Choosing a mutual fund is not the same as choosing a restaurant!

Published: October 14, 2016 at 11:24 am

Last Updated on

Suppose you are coming down to Chennai for a week on work. You are a foodie and would like to try out the local cuisine. What do you do? Ask a friend or relative for good places to dine in? Search for “best restaurants in Chennai”?  Yes, that seems logical. What is the worse that could happen? You dislike or even hate the food or have a case of the Chennai belly? No biggie. A couple of days later, it is water under the bridge.

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Freefincal regulars would have guessed the contents of the post from just the title. This post is not meant for learned folk like you. I request you to forward it those who might benefit from it. It is directed at two sets of people:

(a) Personal finance bloggers who create “listicles” – Top 10 mutual funds, Top 10 ELSS funds, Top 10 mid-cap funds etc. for the simple and singular reason that it ‘sells well’ in Google

(b) The tens of thousands of investors who search for such “top funds” or “top stocks”.

michelin ratings
The famous Michelin restaurant star ratings guide

Reasons why mutual fund selection is different from choosing restaurants (or even furniture!)

The pros and cons of eating out on a recommendation are temporary! More importantly, you know when you are having a good time and when you are having a bad time. Even more importantly, you know how to react/respond in both cases.

When my friend says, “the butter chicken at XYZ is awesome”, my experience is unlikely to be too different hers. It is not a case of blind men and the elephant!

If I buy a  ‘top fund’  because someone (including a rating portal) says so, I need to recognise
1. What is the definition of top/best used. ‘Best’ could be mean great taste or ambience. If it just means maximum return, it is immature, to say the least.

2. That these ratings will change fast (unlike restaurants ). And that they are changing because the outlook of an investor is different from the outlook of of an analyst or blogger writing a post. That is the nature of the market. Butter chicken prepared this month will not taste very different from that prepared the next. Investing in volatile instruments depend on when the investment was started and the sequence of returns that followed. The analyst will be tracking a different sequence than the investor.

3. How to define good performance and bad. This is an individual definition. At least to start with, this can be done with borrowed conviction and then refined. However choosing a fund on recommendation without knowing how to analyze performance is like making a parachute jump without learning how to open it.

4. that unlike mutual funds one can have multiple dining experiences without much of a problem. Random mutual fund (or stock) buying is often a sign of a cluttered mindset!

Are you (Am I) being a responsible blogger?

It is a fact that most people search for “top funds to buy” and not “how to choose a mutual fund“. Does that mean I should such posts? Give the people what I want? Write posts for Google and not for people, not for a community? Sure that would get me traffic, a lot of traffic. I will be featured in the “top bloggers” list (another dangerous listicle). Should I define success by running a fish stall or by running a fishing gear stall?

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
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