Markets On A Canter. Mutual Fund Investors, Beware Of Mis-selling!

Having dropped precipitously to 6,980 levels in February last year, the Nifty has since zoomed ahead by an impressive 37% to nearly 9,600 in just over a year's time. In fact, the bellwether index has witnessed a jump of nearly 1,600 points since the demonetization-led lows it made in December '16.

While the near-term direction of the stock market is anybody's guess right now, Mutual Fund investors, especially first timers, need to exercise caution while dealing with intermediaries. Bull markets often breed a small but potent number of unscrupulous Advisors who aim to cash in on the euphoria to reap short term gains for themselves - and disappear when your money sinks. Keep your eyes and ears open for these all too common sales spiels:

"ABC is a great fund. It has delivered 75% returns in the past year"

This one is as fallacious a reason to invest as they come! First, if a fund has already delivered a high return in the recent past, chances of a cyclical correction in the medium term are imminent - so if you're unlucky, you'll find your investment value sliding in the first few weeks or months after you invest. Second, this sales tactic usually automatically positions high risk, high beta (volatility) funds as they're the ones that prosper the most in a bull market. The suitability of such high-risk funds to your personality and investment goals can only be ascertained after analyzing your requirements carefully.

"The markets are looking great for the next one year due to GST/ earnings picking up/ delayed consumption effect etc etc"

When it comes to the next one year's market movement, your guess is as good as mine. And so is your local kirana waala's, by the way. Even if fundamentals do play out as planned, who's to say that they haven't already been largely factored in - in which case, the upside may be restricted even in the face of good news. Don't invest because you believe that fundamentals are going to play out in the next twelve months. Wasn't in Keynes who said that "markets can remain irrational longer than you can remain solvent"?

"Equity Funds are low risk right now, due to liquidity"

It's true that domestic liquidity has to an extent, curtailed the long-held dependence that the Indian Equity markets have had on FII money. Mutual funds' equity oriented schemes witnessed net inflows of $ 1.5 Billion in April 2017 alone; more than twice the April 2016 number. However, remember that liquidity can be a fickle bird, and the strong liquidity current that we're witnessing right now certainly doesn't transmogrify Equity Mutual Funds into a type of low risk investment. Invest into them only if you won't start hyperventilating if the tide runs out temporarily - for a few weeks or even a few months.

"FD rates have fallen. You should switch your FD money into equity funds at these levels"

Falling FD rates doesn't make a valid case for you altering your risk profile altogether. Neither does the fact that stock markets have risen - which, from a tactical asset allocation standpoint, should mean a lower equity exposure than before. Don't blindly believe an Advisor who is attempting to pull your money from FD's to Equity MF's by sensationalizing recent market returns. Consider debt funds as an alternative instead.

"If you're a low-risk taking investor, you should go for a Balanced Fund"

Most so called Balanced Funds are really skewed 65% in favor of equities. This essentially makes them a fairly high risk investment. If you're a super conservative, low risk investor, stick to fixed income funds and avoid Balanced Funds.

"XYZ is lower risk than ABC, because it has a lower NAV"

Another devious little sales tactic. Just because a fund is an NFO (New Fund Offer), or has a lower Net Asset Value, doesn't make it any less risky. In fact, many low NAV funds may in fact be higher risk than bellwether schemes that have been around for several years and have weathered many a brutal market shock. Case in point: JM Core 11, which was launched amidst the throes of the bear market of 2008 at an NAV of Rs. 10, is still trading at NAV of Rs. 7.73 today (-22%), 9 years hence. The NAV of Franklin India Blue chip has risen nearly 170% in the corresponding period!

"You should invest in ABC because it's 5-star rated on so and so website"

Many credible websites publish "star ratings", but they are not valid fund selection criteria by themselves. Many star ratings are "lagging" indicators, meaning that they reflect how the fund has performed, rather than how it is expected to perform going forward. You could discover that a fund that is rated 5 stars on one website, may be rated 2 stars on another and 3 stars on yet another! And just because a high risk, small and mid-cap fund is rated 5 stars, doesn't make it suitable for the deployment of the last dregs of an octogenarian's retirement corpus. Best to look beyond the star rating drivel your so-called Advisor may be trying to feed you.