term, but the journey was not simple. Its NAV went up first, then came down and then again up and down. See the ups and downs in the below chart for 20 yrs
Did you notice how tough it would be for someone to not exit and stay invested?
If deep down the fund value is growing. This can be measured by check how the moving average is trending. If you do the average of 2 months NAV and then 3 months and 5 months and keep increasing it, you will see the trend is up and that’s what is the most important take for an investor.
Let’s see how the moving average trend looks like for this same fund over 20 yrs period
Don’t look at the fund performance and NAV movement every day or month
The volatility in the stock market will keep hitting your emotions and tell you – “Hey, it’s better to sell your funds and be safe”. The biggest problem with mutual funds is that its NAV is available on the daily basis.
What would happen if you were allowed to see your mutual funds NAV and its performance only after a period of 5 yrs? What if an investor who had invested in HDFC top 200 long back in 1996 was able to find out how its fund had performed every 5 yrs?
Below I have plotted the NAV data for the month of Oct for 1996, 2001,2006,2011 and 2016. See how it looks like
This tells us that if we stay with our funds (provided they are chosen properly and reviewed from time to time) can help us grow a massive amount of wealth.
So stop looking at your mutual fund’s performance in short terms like 3 months or even a year.
Mutual Funds investments are highly liquid – If you redeem your mutual funds, you can get back your money in 3-4 business days in case of equity mutual funds. In case of liquid funds its just 1 day, so for short term requirements you can keep some money in liquid funds, but most of your long term goals related investments should be in equity mutual funds
Post-tax returns on mutual funds are better – As of now, the long term capital gains in equity are tax-free, which means that after 1 yr of investments, any profits are not taxable. So this is another advantage of investing in equity funds
You can change your investments any time – Other than tax saving mutual funds, almost all the mutual funds can be switched to other mutual funds if you want. So if your fund does not perform well, you can switch it anytime to another fund
I hope you got some great insights into your equity mutual funds investments and how you should behave as a mutual fund’s investors. It’s very different from investing in Fixed Deposits or PPF or any other kind of investors and your expectations should be very different.
Let me know if you have any more points to discuss or ask in the comments section.
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103 replies on this article “99% mutual fund investors do not understand these 3 critical points for long term success”
Interesting N educating article. I am a retired man N can you suggest some funds to invest Rs 20 lacs. where I can get some monthly income for my expenses as well as there is an appreciation in value to beat inflation.Thanks
Sir , suggesting a mutual fund name without understanding your risk appetite and your requirement in detail is not a right thing. If you can leave your details here on our website, my team will give you a call and talk to you and guide you
Very well expland about mutual funds and its type, Good information.
Thanks for sharing
Glad to know that Amol ..
Are you talking about the below fund which holds good in current scenario ?
ICICI Prudential Value Discovery Fund (G)
You mean in the article ?
Can you give links to site where we can plot this 200 NAV average for MF. Or may be how to DIY.
There is very less technical material available for MF as compared to Stocks
I am not sure were can you do that analysis !
One common investing strategy used by many mutual fund investors is to look through the fund rankings at the end of each year and pick the top four or five best-performing funds to invest in for the next year. On the surface, this sounds like a reasonably logical investment strategy. There is just one problem; it does not usually work very well. The strategy overlooks the fact that investments tend to be cyclical.
Thanks for sharing that Rishika
Is investment in blue chip company risky or safe investment option?????
Investments in any stock is always RISKY !
Can you suggest me some good mutual funds dat invest in blue chip
Take any diversified fund like ICICI pru Discovery !
Hi Manish – Awesome article. I wanted to start investing in a SIP for long term period atleast 10-15 years is the time line.
I am well aware of SIPs and made some investments long back. Do you recommend any particular fund. Would like to go some what aggressive this time. I had invested in HDFC top 200 and IDFC premier …
You might want to look at ICICI Pru Discovery this time .. a good fund ! . Also let us know if you want to invest through Jagoinvestor ? We have many benefits for our clients ! .. Just fill http://www.jagoinvestor.com/mutual-funds#sign-up
Need your valuable suggestion on this Mutual fund scheme : IDFC Premier Equity -Direct Plan – Growth.
