Risk in mutual fund investing comes from:
a) not knowing what you are buying
b) not understanding standard deviation of the instrument
c) not understanding that the past performance is completely useless for knowing what will happen in the future.
Let us take just one ‘type’ of fund: The Gilt Fund.
All asset management companies have a Gilt scheme – the scheme which invests in GOVERNMENT SECURITIES only. Intuitively we all think that investment in Government debt/ bonds is safe, right.
However there are 2 types of risk in a Gilt Fund:
1. Inflation risk: when you get returns LESS than the rate of inflation, you have a risk of getting NEGATIVE REAL returns. This is a real risk in a Gilt fund – and the returns that you would have got in HDFC GILT FUND is as follows:
5 year return: 6.8% return. This is far lesser than the return on National Savings certificates. Also over the life of the fund there would be MONTHS – (if not quarters) where it can give NEGATIVE RETURNS – and huge negative returns (not even talking of NEGATIVE REAL RETURNS, negative nominal returns have happened). Jan, Feb 2009 gilt funds gave very poor returns (check valueresearchonline.com).
02 Jan 2009 to 04 Jan 2010 : Hdfc Gilt fund gave a HUGE NEGATIVE RETURN – Fixed deposit holders DO NOT UNDERSTAND THIS!
Now take a time when the returns are poor – the smart investor exits – and the poor small investor is left holding the baby – and THE HIGHER AMC charges.
So if you do not understand yield to maturity, duration, interest rates cycles, YOU CAN LOSE money in a BLUE coded product. Now add the tax burden to it, the small investor is surely better off in bank fixed deposits.
Classifying is good, but it has to be done very very carefully.
How is it going to hurt the RETAIL INVESTOR: THE bank RM or the IFA is now going to tell the investor….’Sir gilt funds are like FIXED DEPOSITS with the government of India….and you can get capital gains if you opt for ‘growth’…and your MONEY is very very safe. So please invest…
Ha did I tell you that commission wise it is today immaterial whether you sell equity funds or debt funds?
And thanks to SEBI mis-selling bond funds will become very very easy?
Ha cometh the man cometh the opportunity to sell. Or mis-sell. God bless.
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