Page Title – Drawbacks of Mutual Funds for HNI Investors

Meta Description – Mutual fund is no longer the best investment tool for HNI investors. Read more to
know about the drawbacks of mutual funds for HNI investors.

Keywords – drawbacks of mutual funds, mutual fund, mutual fund investment

Drawbacks of Mutual Funds for HNI Investors

Mutual fund investment has increasingly become a popular investment tool recently. With the retail
investors entering the domain and stricter regulations from SEBI, is it a mutual fund as lucrative for HNI
investors, as it used to be? Here are the major drawbacks of mutual funds that HNI investors must be
aware of.

What are mutual funds?

A mutual fund is a pool of money collected from numerous investors. A professional fund manager
manages this money. A trust collects the money from investors sharing a common investment objective.
The same is further invested into bonds, equities, other securities, and/or money market instruments.
Units representing part of the holdings of the mutual fund are held by each investor. The gains which
are generated from this collective investment are distributed proportionally amongst the various
investors, after deduction of expenses, calculated using the scheme’s NAV or the Net Asset Value.

Drawbacks of Mutual Funds for HNI Investors

1. Behavioral Flows

This is among the major drawback of mutual funds. As the retail investors have started investing in the
mutual funds, these are highly impacted by the behavioral flows of the uninformed investors. The ‘Loss
Aversion Bias’ highly impacts these new investors. They act in haste to prevent short term losses and
withdraw the money when the market falls. Exiting the investment at this stage, when conversely, the
informed HNI investors add more funds, leads to losses for the entire pool. Hence, the strategy of the
HNI investors fails to play out. Over longer timeframes, the stock market tends to recover eventually but
the reduction in the funds does not allow the fund manager to make investment when opportunity
arises.

Additionally, the retail investors are also affected by the ‘Action Bias’. These investors invest for short
term gains. The action bias forces them to constantly tweak their portfolio by taking profits too
frequently and redeeming for short term goal fulfillment. On the other hand, HNIs tend to invest for a
longer term but are unable to make equivalent profits due to such behavioral flows.

2. Restriction on Types of stocks

To protect the interests of the retail investors, broad investment guidelines have been laid down by SEBI
for mutual fund investment. This ensures a minimum level of diversification in the portfolio and
minimizes risks for the investors. Clear definition of what constitutes the small, mid and large cap stocks
has been given post re-categorization of the schemes. Also, the portion of the fund’s assets that can be
invested in these categories has been specified by SEBI. This restricts the judgment of the fund manager.
Also, while it makes the investment less risky, it also eliminates situation where for instance, a large-cap
fund may take exposure over mid-cap stocks to give a boost to returns.

3. Allocation per stock/ per sector

As per the directions given by SEBI, in case of unrated debt instruments, a mutual fund manager is not
allowed to invest more than 10% of the portfolio in a single issuer. Hence, while a standalone investor
may reap higher gains by investing more in a stock that grows over time, a mutual fund is limited by 10%
of the portfolio amount. There are caps on the expose that can be taken by a scheme to a particular
group, sector or security. More than 10% of a particular stock cannot be held by a scheme’s portfolio in
case of equity funds.

4. Dilution

While diversification in a mutual fund investment is beneficial as it averages the risks of loss, the same
tends to dilute profits for the investors. A minimum level of diversification has been set by SEBI, as
stated above, which lowers the risks and the gains as well.

Investment is all about making informed choices. The mutual funds have grown rapidly over the past
five years, which has given good returns. Even today, they are a good investment option for the retail
investors. Yet, given the scenario, these drawbacks of mutual funds are not in the best interest of HNI
investors. Hence, they must look at alternate investments like PMS.

Keyword Density

Drawbacks of mutual funds – 1.66%

Mutual fund – 3.87%

Mutual fund investment – 1.11%