How to become an expert mutual fund investor: Know thyself | Value Research This is the first in our seven-part series where we share all that you need to know to make profitable mutual fund investments.
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How to become an expert mutual fund investor: Know thyself

This is the first in our seven-part series where we share all that you need to know to make profitable mutual fund investments.

Over the last three decades, we, at Value Research, have had the benefit of closely observing the evolution and growth of the Indian mutual fund industry. During such a long period, tracking mutual fund schemes and watching their fortunes traverse the ups and downs of the market have greatly helped us evolve and refine the way we analyse funds and think about different product categories. This has also enabled us to build a framework based on which we can determine how to go about investing in mutual funds across a plethora of fund categories and even within those, how to choose the right funds for individual needs.

During all these years, many AMCs have come and gone, many new products have come into being and many regulatory changes have happened. But unsurprisingly, the key tenets of becoming a successful mutual fund investor haven't changed. This is the first in our seven part series where we share all that you need to know to make profitable mutual fund investments.

Know thyself
If one looks at the entire human history, this two-word aphorism 'know thyself', meaning know yourself, is one of the common threads that weaves through the multi-coloured fabric of races, cultures, traditions, spiritual and even the scientific framework. Even in the world of personal finance, this age-old adage plays a very important role and can even determine the final outcome of your financial journey. The financial advisory industry has coined a term for the process of knowing yourself - 'risk assessment'.

The process involves assessing a person's temperament towards investing in various asset classes. This preference usually varies from the least volatile and most secure to highly volatile but equally rewarding investing instruments. This assessment is generally done through interviews or questionnaires.

However, if you decide to assess your response to the potential risks that you may face along your investment journey, then you can determine it by using a simple tool. First, ask yourself - what will you do if today the markets fall 30 per cent? Now look back and see what you actually did when something similar happened in the past. Is there any divergence between the way you are 'thinking' now and the way you actually ended up 'doing' in the past?

What transpired in your investing journey when the markets declined as steeply as 61 per cent in 2008-09? And if you are a relatively new investor, then what did you do in March 2020 when the market took a deep dive and wiped more than 35 per cent of your investments in just a few weeks? Did you stop your SIP? Or did you redeem your equity investment out of fear?

If you are one of those who did any of these, then you are a conservative investor with a low tolerance for a downside, irrespective of what you think about yourself. On the other hand, if you were fearless to invest more in equities when the market started to decline sharply, then you are an ideal candidate for having a higher allocation towards equity.

Having said that, conservative investors can gradually become more experienced and informed investors. Since you start gaining experience of investing in mutual funds, particularly with a small allocation to equity such as conservative hybrids, you would become prudent enough to handle higher equity allocation in your portfolio within a few years.

So, any risk assessment in investing has to be rooted in actual demonstrated behaviour. Your guiding light should be your responses to real-world scenarios, instead of assessment tests that are widely available these days. The objective analysis of your risk tolerance with this practical approach should help you determine the right asset allocation for your investment portfolio in your financial journey.

Also in 'How to become an expert mutual fund investor' series:

Part 2: Begin with the end in mind

Part 3: Balance is the key

Part 4: Avoid hitting bumps

Part 5: Don't forget the reverse gear

Part 6: Cherry-picking funds

Part 7: Be a sage


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