Investing in Equity Mutual Fund is like taking a journey in a Taxi

You must be finding strange at the above caption. Must be wondering what is the correlation between the two and how the two are comparable . Sometimes we understand a thing better if linked with some  vivid experience .

Let us assume I want to take a cab from Delhi to reach Agra . What are the things I am going to look at before selecting and going for the journey .

How quick and safely I can reach my destination .  I can not be unreasonable to think that a 4 hour normal journey will be covered in 2.5 hour or also not be accepting that it should take 6 hour . I have a realistic time expectation as to when I will reach . If I have targeted a particular time to reach I should start at right time. I don’t want to go slow and be late .But at the same time I might not be in hurry to reach as quick as possible  taking unnecessary risk but if I reach before time safely I would be happy.  In Equity MF investment like reaching Agra my long term goal could be  children higher education ,marriage, post retirement etc . I have targeted a level of return to match my cash flow requirement so must get that much at a right time. I should start investing well in time or have a realistic time horizon where I know I will get my desired return.  My expectation of return has to be realistic but in case I get more than what I realistically expected I would be happy .

In our cab drive we know and are mentally prepared that at some places we will see heavy traffic and speed will be slow but also know that there will be places where car will speed up and earlier time loss will be compensated . Similarly in equity fund we should be mentally prepared that in between in short time duration sometimes return might be low as condition might not be favourable but again there will be good market scenario also where opportunities for earning higher return in the fund will come and earlier short term low or less return will be recovered .

Roads might be bumpy at some places and some place smooth . I want a smooth ride so expect the cab driver drive with caution at potholes and speed where smooth. Stock Market is also bumpy and we expect fund manager to protect downside when market is falling or volatile and when market moving upward take advantage of the upside . The overall ride is mix of both experience but the total experience ends up well and happy . Just like we expect cab driver to balance his overall drive looking at road condition we should expect the same from equity fund manager looking at the market condition and opportunities available.

Even if the car goes slow or some one overtakes it we do not change the car and shift to fast moving one  . Once we have decided after thorough diligence about the cab and driver we trust him and ride in the same car . In case of equity mutual fund also once decided after doing all analysis and diligence we do not keep on shifting between funds due to short term performance . In short term there will one fund overtaking other like cab but if we have conviction and evidence that the fund will deliver as per our expectation we continue invested . We can shift from one fund to another only when it becomes a non performer and something serious wrong and no corrective action being taken similar to when the car goes for a breakdown and change becomes imminent.

We might look at the cost but again for the sake of low cost we do not compromise on comfort and other thing . In equity mf investment also the cost has less relevance if that gets compensated by better return .

We look at the cab driver . If he is new we might be a bit hesitant but if he is experienced we don’t hesitate . Again when one is selecting a equity fund the experience, expertise of fund management also needs to be looked before making an investment decision . In a cab you don’t know from where some rash driver can hit you , suddenly caught in traffic jam and at times driver take diversion route ,don’t know when the car ahead puts brake and your driver need to be alert to put brake in time etc . Similarly equity investment is subject to so many risks , market risk , company risk , business risk etc and a skilled prudent fund manager is expected to manage all risk to see that the portfolio is least hit and damaged . He has enough tools and research based inputs which helps him to tackle various risks .

We do evaluate the interiors, comforts , speed , seating comfort .  That makes the ride happy and peaceful. Similarly when investing in equity fund you look at asset quality , the various options , systematic approaches of investment , transfer and withdrawal, payment mechanism these provides you advantages over investment avenues .