Investment

Do businessmen have unrealistic return expectations from mutual funds?

By Rishabh Parakh

You do not teach the paths of the forest to an old gorilla. Similarly, you don’t tell a businessman how to make money. I started my discussion with this disclaimer, which is a famous African proverb, with Jinesh Patel, a businessman.

Patel asked me to suggest the best mutual fund schemes for him, which would give him 20-25% returns annually.

I wanted to know about his thought process before I gave more advice. I asked him why is looking for 20-25% returns from mutual funds?

Patel told me that he could get even higher returns from investing directly in stocks, or his own business. He expected the same from his investments in mutual funds, too.

“Tht is not an apple to apple comparison,” I told him. Comparing returns from mutual funds with the returns from stocks, or business margins cause a huge expectation mismatch. I find this mismatch common among many investors in the business community.

“What should be the right expectation,” he asked.

“Before I answer that, let’s set our investment objectives right. The money invested in your business or stocks can either die, survive or thrive. There is no limit to the returns you can generate from these two sources, subject to the risk you carry.”

Patel was confused. “Do you mean to say that I should not invest in stocks? Or should I lower my expectations from mutual fund returns,” he asked.

“Certainly not! I am only trying to set the right expectations. If you want 20-25% returns from your mutual fund investments, you need to invest in mid-cap, small-cap, or sectoral funds. All of these funds carry a higher risk. Since you are a businessman and invest in stocks too, why would you want more risk with your mutual funds investments. I would suggest investing in index funds, large-cap, or multi-cap funds. Expecting the 20-25% returns is not realistic in the current economic situation, for the foreseeable future.”

I gave him some more tips to plan for his mutual fund investments. These pointers can help anyone who runs a business and looking to invest in mutual funds.

1) Use mutual funds for diversification. Most of your investment is in your business itself, as well as in real estate.
2) Invest a minimum of 70-75% of your savings back in your business, and focus on increasing your stock value.
3) Use a part of the remaining 25-30% for investing in equity mutual funds. Use SIPs and tag it to a goal like your child’s education.
4) Invest 30-40% of your emergency fund in pure liquid funds.
5) Use the SIP route for monthly investment and systematic transfer plan or STP for lump sum investments.
6) Do not invest in equity mutual funds if you cannot park it for a minimum of seven years.
7) If your business does not have the potential to scale up further, do not flock to stocks. It might work during the current pandemic, but quick money is an addiction and can be dangerous when the tide turns.
8) Invest in stocks only when you have the time and expertise to monitor them, and the money to spare, and when you are sure it will not disturb the focus on your business. If not, Mutual Funds Sahi Hai, even for businessmen.

(Rishabh Parakh is a Chartered Accountant, founder and Chief Gardener at Money Plant Consultancy. He is also uthor of Financial Spirituality.)

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