The digital era we are now living in has given us convenience, access, reach, and information. It continues to evolve quickly and holds many promises and possibilities for us in the future. Amid all this, it is interesting to see how the investors have also evolved. From physical forms to digital platforms, we have come a long way. However, with increased ease, information, and access to investment platforms, the investor faces a dilemma even before an investment decision is made— whether to invest directly or take the help of an expert.
When it comes to investing in mutual funds, or for that matter any kind of investment, there is no ‘one-size-fits-all’ solution. Every investor is unique, with different financial needs and risk profiles; hence, they need to follow a tailored mutual fund investment strategy. Every investor comes with a different level of experience, knowledge, and biases for investments. Thus, standard solutions and templates may not be suitable for everyone. The first step, thus, would be to determine if you are indeed the best person to manage your investments. If you want to opt for DIY. or do-it-yourself, investing or investing directly without human assistance, ask yourself these questions:
Do I have the requisite expertise, time, resources, knowledge, and understanding of investments?
Can I act rationally and eliminate emotional biases from decision-making at all times, independent of market volatility?
Will I be able to maintain discipline and commitment to the long-term investment journey in the absence of guidance?
If your answer to any of these questions is no, then perhaps you do need the guidance of an experienced person like a mutual fund distributor (MFD). That said, let’s look at some benefits of opting for the mutual fund distributor route and where a distributor can help in your investment journey.
Risk profiling and asset allocation: All investors have a different risk appetite and risk tolerance. An MFD can ask the right questions to investors to determine a risk profile for investors. Based on this, a suitable asset allocation can be decided. DIY investors may miss out on this and opt for an asset allocation without proper risk profile understanding.
Need-based investing: Most DIY investors invest without specific financial needs or objectives, and thus, there is a lack of direction. An MFD can help you quantify your financial needs and suggest suitable MF products, build a tailored portfolio and guide on the required investment amount.
Behavioural biases: DIY investors are prone to be influenced by their behavioural biases and emotions while making investment decisions. This can be detrimental to the wealth-building journey. An MFD can help you avoid such biases and emotions while making investment decisions. An MFD would also handhold you during volatile markets, helping you avoid all the noise and giving you the confidence to continue with your plans.
Research and knowledge: Investing in mutual funds requires adequate research and knowledge. There are around 45 fund houses in India and hundreds of schemes in different categories and sub-categories. One may not have the time and knowledge to do the research and make the right investment decisions. On the other hand, an MFD’s primary job is to guide investors in selecting the right mutual fund schemes, considering investment objectives and risk profiles.
Portfolio review and rebalancing: The investment process does not end with investments, and you need to ensure that your portfolio is on track to fulfil your financial needs. Regular tracking and periodic reviews followed by necessary corrective action in case of any deviation are required to be done, including any rebalancing of the asset allocation. MFDs can help investors set up a diligent and disciplined process of portfolio review and rebalancing.
To summarise, the investment needs, expectations, and experience of every individual is unique. When you are beginning your investment journey, the right start must be made, and hand-holding may be required. However, we have seen that even many experienced and big investors continue to prefer associating with distributors, given the extent of impact they can create over the long term. Countless small decisions eventually pile up and make a considerable impact on your wealth with time. Controlling behavioural biases, emotional decisions, and such mistakes can be detrimental and set you back on this journey. The impact and contribution of MFDs can only be judged with time if you are associated with one.
Misbah Baxamusa is the chief executive officer of NJ Wealth.