Mama, what are these mutual funds doing?

livemint.com:

sahi is sky high. Money is pouring in. New mutual funds are being launched.

Everything seems perfect. Yet, I believe at least some of what is happening may not work to the advantage of the retail investor. And let me say upfront that some of these ideas are being drowned out by the big returns posted by mutual funds these days.

However, in the medium to long term they could cause quite a bit of damage to retail investors’ portfolios. Here goes… I will start with the obvious – the infatuation with systematic investment plans (SIPs). Recently I wrote, “oftentimes SIPs are nothing but tools to obfuscate the incompetence of the investment advisor/decision maker." I strongly believe this.

Think about it for a moment. SIPs are only a means to an end. They are a way of making an investment, not an investment in themselves.

So before one has an SIP, there needs to be a clear understanding of where the money is being invested and whether it fits into the overall plan. What we do know, or can guesstimate from the data, is that a lot of the money flowing into mutual funds is going into small cap, mid cap and thematic funds. Any experienced person will tell you this does not smell right.

Every time this has happened in the past, investors have gone on to lose some serious money. Yet, the mutual fund industry continues to pat retail investors on their backs for the wonderful SIP numbers. Another big issue I have with SIPs, and which underscores the point about incompetence, is related to the simple idea of “be greedy when others are fearful, and fearful when others are greedy".

The SIP idea is good to instill self-discipline and prevent you from overspending. It’s not necessarily a great idea to make you a successful investor. To do