Research well, assess risks before investing in mutual funds
Research well, assess risks before investing in mutual funds

The choice of investing in a mutual fund (MF) could be based on the fund objective, the risk associated and then the expense ratios etc. Of course, the investor’s risk appetite needs to be assessed along with the timelines i.e. the tenure of investment in a fund.

The other parameters though not necessarily to be followed are their track record or past performance, brand, etc. while some useful ones could be the extent of volatility, standard deviation and so on. 

A few investors even would look at the portfolio these funds hold and decide to invest, which could backfire as the fund manager could alter the allocations of the fund while the data available is pertaining to the past quarter.

At best, it throws light on what extent the fund manager is sticking to the fund philosophy or deviating. I’ve seen some investors in trying to master the strategy and copy the MF portfolio to trade on their own, only ending up with little or no success. Both these are not a great way to approach investing. 

In deciding to invest in a fund after looking at the portfolio may not be useful as the allocations keep changing and the details are not completely available. For instance, all the fund fact sheet would reveal, the exposure of the fund to a particular stock and to what percentage of the fund.

One may even check for the earlier quarter report to find out if a particular stock was picked or not and even if picked the change in the exposure. It still doesn’t answer the critical questions of the entry level in that specific stock and if there are changes in the allocations then what levels were they trimmed or further added. Also, the fact sheet wouldn’t inform if there were multiple transactions that were done while the allocation remained same throughout the concerned period.

And in the latter case of replicating a fund’s portfolio in their personal portfolio would be a gambit that could boomerang as the investor wouldn’t know if the right entry is achieved. Also, stocks are picked up from a portfolio perspective of the fund manager and how he/she would view a particular stock’s presence would bring balance to the overall portfolio.

The fund manager might exit, average or profit book a particular stock which wouldn’t be reflected or known to the investor replicating the same portfolio. This could lead to untenable losses and costs. 

Coming to the costs, the fund houses trade in large volumes and have access to the bulk deals due to their financial muscle, leading to pick at levels which are not available for the retail investor.

Moreover, the transaction costs for these funds would be far lower than the ordinary investor’s trading accounts. The ability to purchase or sell the securities in large quantities would make the fund houses to act quickly and probably derive a better bargain. This arbitrage is certainly lost for any retail investor. 

The best the portfolio helps is allowing a retail investor to introduce to a new stock which was not in their radar and after due diligence, proper analysis; the investor could take positions. The conviction, however, should come from their own research, risk tolerance and screening mechanism.

Blindly, trying to replicate a fund’s portfolio or going in detail to analyse the portfolio for MF investment would be a futile exercise. (The author is co-founder of “Wealocity”, a wealth management firm, and could be reached at [email protected]

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