People use smartphones in Mumbai, India, on Friday. (Photographer: Dhiraj Singh/Bloomberg)

The Mutual Fund Show: The Dos And Don’ts Of Online Investing

Investing in mutual funds online has become simple, especially for first-time investors, but the ease isn’t without its pitfalls.

A complete understanding is necessary to avoid mistakes, according to Kunal Bajaj, head of wealth management at MobiKwik. “Many retail/first-time investors haven’t seen a (market) cycle and sort funds based on the highest returns over a 12-month period,” he said on BloombergQuint’s weekly series The Mutual Fund Show. “What they should instead do is look at rolling returns to understand the consistency of the fund’s performance over time.”

But there are advantages of online investing as well such as eliminating the bias of fund advisors, according to Bajaj. “Typically, the advisor comes with a pre-conceived notion and offers you a certain set of mutual funds because either he/she is comfortable with it or works for that company.”

The biggest mistake that people make when investing online is that they buy based on past returns, said Edelweiss Mutual Fund Chief Executive Officer, Radhika Gupta. “They sort on the basis of returns and investing is very counter-cyclical,” she said.

Watch the full show here:

Here are the edited excerpts from the interview:

The simplest mistake which lot of people tend to make is that they sort the returns of mutual funds by last one year, tend to invest in best-performing fund and you realise that next year the returns are not the same. Can we start with this mistake first?

Kunal Bajaj: This is an obvious mistake but let’s talk about the positive aspects to begin with and the reasons why someone should think about online investment. While the mutual fund industry has done a stellar job in terms of the assets under management, which are growing year after year and growing ahead of general economic growth, it has not done well in financial inclusion. 25-26 years after the first private mutual fund was launched, we are talking about Morgan Stanley in 1992-93, we have about two crore unique individuals who ever invested in a mutual fund. We are talking about 135 crore population. Let’s assume that some of them are out of the income bracket or target market for personal financial savings but even then, it is a shockingly low number.

The problem is that the operating cost of a traditional model is so high that the only way we can do proper financial inclusion is by taking investment, payments and all the other financial services onto a mass platform and taking it online. Great example would be number of bank accounts we have. We have 95.8 crore debit cards in India as of December which tells you that 96 crore people have bank accounts but only two crores of those have invested in mutual funds.

There is a large opportunity. There are three reasons why an investor will want to invest online. The first is convenience of investing anywhere you like at any point in time. Today with KYC being completely automated, setting up a bank account being automated, it is two-three minute process which starts your investment journey rather than having to fill out forms and paper. The second reason is choice. Typically, when you go to an advisor, the advisor comes with a pre-conceived notion and offers you certain set of mutual funds because either he/she works with that company or is comfortable with. When you go online with any of the large platforms, including MobiKwik, you do get fund recommendations, but you also get a choice to invest in any mutual fund you choose. So, there is an element of choice which is available which may or may not be there with the advisor who you are working with.

The final reason is cost. The cost element is important. We can accept small ticket investments, you can start an SIP worth as little as Rs 100 on the MobiKwik app and we can provide this because we have a customer base. So, adding a mutual fund feature is very easy. Whereas for a traditional advisor to do a Rs 500 or Rs 1,000 SIP, which probably doesn’t make economic sense.

What is that comes to your mind when you think of mistakes which people make when they are not adopting traditional route but going through an online route which is more convenient and cost-effective?

Radhika Gupta: We at Edelweiss run a campaign of ‘advice zaroori hai’. We believe that whether you are investing online or offline, investing is behavioral. It does not come down to just selecting funds. Unfortunately, it is not like going to a grocery store and asking for specific things. It is very customised, goal-centric and personalised. What is right for me may not be right for someone else. For most people, whether you choose to invest online or offline, they need the element of financial advisor. That’s the belief which is core to us.

There are a couple of things which people do online and offline, but you see this escalating online. One is looking at what’s in season. Traditionally, the model is going to an app and select an asset class or fund which had the best three-year return without knowing that the scheme category may not be right for you and what are the reasons for that algorithm to show what it does. At the end of 2017, most online investors — and we have seen in sales of our schemes— would have gone and invested in mid- or small-cap fund because three-year return was looking outstanding. Clearly, for a majority of people, and there is nothing wrong in mid and small cap, yet it may not fit the risk appetite of others. You have done a blanket investment in that asset class because it was in the best-performing asset class and then you have gone through 2018, where the asset class has done terribly, looked at your online account and made a decision which may not be good for you. That’s the biggest mistake which people do. They sort on the basis of returns and investing is very counter-cyclical.

