These days its quite prevalent for people to think they do not invest in stocks, as they are risky, while they invest in mutual funds (which are safe). This is pure case of financial engineering or marketing buzzwords which fool people. This kind of thinking is bound to make one take wildly wrong expectations & compromise safety.
If someone is investing in a portfolio management scheme (or hedge fund in India) people take lots of caution and know it is almost impossible to choose any fund manager which will repeatedly beat the index over time and will become large, however when we talk of mutual funds people shut there brains (“Mutual funds Sahi hai”- has contributed to this). This kind of domain dependency is crazy.
Its better to be questioned, what do mutual funds hold – in the end they hold stocks of companies. That automatically makes them equivalent in risk to stocks (In most cases mutual funds are more risky infact Why? You are taking the additional risk of choosing the person who will beat the market in future)
In fact do a basic study, go over different time horizons and different countries, choose the top performing mutual funds (Lets say in 2011,2009,2005 in India, USA, Europe), see how many remain top next 5-10 years? You’ll be shocked at the results and probabilities.
In addition, people have their advisers, advising them holding two three mutual funds which are considered diversified portfolio (Irony is major stocks holdings in those 3-4 mutual funds is the same). For advisers, if we check the track records of major funds of funds (it’s very poor except a few). When you are choosing an adviser, you are investing in a funds of funds manager, its no different.
In fact, most mutual fund distributors or advisers in India don’t even have a strategy or process or the financial resources for basic high quality research forget, fund of fund. Most advisers see past few years track record of mutual funds and churn portfolios, it’s a sad reality.
Now again think is mutual funds safer than equities? Actually, it can be or can be not, however as a category it isn’t. This is a classic case of financial industry packaging stuff and selling it as something else. While choosing an adviser ask his process, track record, strategy, etc.
In the end investing in mutual funds or through an adviser, remains giving money to someone else (think how much you think when your friend asks for money almost similar is the case here). It may or may not be safer than equities, in most cases it isn’t. Domain dependency doesn’t work well in Finance.
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