Saturday, October 27, 2012

Index based Mutual funds - behavioral science at play!

Last month, when the BSE squatted, I was, once again, tempted to invest in Index based Mutual Funds, just like in 2006, when the market dumped because of the global economic crisis.

An Index Based Mutual Fund (IBMF) is a relatively straight forward variant of various mutual funds available in India, wherein the fund holds all stocks comprising an identified Index in the same proportion as that in the Index and changes it along with movements on the Index. Idea is to replicate Index returns. An ideal bet, when you are sure that market is grossly undervalued in general and is going to go up in foreseeable future. Which is why, I was, especially, tempted to invest into IBMFs in 2006 when market had hit sub 10,000 mark.

However, to my surprise, it very difficult to even getting basic Qs answered about IBMFs. I approached the known agent who used to help me with my annual investments in Equity Linked Saving Scheme (ELSS) mutual funds for tax saving purposes. Typically, a brief analysis for NAVs of top 5 Mutual Funds (MFs) and their dividend history is sufficient for deciding the final bet for an ELSS investment. Plus, the agent will have sound information up his sleeve, about any forthcoming dividends etc. Just fill up the form and give him a cheque and you are sorted.

But, when I asked him about Index based funds, it looked like, he was almost caught off-guard ! With a promise to get back to me, he continued to suggest me to invest in typical equity based MFs or gold etc. He had little information about the players, fund sizes, return history etc. Seemingly, not many people (read retail investors) know about Index based funds, nor do they want to know about them! While, all factual information is available online, it is not enough for taking the final investment decision. And that's because, typically, information about general performance of the funds and its fund manager/s, liquidity, ongoing problems being faced by fund houses etc. is never available online and that’s where agents play a very crucial role.

While, I continue to wait for that agent to call me back even today (frankly with little hope), this feels like a classic case of a vicious circle, wherein, I will not invest into a product until I get comfort from a agent, who will not focus on selling it (and acquiring required information for the same) until a substantial number of retail investors ask for it !!!

Pure behavioral science at play. :p

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