Goals vs funds

For better or worse, government and regulatory action drive investors' behaviour. There's nothing wrong with it - this is a heavily regulated area worldwide, and entire categories of investments are either created or destroyed in response to the laws and regulations.

In India, over the last few decades (perhaps two) or so, a lot has changed in mutual fund investing because of SEBI's actions. While entry load abolition, direct plans and the regularisation of fund categorisation have had the biggest impact, the downstream effect on the actual funds and investor choices has been immense.

The biggest example has been the complete remaking of the longstanding hybrid categories. Terms like 'MIP' (monthly income plan) and 'balanced', which a couple of generations of investors grew up with, have completely changed, both in name and nature. There have also been smaller and quite impactful changes, which are perhaps harder to appreciate but are no less important for investors to get the measure of.

Our cover story of 'Mutual Fund Insight' July 2024 issue is about one such change - a switch from what used to be multi-cap funds to what are now called flexi-cap funds. The regulator's driver for this change was that what were called mid-cap funds were nothing of the sort. Almost all such funds were being run as large-cap funds. Back in 2017, SEBI (Securities and Exchange Board of India) mandated the portfolio construction of such funds at a more micro level, making sure that the product was actually what the label said.

I won't shortchange the cover story by giving more details here, but do read it carefully. It's not only quite interesting for any mutual fund investor, but also useful in planning your investment portfolio.

If you think deeply about fund categories and how you, the investor, use them, you might realise a basic problem. These categories are not about the investor at all. Instead, they are about what stocks do funds invest in and how they are structured internally. No investor has an actual goal of investing in a mid-cap or a liquid fund. Instead, the investors' goals are 'Grow my money as much as possible for 10 years', 'I need to park this money with complete safety for three months', and so on.

Planning your mutual fund investments is mostly about mapping from the latter to the former - from your goals to the fund categories that SEBI and the mutual funds offer you.

Understanding this mapping is crucial for successful investment planning. Only by aligning your investment choices with your financial objectives can you navigate mutual funds effectively.

Unfortunately, it's not easy. If you just go online and look at, say, the websites of mutual fund companies and social media, you'll get a lot of input about the products but very little about translating your needs to the products. Products are easy to talk about and are heavily standardised. Investors are not. Each investor has unique goals, risk tolerance and time horizons. Therefore, it becomes essential to have a more personalised approach when selecting mutual funds.

Financial advisors and tools that help bridge this gap between investor goals and mutual fund offerings can be invaluable. It's not just about picking the right fund; it is about creating a cohesive strategy that aligns with your financial goals.

Essentially, that is the goal of every mutual fund product and service that Value Research has, and is developing. If you want the answer to a question like, "Which large cap had the best performance over the last three years," the answer is trivially easy to find. Unfortunately, without the context of your own goals, it also becomes quite useless.

The mapping between your goals and mutual funds is what 'Mutual Fund Insight' magazine and our other products do.