Recently I read an article written by a senior executive of a leading mutual fund house. The article was well written and made couple of interesting points that industry folks do not like to admit. He mentioned two of the points given below which is 100 per cent true.

• Never try to predict the future performance based on its past
• Even fund managers cannot predict market direction

Yet I find it ironic that most of the mutual funds use these very points as baits to entice investors. Past performance is touted all the time and fund managers are accorded god-like status.

A mad race for the assets

Passing the buck is one of the favourite games that insurance companies and mutual funds seem to play.

In the race for being number one whether in terms of assets under management, AUM (the total amount collected by a mutual fund across different schemes) or premiums collected, to boost egos and to earn fat bonuses, you see everyone talk about investor education and interest but rarely do you see fund houses do what is best in the interest of their investors.

Innovation is certainly good and healthy for the growth of the mutual fund industry, which is still in its infancy in India as compared with the US mutual fund industry.

Is the Indian insurance market saturated? 

Compare our $ 62 billion (Rs 300,000 crore) mutual fund industry with the US mutual fund industry with $ 10 trillion under management. Fidelity, Vanguard and American Funds itself manage $ 1 trillion each.

• Do you trust your insurance agent? 

This goes to show how miniscule our mutual fund industry is as it barely manages assets around 0.6 per cent of the US mutual fund industry's AUM.

This also goes to show that there is a lot of potential for the industry to grow over a period of time. One statistic that I often come across is that around 52 per cent of the US population is invested in mutual fund products as against the 4.5 per cent that we have here lately (up from the 1.2 per cent earlier).

US plans vs Indian plans

Retirement plans in the US through 401Ks, 403b and education plans such as 529 are predominantly done through mutual funds.

Compare this with retirement corpus growing options available to people through their employers (Employee Provident Fund which guarantees 8.5 per cent interest that changes from year to year based on political compulsions).

All this is set to change with the launch of pension products in the country. Additionally with a lot of asset management companies, AMCs (companies that manage investors' funds through mutual fund schemes), such as Goldman Sachs, AIG, JP Morgan planning to start operations, choices are bound to go northwards which will create more confusion in the minds of people.

Investors' interest at heart?

Despite all the changes and competition what is lacking in the industry is the nerve to do what's in the best interest of the investor.

• Buying insurance? Beware 

In the rat race to garner more assets (money from investors) and reach the coveted numero uno position, mutual fund houses look for distributors who can sell more (never mind how the sales are done).

Incentives, lavish parties, vacations are given to sell more. The barriers to entry being lower, very little attention is paid to the quality and education of advisors.

Doctor, heal thyself

This is one industry where doctors and pharmacy owners are seen in the same lens and pharmacy owners score over doctors as they can very well call themselves doctors.

Distribution and advisory are two separate things and this is better understood by the mutual funds themselves. Even the media awards to the so-called best advisors are given on the basis of AUMs to outfits, which are pure distribution (intermediaries between you and the mutual funds, who convince you to buy a particular scheme for a commission from the mutual fund) houses.

One has to realise that though a pharmacy might have multiple locations and sales in crores, it can never win the award of being the best doctor. But financial advisors are rewarded for how many mutual funds they have sold.

• Five ways to invest in a mutual fund 

Never mind the countless churning and unnecessary selling that takes place at the end. And yes if things were to go wrong then pass the buck on the agent or distributor, as he/she is the front-end to the investor.

You have to protect your own interest

Make sure you understand why you are buying a fund in the first place and how it fits into your portfolio.

Ask yourself this question: Which goal or objective can this fund help me attain?

Understand your risk tolerance and how you behaved during the May crash and the recent correction. Did you have sleepless nights? In one month (May-June), net asset values, NAVs, of most mutual funds were down by 30 per cent and the worst by 38-45 per cent. Look at risks as well as returns.

Remember that the days of making 30-40 per cent returns per annum are over whether it is equity, property or art. Resist the temptation of investing in schemes by just looking at the returns on the investment.

Discount the advertisements promising fancy returns and take it with a pinch of salt.

Next Friday: Why ULIP is not the best insurance product