(This column was first published on Value Research India.)
My 4-year-old son is fascinated and obsessed with motorbikes. He has close to a million (almost) toy bikes, and he’s always looking at the real ones when we’re out. He’ll check out their headlights, the shapes and colours, he’s aware of what disc brakes are and how different bikes have different types of silencers. He’ll ask me what kind of sounds a bike makes and how fast it can go, and I’ll pretend to be the motorbike expert that I’m not.
With his own understanding and thanks to his observations, he’s categorised bikes into three broad types – all cruiser bikes are called Singham bikes, the ones that look like racer bikes are called Dhoom bikes, and the rest are called Normal bikes. When he grows up, he’s going to get a yellow Dhoom bike. I’m supposed to get a black Singham bike, not now, but when he grows up and gets his Dhoom bike. And as far as normal bikes are concerned, he doesn’t want anything to do with them. Normal bikes, you see, aren’t as cool as the other two types of bikes. And what’s more, they probably don’t even go as fast.
He wants a Dhoom bike because it’ll make him faster than anyone else on the roads. He wants me to get a Singham bike because it gives his dad a Bollywood hero-type image. His purposes for different types of bikes are clear in his mind, which is exactly the kind of clarity that mutual fund investors should have as well. Different types of mutual funds serve different purposes. Just like there’s no one kind of bike that’s preferred by all riders, there’s no one type of fund that fits all investment objectives.
If multi-cap or mid- and small-cap equity funds are racy like Dhoom bikes, a large-cap equity fund would be sturdy like a Singham bike and a balanced fund would be steadfast like normal bikes. What type of fund you choose depends on your risk profile, returns expectations, and investment objective & timeframe. Someone investing for the first time shouldn’t hop onto a racy fund and risk getting hurt by an unexpected fall; a balanced fund would be more ideal for them. Similarly, a sturdy ride would be good for an investor who is nearing retirement, but someone in for the long run could use the pace of a mid- and small-cap fund.
Of course, for some investors, a debt fund would be best suited instead of an equity fund. After all, there are times when you don’t want to ride a bike at all; you’d rather use some other form of transportation. The options are aplenty, each serving a specific purpose. Understand this purpose, analyse your need and pick wisely.