More isn't always better

India's mutual funds are now like mobile phones, cars or any other consumer product. Every month, we see a spate of new funds, all of which seem to have a new set of features, just like consumer products. So, on the surface, to anyone who's just scanning the headlines, mutual fund investors appear to be experiencing a renaissance of creativity from fund companies. New and innovative fund types are frequently introduced, ostensibly to cater to investors' needs with cutting-edge products rather than the conventional, tried-and-true funds we've long known.

But is this the whole picture? Those well-versed in the financial services industry's history of 'innovation' might view these developments with scepticism. Before delving into the motivations behind this latest wave of novelty, let's examine its root cause.

Do these new fund types align with the fundamental principles of mutual funds? Evidently not. Their origin stems not from investor needs but from the fund companies' business strategies. The focus is on marketing novel concepts rather than cultivating a stable investor base in established funds. Moreover, SEBI's new categorisation system, which limits core category launches, has pushed this 'innovation' towards niche and specialised fund types. A fund house can launch a limited set of basic fund types like large cap, mid cap, etc., but any number of thematic, sectoral or index funds. In reality, investors are better served by selecting straightforward, mainstream funds with proven track records and maintaining consistent investments in them.

The entire point of mutual funds is supposed to be 'simplicity' but this spate of specialised funds works against that. Investing in such funds implies that investors need to judge for themselves which sectors or which themes will do well. However, not having to make such decisions is precisely the convenience and core service that mutual funds are supposed to deliver. As a fund investor, your job should be limited to choosing a handful of diversified funds, while everything else should be off-loaded to the chosen funds' managers.

So what else is your job? As an investor, what part are you supposed to do, helped by the right tools, of course? Here's a simple recipe that will serve everyone.

Effective investing begins not with investing but with setting realistic goals. Many investors start with unrealistic expectations, like turning modest monthly investments into large sums over short periods. While the future is uncertain, some financial needs, such as children's education and retirement, can be estimated fairly accurately. Once goals are established, calculate the required savings to achieve them. Automating this process is beneficial. Mutual funds offer SIPs (systematic investment plans), which automatically invest a fixed amount every month. SIPs' main advantage is enforcing regular investments, helping address a common problem of inconsistent saving habits.

For asset allocation, a simple rule of thumb is effective - keep funds needed within 3-5 years in debt instruments and the rest in equity. While more complex strategies exist, this straightforward approach is often equally effective. In today's market, where diverse mutual funds are aggressively marketed on the basis of 'this' or 'that' feature, a minimalist approach is advisable. Rather than spreading savings across numerous investments, focus on a handful of well-established, general-purpose mutual funds with strong track records. This simple strategy can effectively meet most savings needs.

Don't make it complex; don't take on too much of the burden of decision-making yourself. Do only what you, as an investor, should be doing. Much of the assistant's work can be left to Value Research Online and the actual fund management to the fund manager. This division of labour will serve you better than any other approach.