This is no research article. This is simply my experience over 15 years of interacting with investors both as an analyst and an advisor. This is my experience on how investors miss out on good products because they do not take the road less travelled. Since I have dealt with mutual funds/stocks for the most part, let me take those as examples to drive the points.
AMC familiarity and size
Several investors I knew preferred schemes from fund houses that had names they were familiar with. It would either be their own bank names or very large brands that exuded confidence. I dug a bit deeper into this and realized it was not only the comfort they had with the brand names. It was because the lesser known schemes were simply not available, either with their banks or their fund distributors. And the media too seldom mentioned beyond the top 5 players, back then. Even well-meaning financial advisors preferred to stick to large names, both for ease of doing business and to also play it safe. While there is no malice in such a decision, in the process, both investors and advisors remain closed to newer ideas from smaller fund houses. For examples, even 5-7 years ago very few wealth management arms of banks offered schemes from a fund house like Mirae to their investors. Similarly, names like Religare Invesco (now Invesco) did not go too well with investors. These AMCs, over the years, produced several top funds that became consistent performers and their AUMs gradually swelled. Those investors who reaped the early returns that these fund houses delivered (with a nimble AUM) would see that momentum carry through, in their portfolios.
Not having differentiated strategies
Most investors who came to us had a tax-saving fund, a hybrid fund and a large-cap fund. That made for a portfolio. Why? Because that was what they were offered to make a start with, in mutual funds. A portfolio seldom had a well-rounded construct of funds with varying strategies that would either provide hedge or would deliver.
While there is so much discussion today about growth, focused strategy, quality and value styles of investing, funds that quietly and faithfully adopted these strategies, and performed, went unnoticed until they were promoted. Parag Parikh had a value fund with an international twist. Little did investors know it would prove to be a great hedge to other funds that were mostly high beta.
Similarly, while there is so much talk of focused strategy in the last few years (with market too focused in its rally), funds from the Motilal stable followed such strategy long before a formal category came into place. Now the problem is, these strategies can seem unattractive at times. For example, the Parag Parikh fund was prone to periods of underperformance (as a value fund) when Indian markets rallied. It began to gain notice only when its international holdings and value stocks shone when Indian markets went shaky.
Similarly, many investors who had plans to save for their children’s education abroad mostly had a child plan or at best a few large-cap and hybrid funds. None were told that even a small proportion in international funds (US-based) can help them diversify and provide hedge against the currency in which they were going to spend later (dollars). Why? Because, a decade ago, international funds barely beat Indian funds or indices. Also, they are taxed like debt. So, they did not gain the tax-conscious Indian investor’s appeal. But today, with almost 3 years of international funds’ outperformance over Indian markets, it is beginning to gain interest. Investor’s obsession for taxation and expectation of top returns always from a diversification tool meant losing its benefit when it mattered.
When confused, keep it simple
This one stems from own experience. I was an investor well before I turned an analyst. When markets corrected steeply, I had theoretical knowledge that I had to buy more. But I had little idea on which stocks to average. I then heard about India’s first ETF (Benchmark). It was in the market for a while and did not have great volumes. But it was good enough for a small investor like me. I bought. Then came 2008 and by then as an analyst, I knew I had to average. This time it was the lesser heard of index then, Junior Nifty. From there on, I would try to average individual stocks when they went through their own earnings or sector-related correction, but when they all fell (broad market correction), it was the index. This was not the best strategy, but it was optimal. I didn’t run the risk of throwing good money after bad, if my stock pick was flawed.
When I started suggesting this to known circles of investors, they weren’t convinced. This is because nobody ever told them to invest in indices when funds and stocks did better all the time (back then). Also, who gains (other than investors) in a passive product?
The purpose of sharing these here is twofold: one, what is popular need not always be good. This is why seeking advice in public social forums (peer help mostly fails in investing, trust me) is not a good idea. Two, when you seek advice (even if it is professional advice), it is important for you to also stay on top of what’s current and what’s changing rather than go with popular wisdom. That way, you will not lose out on quality products that could have made a difference to your wealth. There is a third purpose to my writing this, which is that all of us at PrimeInvestor has gone through these cycles for ourselves and for our investors and hence and open to, and observant of new and emerging trends in the world of personal finance. Where you fail to see or don’t have the bandwidth to, we pitch in.