The standard disclaimer on any mutual fund product in India is that “past performance is no indicator of future performance”. However buy high and sell low has become the mantra of mutual fund investors as they invest based on past performance. The reason for such investor behaviour is due to the fact that the whole distribution community sells past performance. It is easy to sell a fund that has given good returns in the past and it is easy to tell investors to redeem their investments when returns are poor.
It is not easy to sell future potential performance as it requires effort to understand markets, economy, corporate performance and global macro. This is where serious efforts to train the sales community of mutual funds come in.
The sales community of mutual funds must take an effort to understand the products that they are selling. An equity fund outlook depends on various factors including the investment philosophy of the fund manager, how the philosophy will work in the market environment, what will drive the performance of the fund- whether it is global central bank actions or strengthening domestic economy, what is the effect of Rupee on the fund, what is the effect of interest rates on the fund and other such highly relevant factors.
A fixed income fund outlook depends on inflation expectations, global central bank actions, domestic macro economic factors, corporate balance sheet strength, RBI policy actions, Rupee movements, even equity flows and other such factors.
A knowledgeable salesperson can convert an investor from buying high and selling low to buying low and selling high. Risks always exist in investments and a large part of the risk of an investor is mitigated by educating and guiding the investor rather than by selling past returns
The mutual fund salesperson is the face of the organization to the investor. It is extremely important that the salesperson comes across as well trained in financial markets. A salesperson can actually infuse confidence in an investor to invest at bad times, when past returns are poor but future potential returns are bright.
Financial markets are highly dynamic. One day it can be Fed driving markets next day it can be domestic inflation and current account deficit. There are a myriad of factors that drive markets in this globally integrated financial system and a salesperson selling financial products must understand the nuances of the market.
Mutual fund sales persons, wealth managers, distributors and independent financial advisors must equip themselves for continuous learning and that is the only way they can provide confidence to investors. Continuous in the context of financial markets is 24*7*365.
The fact is that mutual fund investors almost, always base their investments on past performance rather than what is expected of the future. This type of investment decisions also almost always leads to investments at the wrong time. Investors typically invest at the peaks of markets and withdraw at bottom of market. A look at the inflows and outflows in mutual fund schemes will corroborate the past performance factor. Inflows into equity mutual funds peaked at bubble times in 2007 and have since then witnessed a steady outflow and are almost at a bottom at present.
Fixed income investors too went wholeheartedly into gilt and income funds in the April – July period when ten year government bond yields hit 7.16% in May 2013 but are now selling their investments at a time when the ten year yield is 8.83%. Gold ETF’s saw good inflows when gold prices were peaking at over Rs 30,000/10g but are now stagnating at gold prices of around Rs 25,000/10g.
Such buy high and sell low investment decisions can be avoided if there is proper continuous training imparted to the sales community of mutual funds.
Arjun Parthasarathy is editor Investors are Idiots.com and INRBONDS.com and is bent on educating and guiding both investors and the sales community on markets and investments.