Ignoring the distractions

A lot of the sound and fury about mutual funds doesn't mean much for investors

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Sometimes, it does look as if the Indian mutual fund industry generates far too much news and activity that does nothing much except alarm and baffle investors, while being of little importance to their investments. Based on recent inputs I have had from investors, there are two such activities going on just now. One, the wholesale formalisation and reorganisation of mutual fund categories, triggered by markets regulator SEBI. And two, a steady trickle of news stories and their social media forwards about foreign fund companies abandoning India, sparked by the news that Blackrock, the foreign half of DSP Blackrock Mutual Fund is selling its stake to DSP.

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This information flow creates the impression that some fundamental change is afoot, and perhaps some deep-rooted problems in the whole activity of investing are bubbling up. In reality, nothing of the sort is happening. These changes are of real relevance only to those who are in this business; the actual impact to investor is minimal.

The chatter about foreign funds leaving India comes up periodically whenever a foreign fund company sells out its Indian stake. The stories generally sound like there's something deeply wrong with the mutual fund business in India, with many of them taking an alarmist tone. There are two problems with this. One is that there is no connection between mutual fund investors' investments prospects and the business prospects of those who are running mutual funds, whether they are foreigners or they are Indians. Over the years, many businesses have established themselves while others have sold off their operations and moved on, with no impact on investors. The second problem with this alarmism is that there is no pattern at all to the quitters. Each has had its own reasons, and there is no trend to be observed, nor any broad conclusions to be drawn.

As for fund categorisation, I've written about the process in this column earlier in this month, describing how it formalises and enforces a process that was always an integral part of fund investing. However, looking at it from the practical standpoint of fund investors, this whole categories-business is actually less important than it looks. Here's the reason. SEBI's regulatory process has resulted in 36 categories of funds. These comprise equity funds, debt funds, debt-equity hybrids, and some other assorted types of marginal importance. Following the rationale of how funds are managed, and the kind of investments that are made in them, this looks logical.

However, for a new investor who is just starting out trying to figure what this mutual fund thing is all about, 36 categories are a needless distraction. You can actually ignore around 30-32 of them and get by just fine. In fact, I'm a bit of a hardliner when it comes to promoting simplicity in investing, and so wouldn't disagree with the view that a lot of individual investors could get by fine by ignoring 34 or even 35 of these 36 categories.

How would that work? Well, if you are an individual investor whose financial life is structured the way it is for most people, then this is what you need: Equity multi-cap funds for long-term savings, aggressive equity-debt hybrid funds for medium term savings, ELSS funds for tax-savings plus long-term savings, and maybe short-term debt funds as a higher-returns, tax-efficient alternative to bank fixed deposits. Even more interestingly, depending on the time-frame that one is investing for, this could be reduced to just multi-cap funds or just aggressive hybrid funds, with only tax-saving funds needed in addition.

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