I am investing in this fund 5 years through SIP’s. Manager Kenneth Andrade has left and Anoop Bhaskar has joined IDFC and managing this fund since April 2016. This fund was a 5 star fund a few years back and now is a 1 star or 2 star fund.
Financial experts are suggesting to exit this fund and invest in other midcap funds which are doing well.
But my gut feeling says that since Anoop has good track record, he will get the IDFC Premier Equity fund back on track in a few years time. Also, if we continue with our SIP’s thru the lean period of the fund and the fund manager can make the fund perform well, then we can reap profits.
Big dilemma is Should we stick with this fund or exit this fund. Please provide your valuable opinion and suggestions on this fund. Thanks.
I think you should still stick to the fund . Most of the times there is a big team which manages the whole fund, instead of just a single person. See how it goes for next few months before you decide to exit !
Thanks Manish for ur suggestion !
Thanks for your comment Balaji
I have my pension a/c in SBI chandrayangutta Branch now. Here service is bad and I have to keep contacting them without any response often. I want to transfer this pension a/c to near by Ramakrishnapuram Branch of SBI. Will theer be any problem with Pension credit? I have auto debit to MF thro NACH autodebit. Will it get affected? Earlier EC debit to LIC will continue?
Sorry we are not aware of that.
Thanks for your comment rajeev
Nice article, Manish. Very well written and makes me believe more on MF.
I have a question though, how does compounding works in MF growth. Isnt it directly propotional to NAV of the fund. Today nav is 100 rs and for 1000 rs I bought 10 units. I hold the units for some years, and then decided to sell it. On the selling day, the nav can be more than or less than 100 and hence i get NAV*10=xx rs. where is compounding playing a role here?
There is no fixed interest you get in mutual funds, the compounding is back calculated in MF. so if you buy at NAV of 10 and your NAV becomes 100 in 10 yrs, you back calculate and say that you got 25.89% Compounded return . Its not known in the start ..
Basically compounding means that the growth happens on not the investment amount, but the grown amount every time .. thats what is called compounding ..
If you need help in mutual funds, our team can help you in everything .
Just fill up https://www.jagoinvestor.com/mutual-funds#sign-up
-Nice article but have a Question?
In all your examples you mentioned a Lumpsome amount invested in a certain fund and its returns after a span on 23 years ( 10 Lac in 1993 is now 7.6core now). But as an average investor, we can only reach to that amount only after few years of regular SIPs. So you suggest to STOP investing in that Fund when we reach a good amount and then leave it for 20 plus years for good returns? If that’s the case, we never be alive to see such returns. 10 Lacs amount in 1993 is now equal to 50lacs in 2016 after inflation adjustment.
Sir, this is mainly for those who still have 1-2-3 decades left for investing in equity. If someone is already near his retirement, then this is not applicable for them as the time is already gone.
Really appreciated. Simply understandable to everyone. Thanks.
Thanks for your comment Dominic
Manish, I have a query regarding Franklin India Bluechip Fund. As per the image for Rs. 10 Lakh invested in this fund from 1993 to 2014 the returns are 76 times i.e., 760 lakhs. I tried to verify it on valueresearchonline.com with Rs. 5,000/- Monthly SIP for 20 years so, my investment is Rs. 12,05,000/- and the returns are Rs. 2,52,91,300/- which is around 20.9 times. So, how you got 76 times?
Because the data I showed is for Lumpsum investment and not SIP , with SIP you might get different numbers and thats what you got !
Thanks for giving wonderful insights on MF which is a very gray topic. What fascinated me is the list of 40 odd out of 80 companies you have provided in one example. Is there any way we can see which all companies an MF invests into? When they say Midcap, Smallcap or Bluechip I assume they invest in a handful of companies. How can we figure out which all?
Appreciate your continuous attempt at making India financially literate.
Glad to know that Akshay ..
Nice Article Manish!
I liked the point ‘if you were allowed to see your mutual funds NAV and its performance only after a period of 5 yrs’.
