Never Invest in a Mutual Fund Product You Don’t Understand!

Mutual fund sahi nahi hai

A couple of days ago, I was having a discussion with my father about the recent DHFL default in debt Mutual fund space. He reads the newspapers regularly and  had read about ILFS, Essel group crisis and now DHFL. So he got concerned about the liquid mutual funds.

The first thing my father said was that he sees an ad daily on the television, “Mutual fund Sahi hai“. If Mutual fund sahi hai, then what do all these instances of default mean. I had explained many times earlier about the risks involved, but he was disappointed to learn that the sales team hide information about risks and just focus on one point to prove that mutual funds are always right.

My parents don’t know much about financial products, so I manage their portfolio and risk. My father retired four years ago and gets an indexed pension which is sufficient to meet their day to day and medical expenses. After checking the retirement calculator, I always knew that they wouldn’t have a sufficient corpus as most of their savings were spent on my and my sister’s education.

Thanks to an indexed pension, they get active income throughout their life so we didn’t have to think about buying an annuity. Also, funds get stuck in annuity and what if you need large corpus to fulfill any emergency. I also remember the day when we went to bank to deposit his retirement cheque. The manager tried to sell a ULIP. Since I was there I clearly told them no.

Later when we visited another bank to get KYC done for Mutual fund investments, they tried to sell regular plans. It’s like wherever you go for an investment product, the salespeople will be ready with a pitch to complete their target and sell a junk product to you.

After reading about the bucket strategy, we decided to keep 60% portfolio in FD, MOD, etc. and some part in Senior Citizens Savings Scheme (SCSS). The plan was to protect the corpus and let it grow matching with inflation as senior citizens get higher rates. Also, in case of emergency they can withdraw it anytime without much hassle.

15-20% was invested in liquid mutual fund due to its taxation benefits over FD and remaining in equity (as it should not be required for at least 10 to 15 years and I am always there to fund any emergency through my corpus). I don’t trust anyone to manage the risk for my parents as most people out there like distributors, bankers, etc will try to take customers for a ride.

The reason for this post is I have managed risk properly for the last four years for their equity portfolio, but I never thought that one by one there can be crisis in debt part. It’s like you focus on improving your middle order problems as the top order is sorted out then suddenly one or 2 of your top order gets injured and can’t recover for months.

Now you are staring at a fragile top order which was not there in your contingency plan.

Fortunately neither me and my father suffered a lost a single penny in debt portfolio due to recent events but this has been a very good lesson for everyone who invests in debt MF. They are more complex than any equity MF. Choosing an equity MF is more easy compared to debt MF. Losses in equity can recover with market (only with long term investment) but its almost impossible to recover it in debt MF.

Finally, for my father’s portfolio we decided to max out SCSS as it has some scope left and rest debt will be kept in good old FD only. I can’t imagine a situation for them where they would have lost their hard earned money due to such events. I would not have been able to sleep properly if something like that had happened.

Also, those who manage their parents portfolio due to their limited knowledge on financial products, please never invest in any product which you don’t understand clearly and younger generation and senior citizens have different risk appetite so quantify that before taking any decision. Sorry for a long post but I thought to share my experience as it might be helpful to others