Many investors think investing in mutual funds takes care of asset allocation, market timing, portfolio management – and they will get good returns. I have been trolled on twitter (by idiots I presume) for saying some of this. Hence a post.

As an investor there is only one person who is responsible for getting good returns – and that is YOU, yourself. There is no way how you can escape this responsibility. Never mind, it is the press which says that the fund manager, equity markets, Donald Trump, Namo,….are all responsible. That is because they have no guts in telling YOU the truth.

When you start the investment process, you go to an IFA. Now the problem is most of them are not competent to describe their role, most of them are not independent, many of them do not know enough about advisory to be able to do a good job. However do remember that for 300 people of investing population, there is one IFA. So if you get a good IFA, it is a miracle.

What is the role of an IFA. He has to hand hold you during the investment process, and make some reasonable fee for doing that.

He will do a risk profiling of the investor (and his family) and suggest a portfolio for you. A sensible IFA knows his limitations. However, most of them will talk to you like they know equity markets, debt markets, commodities, market timing, etc. Actually they do not.

Lets see what would an INSTITUTIONAL INVESTOR DO if he has to invest say Rs. 100 crores.

He will decide on the asset allocation HIMSELF. In your case this work should be done by the IFA, but remember the decision is yours. If the IFA has done a Risk Analysis and arrived at a portfolio of 60% equity and 40% debt, after that you need to pick up shares for the 60% or equity mutual funds. The remaining 40% of course has to be debt instruments.

At this stage the Institutional Investor goes to a PORTFOLIO MANAGER who picks up the portfolio. In your case you have to do it yourself, if you are not sure about the IFA’s competence. Remember the word ‘Independent’ almost does not exist. You have to make sure that he picks the right portfolio for you. For example in picking a debt fund or PPF, clearly he is going to be favoring a debt fund which pays a commission vs a PPF which does not. Will going to an RIA help? (Registered Investment Adviser). Let’s not be naive. What a person is called does not decide his competence or his honesty.

IN case of the retail individual (read you) the asset allocation is YOUR responsibility (advised by the competent IFA), and the portfolio selection is also done by the IFA (largely which fund to invest in). Then he tells you ‘do a sip’. Now for an institutional investor it is the PM who decides on how much to invest at what point in time (market timing). Your IFA cannot time the market, so if you wish to time the market, IT IS YOU who has to do it. Not the IFA. No. It is not his job. Not his area of competence for sure. However some of them do. Remember, it is your money and therefore your responsibility. not his.

The fund manager’s job is to invest the money. Let us say I have Rs. 100 to invest and my IFA has decided that I should invest Rs. 70 in equity markets through mutual funds. He has decided that Rs. 40 will be in large cap, Rs. 20 in midcap and Rs. 10 in small cap. He then chooses say 4 funds in which to invest. I invest (lump sum or sip), I DO NOT WANT THE FUND MANAGER to hold on to any cash. I have cash in MY portfolio. So if the FM holds 10% cash, I am in too much of cash, and it is impacting my portfolio. I do not mind my PMS manager being in cash – IT IS HIS JOB, but not the fund manager.

I hope the roles of each of the players – the IFA, the portfolio manager, the fund manager is clear. I do not mind doing another posts, if you have doubts….please ask in the comment section.