Yea.. if that happens, I think most of the people will benefit !
Hi i am new to this SIP way of investement. Can you plzz suggest me , which fund i should buy. I want to invest 5k in a month that too in two ways. One with low risk and one with average to high risk. Plzz suggest. Thanks
Good article. But what is the impact of the various charges levied by the fund on the mgmt,
Your point on staying long is well taken. Appreciate it. thanks
When you say Impact, you mean negative here I guess.
Charges are deducted from the fund value and the NAV is then published. Its a active managed fund and hence the fees. But if there is no fees, then who will manage it ?
Very informative article. Thanks for this.
Thanks for your comment Mumtaz
Nice Blog. I have one question Am Investing via SIP in Franklin India Blue Chip for one of my financial goal which is about 10 to 15 years from now. Recently I have switched to Franklin India Prima Plus gradually. How about this fund’ s track record. Is this a good fund for long term.
I think prima plus is a wonderful fund to invest in 🙂 ..
great article as always
being presence of so much ratings & advisers (google-ing), it become confusing. specailly fund houses showing returns up to 30 % but on a scale of 10 or more years it becomes 12%!!!!- REQUESTING YOU TO MAKE US UNDERSTAND THIS MATHS.
once you have a decent corpus(acquired ) than comes more sever time whether to remain invested, switch, reinvest or redeem 7 keep some portion as safe?
Its because the 30% return you get in 1 or 2 yrs, there are years when you get negative return too .. so the average turns out to be in range of 12-15% over a long term !
so should we only chose the funds which performing more than 20 years ?
No , it does not mean that. I am only shows the data , thats all .. All funds will complete 20 yrs someday ..
But surely choosing a fund which is 5+ yrs old is suggested !
Very very informative article Manish, Thanks.
With your blog and many other we can understand which fund require to select, investment time duration and also clearly understand fund selection process like select from large cap, mid cap, small cap
Things are very easy to while selecting good performing fund. But my confusion is how to go for which goal in life
Like for what reason we should go for large cap? When we require to select multi cap, and when need to select mid/small cap
If you give some brief then it would be very easy for us to understand
I will do an article on that !
can u advise how to buy e copy of your books ,bcse they all showing hard copy delivery.pls send me the link to buy e copy
Here is the Kindle Edition link for my first book – https://www.amazon.in/Personal-Finance-Principles-Investor-Financial-ebook/dp/B00JON618E?_encoding=UTF8&qid=1486125784&ref_=tmm_kin_swatch_0&sr=8-1
Note that there is no PDF version as such !
very informative and educative article, i request please explain about Balance Fund MF, which is mix of equity and debt.
i being a sr. citizen would not like to take high risk. pl advice about balance fund of HDFC, ICICI,BSL AMU etc
What exactly you want to know in that ?
Because in balance funds the equity/debt ratio is somewhere around 60:40 or 70:30 .. So the retuns are also moderate !
Thats all is there in balanced funds !
I have been investing 50% of my income in MFs for last 6 years. I once heard Prashant Jain saying that he invests all his money in MF and any decent fund should double in 5 years. Now – it certainly doesnt mean you should blindly follow any fund just for the heck of it. When should you exit, switch? Nobody seems to address these questions. You guys have sold the idea of MF a lot. India’d middle class is convinced about SIPs. But what next?? Please go a step ahead and also write on what you should keep looking for once you have started to invest in SIPs.
Good Point Priyanka
I will try to write on that topic as well.
You have been writing about equity mutual funds & all other financial areas. However 1 area most of us lack is in the debt fund area. To many of us equity mutual funds are easier to understand. But debt its very difficult due to its vastness.
Can you pls help to clarify (potentially in a new article):
– what categories of debt funds are there? (many fund houses show different categories)
– which debt funds to invest for what kind of goals?
– what type of debt funds are to be invested in which situation? (for ex: falling interest rate scenario)
– as an outcome of your clarification, we should be able to readily identify & invest in some debt funds.
I will write an article on this very soon and clarify on all these points.
