MF Myth Busting - 5

The Indian Mutual Fund industry continues to grow at the rate of knots, but investors still continue to harbor some common fallacies en masse. We've been steadily aiming to debunk some of these myths in the past few weeks, in order to help promote more informed Mutual Fund investing. Here are three more.

Retired People should have zero exposure to Equity MF's
Many Mutual Fund investors who are retired and have no further source of income, believe that they need to invest purely into fixed income mutual funds and avoid the risks associated with equities altogether. However, this is not necessarily true. In fact, with the long-term inflation rate in India hovering around 6 per cent, risk tolerance cannot be the sole determinant of asset allocation. Even retired Mutual Fund investors should consider allocating between 10% and 20% of their portfolios to equity Mutual Funds, in order to strike a balance between risk and returns, and aim for inflation beating returns in the long run.

NPS funds are low risk because it's a government run scheme
Many uninformed Mutual Fund investors veer towards the NPS (National Pension Scheme) for the wrong reasons. The foremost being the incorrect assumption that NPS investments are lower risk in nature than other Mutual Funds. Investors must understand that the NPS cannot be equated with other government guaranteed retirement schemes such as PPF. In fact, NPS schemes are run by the same Asset Management Companies that run regular Mutual Fund schemes, and their fund returns are variable in nature. For the same reason, NPS funds also possess a higher potential to outperform government guaranteed schemes such as PPF or EPF, which essentially invest most of their corpuses into debt instruments. The NPS allows individuals to tailor make their asset allocation (to an extent) to their risk profiles - this brings in an element of risk that cannot be predicted or managed by the government.

Higher AUM funds are always better
A very common fund selection criterion is its size or AUM (Assets Under Management). While it rings true that a high AUM is in fact indicative of a long-term track record of outperformance (as performance track records attract further inflows), it's not always the best fund selection criterion. For instance, small cap funds that are too big in size often become unwieldy and start deviating from their mandates in order to keep up with inflows. Even niche funds such as sectoral or thematic funds may warrant a place in your portfolio despite being small in size, if you're in sync with their investment management philosophy and believe that the sector or theme in question will outperform the broader market in the long run. For best results, view the AUM of a fund parallelly with other importance factors: such as fund manager pedigree, strategy for the medium term and it's broad underlying investment philosophy, to name a few.