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!

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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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4 Comments

  1. Agreed …there are few people who want to take the pain first to understand & then paint the big picture … I guess .. market for this kind of holistic approach is very small .. after all many of us long for ready food only….!!

  2. “Butter chicken prepared this month will not taste very different from that prepared the next”

    “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.”

    Choosing a MF scheme based only on returns is similar to tasting the same butter chicken prepared one month back, because somebody who had then eaten it said it was good! 🙂

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