For now incase you are looking to invest in debt fund and looking for support, my team will can help you in understanding and choosing the right debt fund for you – https://www.jagoinvestor.com/mutual-funds#sign-up
Yes Manish,@nandish this piece of point need to be articulated . Now what’s next is required.
Thats where the yearly reviews come in .. We will try to do some piece of writing on this topic .
Great article as always
Thanks for your comment Kiran
A very well informed article and details very nicely how being in MF for longer period of time reaps better benefits because of compounding.
Just last week I wanted to check the performance of investments done through SIP in equity Mutual Fund would do over a period of time. And found that a SIP of 50K each month for 15 years would be 3.8 Crores! (I checked in one of the Birla mutual funds).
To give you an analogy, if you buy a house and take a loan of 50 Lacs for 15 years @ 8.8% ROI, then paying 50K (EMI) each month for 15 years will only clear your loan of 50 Lacs!
But the same 50K invested in an MF for 15 years would have fetched 3.8 Crores! Imagine the difference.
Manish, one doubt which I have is, if I have some money (say few lacs) how do I invest in MF?
1) Should I invest it at one go, immediately?
2) Should I wait for the market to go done and then invest it at one go? or
3) Break down the big amount in smaller parts and invest at regular intervals?
Thanks for your comment Kaushik
1. If you have lumpsum money, the only reason why you should invest in one go is that markets have crashed a lot and its the time when there is almost guaranteed upside. Otherwise you should better do a STP (invest in liquid fund and let it go to equity fund each month in parts)
2. Not suggested generally, but for advanced investors, this is an option, you can park the money in debt fund and move to equity when that happens, however its very tough to practice in reality
3. Thats same as STP, but manually doing it 🙂
excellent informative ARTICLE
Thanks for your comment Rajeshwar Rao parimala
if i move to direct mutual fund from broker then do i have to pay short term gain as it was less than 9 months ? pl reply
Not if you move to direct by filling up the form at AMC level. But if you just sell it and repurchase direct plans then yes .
nicely elaborated. thanks for sharing
Thanks for your comment Ranjeet Singh
As mentioned by you, you said that we should review our MF investment regularly. Could u please define at what interval should we review it, and what to do if the returns are not desirable?
I have started an SIP in Axis Bank ELSS LONG TERM EQUITY PLAN.
I suggest reviewing it every 1-2 yrs. and if its not doing well , then move to another 🙂
Since people do not invest in lump sum at one go,how would be the rate of return if the same amount is invested in equal installment over a long duration.
It can be more or less. You never know.
It will depend on the market phase !
Well written and informative. I have shared it with my daughter who is a working .
Thanks for your comment Shivakumar
Thanks for your comment v.rk. raman
Very well explained…
I have a question for you. I am investing in MF since 2007 and though I keep track of my MF to some extent and move to different MF basis 3 yrs or 5 yrs experience only as available online so should I keep the amount invested in earlier fund as it is till I need that money or should move it to some new MF. Also, if to be moved to new MF then it should be lumpsum investment or in Installments
If the fund is not performing well, it makes sense to just switch the money fully.
Indeed a great article on MF’s. This is a well known phenomenon (at least to the financially educated investor) that MF’s are a long term game. The more you stay invested to more you reap. What I would like to know is what are your thoughts on switching different MF’s periodically like say every 1yr or every alternate years, etc. How would that affect the overall returns as compared to someone who has been investing in the same fund for the last couple of decades?
There are quite a few startups emerging since last couple of years that help you to shortlist 3-4 equity MF’s to invest in. But these companies also claim to use “scientific methods” to evaluate a fund’s performance and so recommend new funds annually. Now this is what I exactly want to know – A comparison between someone who switches between top MF’s and someone who stays with one fund.
Overall a great article. Keep it up.
Yes, these startups are good idea, however most of them are robo advisors. where most of the analysis etc are algorithmic, If you are ok with that, then you can go with them
Nice article. I really liked this line very much
“The biggest problem with mutual funds is that its NAV is available on the daily basis.What would happen if you were allowed to see your mutual funds NAV and its performance only after a period of 5 yrs? “
Glad to know that Goutam Hebbar ..
