Mutual Funds Day 6: Investment Objective of a Mutual Fund
There are more than 40 Asset Management Companies (AMCs) in India. Collectively they manage more than 54.54 lakh crores as of Feb 2024 (source). The total number of folios by retail investors is a whopping 13.95 crores.
There are more than 2500+ Mutual Fund schemes available, which one will you choose? The answer is “Investment Objective”.
Mutual Funds is just a fancy car, it will take you from one place to another — but you need to decide where to go. When you set an investment goal and have a clear idea it is fairly easy to pick the right Mutual Fund. Just like you buy a car based on your driving requirements, the condition of the roads near your house, safety factors, service costs & satisfaction. If everyone had the same driving conditions, just one make of car would be enough.
Now you could choose to drive the car on your own or keep a chauffeur. DIY mutual funds can be compared to self-driven cars whereas the one managed by your Financial Advisor can be compared to chauffeur-driven cars. In the first case, you need to be fully attentive whereas in the second case, you are outsourcing your life(wealth) to a better person.
All the AMCs are required to furnish the investment objective in their offer document. Ideally, you are required to study the same before purchases.
Example 1: ICICI Pru Infrastructure Fund INF109K01AV5 has the following objectives: “To generate capital appreciation and income distribution to unit holders by investing predominantly in equity/equity related securities of the companies belonging to the infrastructure theme. However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.”
The key takeaways are
- Invest in Equity or Equity Related Securities.
- Infrastructure Theme.
- Returns are not Guaranteed.
Only if you are okay with the 3 objectives you need to continue. If you personally feel the Infrastructure companies may not do well in the next 5 years, then there is no point in buying this MF even though the historical returns were exceptional.
Secondly, the investments are into Equity and hence the “no guarantee” on returns. What will happen in the future is uncertain and unlike fixed-income funds, equity funds cannot give you assurances.
Example 2: SBI Magnum Global Fund INF200K01271
“To provide the investor with the opportunity of long-term capital appreciation by investing in diversified portfolio comprising primarily of MNC companies.”
The key takeaways are
- Long Term Capital Appreciation
- MNC Companies
If you are a DIY investor you should spend more time analyzing the objectives of each fund before committing your funds. In case you opt to go via the Financial Advisor route, they might be doing this heavy lifting for you. Even then it is recommended that you ask your advisor to replay what he has learned just to make sure you are perfectly in sync.
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