The DIY handbook for mutual fund investing

Personal finance columnist Monika Halan's book steers clear of needless complexity and provides knowledge that is useful

Let’s talk mutual funds: A Systematic, Smart Way to Make Them Work for You

Author: Monika Halan

Publisher: Harper Business

Price: Rs 399

The mutual fund industry’s assets under management (AUM) have surged dramatically from Rs 7.61 trillion in July 2013 to Rs 46.4 trillion in July 2023 at a compound annual growth rate (CAGR) of 19.8 per cent. Monthly inflows via systematic investment plans (SIPs) crossed the Rs 15,000 crore mark for the first time in July. However, the pertinent question that needs to be asked is: Are retail investors deploying their money in mutual funds judiciously?

Consider this. Large-cap funds, known to lend stability to portfolios, have witnessed outflows of Rs 3,258 crore by the end of July this year. In stark contrast, investors have poured Rs 22,040 crore into the far more volatile small-cap category. This behaviour points to the prevalence of a “recency” bias —  the tendency to invest in a category that has performed well recently.

Monika Halan, author of Let’s Talk Mutual Funds, writes that she is often accosted at social events by acquaintances who ask: “Which fund should I invest in?” Most people obsess about finding the winner fund when studies have shown that asset allocation plays a far bigger role in determining returns. Ms Halan tries to address this, and several other mistakes to which retail investors are prone when investing in mutual funds. 

Ms Halan is an esteemed personal finance columnist and former editor. Impassioned advocacy of retail investors’ interest has been the hallmark of her writing. In 2005-06, when we worked briefly in the same team at a newspaper, she was writing about the need for home loans linked to an external benchmark—a good 15 years before the Reserve Bank of India (RBI) made it mandatory for banks to offer them. 

Ms Halan has combined her stints as editor with work in the area of public policy. Her 2016 research paper with Renuka Sane on mis-selling by banks focused the spotlight on a significant, and persisting, concern. She has also served on government committees (like the ones headed by D Swarup and Sumit Bose) and helped produce reports that have shaped regulations. Ms Halan’s long stint at the Securities and Exchange Board of India’s (Sebi) Mutual Fund Advisory Committee provided her an insider view into the evolution of mutual fund regulations in India.  

The current ascendancy of mutual funds is not mere happenstance. The proactive role played by Sebi in introducing pro-investor regulations has played a major part. In chapter three, the author discusses the landmark regulatory changes ushered in over the years: Removal of the 6 per cent commission to agents on sale of new fund offers (2006); removal of the 2.25 per cent front load (2009); launch of direct plans (2013), and several others. Each such regulatory change was followed by outcries of imminent doomsday, the industry being throttled, agents and distributors losing their livelihoods, and so on. As Ms Halan points out, the debate rarely focused on how these changes would protect retail investors from being shafted. Mercifully, the regulator held firm in each of these instances. As these regulations boosted investor confidence, the industry’s AUM burgeoned. 

The sheer variety of funds poses a challenge to the lay investor looking for a suitable scheme. The author begins by explaining the myriad categories and sub-categories: Open, closed-end and interval funds; direct and regular plans; growth and dividend options; lump sum, SIP and STP (systematic transfer plan) routes for entry; lump sum and SWP (systematic withdrawal plan) routes for exit and so on.

Subsequent chapters on cost, returns, benchmarks, risks, and taxes provide readers with a sound grasp of fundamental concepts. 

Ms Halan then turns to identifying the fund categories that are truly relevant to lay investors. Next, she explains how to select individual schemes. While no method is, or can be, entirely foolproof, her approach is designed to identify funds that have performed consistently over the long term.

Investors who are disinclined to take the trouble of selecting active funds have the option to adopt the passive route. Ms Halan devotes a chapter to index investing, which is gradually gaining ground among retail investors.

Investors must, above all, imbibe the lessons imparted in the chapter on asset allocation and portfolio construction.

Most books on mutual funds available in Indian bookshops are by foreign authors like Jack Bogle of Vanguard or Christine Benz of Morningstar. While these are very good books that ought to be read, Indian investors also need books that focus squarely on the Indian mutual fund landscape. Ms Halan’s work addresses this lacuna. Her book steers clear of needless complexity and provides knowledge that is useful. If you don’t wish to pay a fee to a financial planner to construct your portfolio and select your schemes — planners are anyway hard to find beyond the metros — this book can serve as your guide to sensible investing in mutual funds.