Mutual Funds Day 17: Auto Pilot Mode, No Manual Control Available

When you opt for a Mutual Fund, the decision to buy/sell stocks is taken by the Fund Manager. Even though you provide the capital, you have no say in the stock-picking process. This could be an advantage if you are poor at stock selection and a disadvantage if you are smarter than the Fund Manager.

“If you are incredibly talented and extremely lucky, you will beat the market most of the time. Everybody else will be better off investing in low-cost broad-market index funds.” ― Naved Abdali

Investing in an MF can be compared to a passenger traveling in a commercial airline. The passenger never gets to fly himself, he depends on an expert (pilot) to do that. Even if the passenger is a better pilot, the other passengers and the crew will never allow him to fly the plane. When you pick an MF, you do not get to make the decisions, even if you have good stock picks — the other investors will not be ready to risk their portfolio with your stock recommendations.

There is a class of investing services called PMS (Portfolio Management Services). Usually, the ticket size is 50 lakhs or above. This can be compared to a chartered flight, the fund manager will interact more with you and may consider your risk profile. This does not mean that a PMS should always give higher returns than a commercially available Mutual Fund.

The only option to avoid a portfolio concentration is to select multiple MFs. You as an individual can customize your MF portfolio by allocating percentage weights. You could also vary your monthly SIP contribution to meet your utility. Before you do so, it is best recommended to consult a financial advisor as switching between MFs may attract taxes and unwanted charges.

If you are extremely talented in stock picking, a better approach would be to allocate a fixed percentage to MFs and the rest to own stock pickings.

Example: 90:10 rule. 90% of capital goes into SIPs and 10% is used for own stock selection. When you allocate 10% of funds every month for your own research and analysis, you end up becoming good at stock selection. Your financial literacy will also go up which will help you make better decisions in the future.

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