It must have been in 1998/9 when I heard about SIP for the first time from Suraj of Franklin Templeton – he now is the boss man in UTI.

A fan of SIP me and many others like me have been espousing the cause of SIP for the past 20 odd years. It is a great product and has done a great job in the wealth creation process.

However, the BFSI always overdoes the good thing. Home loan a great product, but teaser loans, and all such ‘innovations’ – NINJA (No Income, No Job Applicants), securitisation,..are all harmful and did hurt the home loan industry.

Term Insurance – a great product, but Endowment and its cousin ULIP were the bastardization of a good product.

Educational Loans – have dramatically increased the cost of education and the pressure on students.

Are we over doing the SIP?

I am not so sure. I asked India’s biggest fund managers and they said – and I am just repeating “No Subra. Our market cap is much too high and we need not worry’.

Will so much of SIP make a fund manager lazy? “No Subra, we are competing amongst fund managers and we will want to be the best, so we will not become lazy.

Will a FM continue to keep buying the same shit and protect his Nav? “NO Subra when a company produces bad results shares will tank, FM can do nothing. He does not hold enough to protect the NAV.

Will a FM run out of investing ideas? “No Subra that cannot happen because each sector goes through a boom and bust..so when one sector is booming, the FM can always buy some other sector.

Sorry but I have my own views which are slightly different. One has to see the market cap NOT of the whole market but the Universe of shares in which fund managers have significant stake. Which means there is no point in looking at shares like Gillette, PnG, Bosch, MRF, Lakshmi Machine Works, Eicher – the fund manager cannot get in and get out fast in such scrips. So one has to take an intelligent guess about the market cap in which the funds themselves deal.

I was appalled at the bonuses that some of the fund houses have paid out – because the income of the fund houses is booming – given the jump in SIPs. Fund houses have of course reduced the head count – the SIP is selling itself. Sebi says “IAP should not be used for getting new clients – but this is observed MORE in the breach.

So where is all this heading?

I do think all fund schemes that are popular/ very popular like Hdfc Top 2oo, Birla Frontline, Hdfc Prudence, Hdfc Euity, Icici Pru Bal adv fund, I Pru bluechip, Franklin Prima Plus, Reliance, ….will soon have much more money than what they can manage. And all of them have a benchmark index (PMS does not). So they will all do closet Indexing.

Alpha will disappear. Or it will become so insignificant that it will be impossible for the IFA (OR the Robos!) to identify the potential aplha creators. So we will go the American way – index under-performance. When will this happen? circa 2022  I guess.

Will my bluff be called? perhaps yes in 2023 I will accept my defeat if I FIND it EASY to spot the NEXT star.

What’s my escape? I hope to be dead in 7 years time.

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  1. I am waiting for that day when the MFs do index, so that I can move to low cost index funds. Until then MFs are good for me.

  2. “Educational Loans – have dramatically increased the cost of education and the pressure on students.”

    This, This is the same thing happening in the Medical insurance , The nexus between insurance and hospitals and medical industry as skyrocketed the medical costs, It has become unaffordable. When the person really requires the medical insurance(at a ripe age) either his claim gets rejected or he is not eligible for insurance. Who really requires medical insurance when he/she is in 20s or 30s.A common man would love to die on safety of his home rather than hospital in the coming times.

    The heart stent business scam got a major blow this week, I love India. Its a great change for a start.
    http://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/national-pharmaceutical-pricing-authority-slashes-stent-prices-by-up-to-85-per-cent/articleshow/57137874.cms

  3. Do I want MFs to make alpha after 2022 or Subra alive – you are putting us in a tough spot there! Want to have my cake and eat it too 🙂

    One a serious note – I believe you are right as SIP is getting into ‘too good to be true’ category. Should we then get into index investing now or wait for 5 years – ETFs are pathetic now.

  4. Let’s wait for a bear market & see how the money dries up!

    I personally feel most of the people who are investing now are not going to stand when their portfolios decline 20-30%

  5. Its lonely at the top, where fund managers for the fear of loosing thier job/bonus do benchmark cloning to a big chunk of their portfolio. Doesn’t matter if they don’t generate significant alpha but God forbid if they underperform their benchmark, their million dollar bonus is history. You are absolutely right about the large size schemes. See what a significant drop in Pranshant Jain’s HDFC Equity AUM over last few years inspite of rising markets and inspite his justifications about 1) how size of his scheme is so small compared to total market cap:) 2) his permananet slide /ppt of how Indian market has given CAGR of 18% since 1980 (this has been debunked in many articles- becasue of non reliability of index then, non electronic trading, total lack of price discovery mechanism, cartelization by brokers, non participation of institutions like FII during that era. If you look at index return since 1994 (arrival of FII and NSE) return over last 23 years is nothing to write home about.

  6. suresh mohapatra

    Sir,I owe a lot to u as IF learned so many things on personal finance from ur columns,One thing I am not clear how a mutual funds marker capitalisation counted.take for example in franklin prima fund the market cap is 60000 crores whereas the aum is 5000 crores only.I know that the no of shares held by the scheme is multiplied with the CMp of share and NAV is computed thereafter.pl enlighten on this clearly.if that has been already written pl share it again on ur twitter account so that ww will b benefited.

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