It also leads to a case of expectation mismatch. When you look at things numerically, markets give you an average of 10-12 percent a year. Unfortunately, that is not merely 10 percent, but it is +30, -30, etc. You look at it online and see a 30-40 percent in mid-cap return, your expectations are anchored to that number and that can become very dangerous. So, it is very easy to get disappointed going forward.

So, a mistake which I will recommend all online investors to not make is to look at what the past is.

What is the mistake they are doing when they come to your site for investing?

Kunal Bajaj: You have to remember the people who have started to invest in the market in the last couple of years have never seen a cycle because they are first time investors and they haven’t lived through 2008-09 and saw the volatility of that period. The mistake they make is in extrapolating prior returns. Whether its sorting one-month returns or sorting last 12-months returns. It is natural human behaviour to expect that the past will repeat itself in the future. You should avoid it.

You should look for rolling returns. Rolling return is a concept where you look at every 12-month period return for the last 10 years. This data is available, and we try and give it because it tells you more about the consistency of the fund performing in a particular manner rather than letting last three to nine months’ data show an overly aggressive or overly conservative picture of performance.

A lot of asset management companies have been quite responsible in the way they have behaved since 2017-18 and there were a number of AMCs like DSP where they shut all subscriptions into their small-cap schemes. At that time, the most popular scheme was DSP micro-cap, which is now being renamed to small cap. They ended all purchases of that small-cap scheme.

As responsible advisors, we tell our customers to add SIPs into that scheme. Although the AMC allowed SIP, we stopped all SIPs. If the fund manager does not believe that he can generate returns over the next two years, and they will open up a scheme for fresh subscriptions as they have since then, then we don’t think that this is something our customers and clients should do in their best interest. It is easy to say that the onus is on the customer and advisor to stop making such mistakes, but we would like to welcome, and we have seen an example earlier is AMCs actually owning up to that themselves, saying that this is not a product they would like to sell any longer. Mis-selling is done by advisors, but mis-selling is facilitated by AMCs themselves in the products that they create.

You should have an advisor. But just having an advisor doesn’t solve your problems. I will call this a ‘bad-uncle’ problem. Just because I have an uncle, doesn’t mean I have solved my problem. He could be a bad relative who is not working in my interest. It is important for you to have an advisor but either find a good advisor or counsel or be your own advisor.

Any mistakes which investors commit when coming to a platform like yours?

Kunal Bajaj: The only mistake which young people make is not realising that we have 40-45 years of working life. You start your working age in early 20s, let’s say 25. You retire when you are 65. So, you have 40 years which you will be saving in, and that, too, over such long cycles. It is almost inevitable that equities will end up making more money for you. Unfortunately, we come from a country of scarcity. We have not seen plenty, at least in our generation. In our earliest earning years, we tend to save more on fixed income and debt side than we do on equity. That is a mistake which the younger generation is cognizant of with the educational aspect of mutual funds sahi hai. The more you save in equity, the more time you give yourself.

No economy or market grows in a straight line but if you give yourself enough time, you will take volatility out. Over long periods of time, you will almost always end up making more money in equities than in fixed income.

There are only three secrets of investing: spend less than you earn—which means you save some money. The second secret is having as many SIPs as possible, or rupee cost averaging. Third is to be lucky and born in a generation where markets are going up.  

The first two are necessary conditions. The third is a sufficient condition which is out of your control, but you need to trust your destiny and things will work out.

When people log in and pick up a fund, is it a ‘fill it, shut it’ principle? Because if you don’t have an advisor and if you are going online with a presumption that you understand funds, it will be important to even get in and out of funds which might be facing issues and then go out and understand these funds. If you are going directly online, then it gets added on to your plate and you should be ready for it, right?

Radhika Gupta: It is not about the fund, but asset allocation. If you are doing a do-it-yourself, then you have a sense of asset allocation. It is ‘fill-it, shut-it and forget-it’ to some extent but it is not so completely. When you go online and add a fund, remember where it fits in the overall asset allocation. Never let that get out of whack. I have seen people log in and suddenly equities are 80-90 percent and just by clicking in, they bought equity funds and suddenly asset allocation goes out of whack.

The one principle of investing to get right is to make sure you have a consistent disciplined asset allocation which is right for you.

When you hold a fund, you must give it time. So, it is ‘fill-it, shut-it and forget-it’ for a while. Remember, you don’t review your business. If you had a factory, you won’t review that factory every three months and if you had bad three months you won’t shut your factory. The same principle applies to funds. If a fund underperforms for three or six months, or even one year, then give it time. Unless there is a material governance or a fraud kind of an event, which is very rare, it is ‘fill-it, shut-it and forget-it’. Once a year, do a portfolio review. Maybe, after three years in an equity fund, do a review whether the fund is beating the benchmark. So, give time to the process.