Monday, July 1, 2013

'Misconceptions!' Are mutual funds relevant? Yes!

Read an opinion on the MF industry on Business Standard -- http://www.business-standard.com/article/opinion/are-mutual-funds-relevant-113063000620_1.html -- given below is my opinion on the subject.

'Misconceptions!' Are mutual funds relevant? Yes

The only reason why MFs will not succeed is because there is a huge misconception about the industry

Financial industry experts fail to understand one simple view that most people from other industries have on finance -- 'It is complicated and boring!'

There is some truth in this view and yet it can easily be classified as wrong. The truth is, its not as simple as the functioning of a savings account. You will have to fill in various forms and give signature on few documents depending upon the financial product you are buying.

The common opinion is wrong for the simple reason that not everyone knows about the intricacies of each industry. If a software expert finds finance as complicated then s/he should also understand that for most people even software is a complicated. Why is there this misconception that 'finance should be simple'?
Now coming to the response for the article 'Are mutual funds relevant?' The author has raised four points why the industry will fail. And given below is my take on each of the four points.

Benefit perception: The benefits are not clearly perceived because most people fail to do their homework. Financial products should not be considered or compared to consumable products like mobile, soap, tv etc. The most relevant comparison for it would be either doctors, architects, or engineers of a specific subject. There are many times when you think that their services are not required but that is not correct all the time.

While everyone has an opinion on what should be done when you have a fever but it is advisable to go a doctor? There are many people who would buy medicines through a pharmacist and act as a self-doctor and they live a long and healthy life, but then many people also tend to fall ill severely because they took the wrong medication.

Similarly everyone will have an opinion on how to approach investments but its best to consult a financial advisor or someone who understands the intricacies of the product. You dont like their opinion, go for a second opinion, just as you would in case of a doctor.

Also don't think that pharmacist is an equivalent to a doctor. Similarly why do people have the misconception that someone who has chosen to be a distributor or broker will understand the big picture of your finances.  (For people who think doctors and advisors are wrong comparisons, I would suggest that you check how many doctors are there in your city and if all of them have similar number of patients queuing up.)

Investments are hassles: Yes it looks difficult to invest at times and there are lots of forms to sign and they ask you with all kinds of question. But the entire idea to protect you and hence the safety measures were created. Medicines too should ideally be given only against prescription although that's not the case but convenience doesn't make the actions as correct.      

Promise vs performance: Here again the problem is that of the first one. Who made the promise?

Consistency: Another misconception. You need to understand the industry and the person. This is surely one place where I would compare it to doctors. There are successful and then there are not-so-successful. Similarly there are successful financial advisor and not to successful financial advisors.
I think most people don't get the structure right. The misconception is that Mutual Fund should be held responsible for anything wrong while this position can have some merit but it would be better to treat the Mutual Fund industry like Pharmaceutical industry. AMCs are manufacturing products, testing them. Just as the dream drug, one pill that cures all problem, that pharma companies would be chasing; mutual fund industry will try to search for its one fund that will perform in all markets in all conditions. But how can that happen?

Just as you need to find a good doctor and hope that they diagnose the illness correctly, similarly you should find the right advisor. Else in one case you might lose your health, the other will risk your wealth.

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