Once again a great article. One thing I have found in Indian MF industry is that it is also risky to just stay invested in a fund. It is because fund managers change and after a good fund manager leaves, the fund underperforms. Mergers and acquisitions also make it tougher to stay invested in a particular fund.
So, even if you don’t want to take your money out of the market, you may want to keep booking profits (long term only) and keep investing back sometimes in a different fund in the same class.
Yes, its a good idea to keep an eye and keep reviewing the fund over 2-3 yrs.
These all are past performances please tell me in present I will invest Rs. 10 lac in equity mutual fund for my son. Now at present his age is 10 years. Please suggests me the best fund or funds to invest Rs. 10lac My mobile no is 9729894094
I am asking my teammate Kunal to give you a call for this .
All these are wonderful ideas, but put into [practice?
What I would be interested in is … “knowing in which Mutual Fund I should invest at the age of 72 years, though I have adequate money to invest, but almost all of it is in Fixed Deposits and just about 10% would be in Mutual Funds.
Can you tell me in WHICH Mutual Fund I should invest to get an average return of 12-14 % and why I should invest in the Fund recommended by you? I would like to know the un-disputed reasons for arriving at the decision of investing in the Mutual Fund recommended by you.
We can surely do that, but that service is PAID 🙂
Nice article Manish. I have a point to make. Considering the fact that debt and liquid funds are taxed alike and may yield tax efficient returns only if they are held beyond three years to avail indexation benefits, is it not worth that debt funds should be chosen over liquid funds in lieu of Savings bank account too, as one earns better returns in debt by forgoing liquidity slightly by 1 or 2 days?
People should choose liquid funds only and only if money is needed in few days and that too on urgent basis when required. Else debt fund should be choosen !
Thanks for the article . Can you please clarify on how the dividends paid by the underlying companies are utilized in a growth mutual fund ? I understand about dividend reinvestment and dividend payout MFs but have never really understood growth funds ?
Also , is increase in NAV the only way growth funds can make money ? In that case , should one detest from investing in a high NAV fund ?
The money which a mutual funds gets from the stocks as dividend is part of the mutual funds NAV itself. Its not paid separately to investors.
Thanks for this wonderful article yet again from you . I have couple of questions in this regard
1. People talk about increasing the investment over a period of time . For ex: i have an SIP for 2000rs on 5th of every month in a particular MF , can i increase the amount to 5000rs from the next SIP onwards?
2. And as you told about switching from one fund to another , how does it happen ? Suppose i have an accumulated fund of 1 lakh in one fund when switching to another fund can i transfer entire 1 lakh to another fund and then carry on with the SIP in new fund ? Will it have effect on compounding ?
1. It depends how you have setup the SIP. If you have done it manually using the physical form and the max limit you had set was 2k only, then you cant just increase it just like that.
However if your higher limit was 10k or 20k etc, then increasing SIP is very easy and flexible.
2. SWITCHING is a process, where you just choose a target fund (of the same AMC) and then just move the money from one fund to another. Its the number of units level, not at SIP level. SO its not that SIP will be switched!
Nice Post Manish Bhai ! Your Hindi Book “acchi niveshak ke 16 sutra” is also a very good gift to distribute among friends and relatives.
Keep it up, may you grow more and more in coming years.
Glad to hear that Abhishek !
Great article for investor education. However, the systematic push for equity mutual funds through various media is sickening! The example given by you of Birla Sun Life Frontline Fund has 80 stocks in its portfolio! You could not have selected a worse example! Does the fund manager need to diversify in 80 stocks to give good returns! And why are investors supposed to pay fund management fees ( which are expensive) if the fund manager is selecting Reliance!! Compare the portfolio to its benchmark and 65% of the stocks are same! Surely, he/she can do better. Please also show the compounding of the expense ratio over a period of 20 years.
That is a separate discussion if 80 is higher number or 20 is good enough 🙂 . But do you agree with the 3 points atleast or not ?
Sure I do, these. These are golden rules, regardless of whether one is a direct equity investor or prefers the MF route
Very nicely explained Manish as Always!
Thanks for your comment Kamati