MUTUAL FUND- DEALING WITH CHOICES

As of 27^th May 27^th, 2014 these were the five year returns in a few select categories as classified by a leading mutual fund data analytics company:

  Category                                                                                            Best             Worst

Equity: Pharma	27.33	22.18
Equity: Technology	29.56	14.79
Equity: Mid & Small Cap	27.21	5.31
Equity: Banking	21.05	9.56
Equity: Multi Cap	19.14	9.46
Equity: Tax Planning	21.09	2.84
Equity: Large & Mid Cap	20.43	3.18
Hybrid: Equity-oriented	21.23	4.17
Equity: Large Cap	19.29	6.87
Gold: Funds	12.37	11.8

 (Returns are in annualised percentages)

The Sensex Return for the corresponding period was 11.71% p.a. and for Nifty it was 11.34% p.a..

So, unless you were in Pharma or Technology, there is a fair chance that you could have got returns that were poorer than the index. I cannot simply understand the divergence in returns that ranges between 2.84% p.a. and 21.09% p.a when the index was delivering nearly 12% returns.

So, there is no guarantee that the savings your plan will deliver the way your financial planner has promised. If he has chosen the fund that was the worst, you would have been better off choosing a bank fixed deposit or a tax free bond.

So mutual funds per se are not great things that can give you returns that are in line with the stock market returns. A few manage to beat the index and there is no guarantee that the fund which delivered the best in the last five years will be the best in the next five years.

For example, from the above, if I take a category ‘Large and Midcap’ (which is perhaps the ideal bucket) the 20.43 return was given by Quantum Long Term Equity Fund” and the return of 3.18% was from JM Core 11 Fund. HDFC Growth/ HDFC Equity that have large investor moneys gave a return of 15.17 /18.90 percent per annum.  So whilst most money got an above average return, less than 2% got anywhere near the best return.

However, it is interesting to note that more than half the funds got above market returns. But a significant quantum got below market returns.

Thus, choosing a mutual fund is a matter of chance. People, who say skill or science, are going on the basis of past record to a large extent. And the portfolio disclosure, the churning is not transparent enough to take a call on the future. No one is giving a view on a mutual fund scheme based on its likely performance. Surely, that is what we need. Not rankings based on past. You say it is not possible? It is possible. No one does it because no one wants to antagonise someone else.

Mutual funds have to disclose their entire portfolio at anytime on a real time basis or a lag of say, a week or so. Only then can someone take a view on a fund. The quarterly or monthly disclosure is not great, but even with that data some forward looking analyses can be made. No one seems to be interested in doing it.

So, in the absence of a forward looking tool, the only way to choose a fund is to look at some common sense lines:

i)     reputation of the Fund House- trust, longevity and reputation;

ii)   Continuity of Fund Manager- How long has the same fund manager been the scheme manager? The longer the better;

iii) Size- A decent size, say at least 1000 crores is good. Very small sizes create track records  with portfolios that cannot be scaled up;

iv)                 A past ranking of the scheme ( take one year, three years, five years and ten years) within the top ten ;

v)                  Have a look at expense ratios- the lower the better.

One thing that bothers me is that some fund managers names appear across multiple schemes with different objectives. It seems that there is a dearth of fund managers and if one guy is managing too many schemes, there will be some stock bias which creeps in.

And the best route to be in mutual fund is through the SIP route. Do not time and put in lumpsum monies in one go. SIP returns tend to be generally higher than the point to point return over time.