mutual fund advice
Mutual fund advice is often disregarded by experienced MF investors, more so these days. With online platforms coming up and allowing you to invest in direct MF plans, the value of mutual fund advice is not recognised. While everybody agrees mutual funds sahi hai, the need for sahi advice is not felt by many. Buying mutual funds is not like buying food on Swiggy/Zomato, buying groceries on Amazon or ordering electronics on Flipkart. But, these days it is hard to explain this to an investor who has the ability to click on a button and make a financial investment.

When markets are in bear grip, some MF investors feel that advice is not important since all funds are falling. During a bull market, everybody thinks they are a super-hero. So, is advice over-hyped? How does the right advice benefit you? What is the impact of wrong advice? We at RupeeIQ conducted a simple study to gauge the financial importance of advice. Read on to know about the interesting insights.

Our study assumes a few things.

One, we have assumed that you have only Rs 1 lakh for lump sum investment.

Two, we have assumed that you have an investment horizon of 10 years. We have looked at historical data i.e. the investor invests from 2009 start to 2018 end.

Three, we have assumed that the investor gets advice from two types of advisors – one advisor gives advice that is 100% right resulting in investment in the best performing fund each year; one advisor gives advice that is 100% wrong resulting in investment in the worst performing fund each year.

We have also not taken into account of tax impact in our calculations each year since that would have complicated things. We have also ignored the fact that MF redemption amount may take up to 1 week to come into your bank account.

What if advice is 100% right

If the investor followed the 100% right advice, undoubtedly he/she will make a lot of money. By investing in the best performing equity fund each calendar year, your initial investment of Rs 1 lakh from 2009 to 2018 would have become over Rs 1.14 crore in 10 years.

Even if you paid 10% in tax, a post-tax sum of Rs 1 crore after 10 years is incredible given that it is 100 times the initial capital. This is the power of the right advice. In practice, even if your advisor gets it right 50-60% times, your wealth creation journey will still be fabulous.

Take a look below at the wealth creation journey if the investor was able to invest in the best performing fund for 10 successive years.

What if you chose the best fund every year for 10 years

Calendar year Investment value (Rs) Return of best equity fund % Investment value at year end (Rs)
2009 100000 147.3 247300
2010 247300 49.36 369367
2011 369367 14.96 424624
2012 424624 72.21 731245
2013 731245 62.55 1188639
2014 1188639 110.66 2503987
2015 2503987 27.06 3181566
2016 3181566 61.11 5125821
2017 5125821 78.66 9157792
2018 9157792 24.77 11426177

What if advice is 100% wrong

If the investor unfortunately got the advice to invest in the worst performing fund every year, there will be severe capital erosion. By investing in the worst performing equity fund each calendar year, your initial investment of Rs 1 lakh will become Rs 6,435 in 10 years. That is over 93% capital erosion.

This is, ironically, the ‘power’ of wrong advice. Many investors by themselves end up investing in funds that are good in one year and horrible in the next year.

Take a look below at the wealth destruction journey if the investor was investing in the worst performing fund for 10 straight years.

What if you chose the worst fund every fund for 10 years

Calendar year Investment value (Rs) Return of best equity fund % Investment value at year end (Rs)
2009 100000 8.69 108690
2010 108690 -14.17 93289
2011 93289 -47.63 48855
2012 48855 -8.46 44722
2013 44722 -41.51 26158
2014 26158 -21.05 20652
2015 20652 -43.01 11770
2016 11770 -14.65 10046
2017 10046 -4 9644
2018 9644 -33.27 6435

RupeeIQ take

The above study is only meant to highlight the power of right advice and fund selection. We know that it is practically impossible to select the best performing fund each year beforehand. We also want to tell you that right advice is not merely about selecting the best performing fund.

Right advice is about ensuring that your financial goals are achieved in the best possible way. With many investors today only investing in MFs on their own, without the proper knowledge and tools, it is likely that you might get caught in a bad fund. As a result, you will suffer.

This study does not want to give an impression that good advice means selecting the best fund, or bad advice means selecting the worst fund. However, we strongly feel that it is important to convey to investors the financial importance of good advice and bad advice.

When you choose to side with a good advisor, you choose wealth creation. By not taking any advice, or also by taking bad advice, you risk a lot.

Disclaimer: Views expressed here in this article are for general information and reading purpose only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on kumarsroy@rupeeiq.com