Brief Summary
This video discusses various aspects of investing in mutual funds, including risk assessment, fund selection, and asset allocation. It emphasizes the importance of long-term investment horizons, understanding market risks, and choosing funds based on consistent performance rather than short-term gains. The video also touches on momentum funds, expense ratios, and the common mistakes investors make.
- Understanding market risk and historical recovery patterns is crucial.
- Consistent performance (rolling returns) is more important than short-term gains.
- Asset allocation should align with risk tolerance and investment goals.
Introduction to Mutual Funds and Returns
The presenter introduces the concept of mutual funds as investment vehicles, highlighting the potential for high returns, especially in pure equity funds, but also notes the associated risks. An example is given comparing Nifty 500 returns (12-13%) to Momentum 50 returns (22%) over 30 years, illustrating the significant difference in wealth accumulation. The presenter underscores the importance of understanding one's risk tolerance and investment horizon when choosing mutual funds.
Understanding Market Risk in Mutual Funds
The discussion addresses the common disclaimer about market risk in mutual fund advertisements. It explains that while market risk exists, historical data shows recovery after downturns. The presenter emphasizes that investing in mutual funds is often the best option to outpace inflation, especially for those with reasonable expectations and a long-term perspective. The key is to assess how much "red" (losses) one can tolerate and for how long they are willing to invest.
Risk Categories in Mutual Funds
The different risk categories within mutual funds are explained, comparing them to different levels of "tadka" (seasoning) in "Khichdi" (a dish). Low-risk funds have minimal equity, moderate-risk (hybrid) funds have a mix of debt and equity (20-35% debt), and high-risk funds are pure equity. Debt funds, particularly those with government securities, are presented as less risky, while corporate bonds offer slightly higher returns with a bit more risk.
Who Should Invest in Debt Mutual Funds
Debt mutual funds are suitable for those with shorter-term goals (1-4 years) and those who prefer lower risk. It's crucial to avoid asset-liability mismatch, where the investment's lock-in period doesn't align with when the money is needed. Debt funds are also good for parking excess capital without immediate deployment plans and for long-term investors who are risk-averse.
Small Cap and Mid Cap Funds
Investing in small-cap and mid-cap funds for the long term (10-12 years) can be a good strategy if one has a high-risk tolerance. However, investors must be prepared for potential significant short-term losses, such as a 25% reduction in value during market downturns. The ability to withstand such volatility is key to benefiting from these funds.
Momentum Funds Explained
Momentum funds are a type of factor fund that selects companies based on their high momentum scores, regardless of traditional metrics like price-to-earnings ratios. These funds actively pick companies with "running horses running fast" every six months from the top 500 companies (Nifty 500). While they can offer high returns, they also carry significant short-term risk, as demonstrated by recent market fluctuations. They are suitable for investors with a long-term horizon (10-25 years) and a high-risk appetite.
Selecting a Mutual Fund
When selecting a mutual fund, it's important to check its risk-reward profile over a minimum of 5 years and focus on rolling returns to assess consistent performance. Funds with the best rolling returns are like "Dravid" (consistent) rather than "Sehwag" (aggressive). Also, check the expense ratio to ensure it's not too high (ideally below 0.7% for direct funds) and see how often the fund beats its benchmark.
Practical Tips for Common Investors
Rolling returns and other relevant data are readily available on various websites. Consulting a financial planner can also help, especially if you ask informed questions about rolling returns. For asset allocation, a younger investor (20s) with a 10-year goal and high-risk tolerance could allocate 50% to large caps and 50% to small and mid caps. It's crucial to avoid "garbage" stocks and limit risky investments to a small portion (e.g., 5%) of the portfolio.
Common Investment Mistakes and the Power of Forgetting
The two biggest mistakes investors make are investing too much in risky assets and having a short-term focus. The presenter shares a personal anecdote about his father, who forgot about old mutual fund investments and was surprised to find significant returns, illustrating the power of long-term investing and "forgetting" about the investments.
Addressing the Myth of SIP as a Scam
The presenter refutes the claim that SIP (Systematic Investment Plan) is a scam, citing the large AUM (Assets Under Management) and the fact that the money is primarily invested in reputable companies. SIPs are a long-term investment strategy, and while market fluctuations are inevitable, they are not indicative of a scam. The presenter contrasts this with the US market, where most investments are through ETFs or mutual funds.
What to Do During Market Corrections
During market corrections, it's important to compare a fund's performance against its benchmark rather than looking at absolute numbers. If a fund falls less than its benchmark, it's a good sign, and you should consider buying more units. Conversely, if it falls more than the benchmark, consider selling and switching to a new fund. The key is to make informed comparisons and avoid picking "garbage" stocks.
