I have been a big proponent of investing in mutual funds – and I do bet lieve that asset allocation is the MOST important thing. So if a person is wanting to put say Rs. 5000 per month in non debt funds (read balanced and equity) out of Rs. 80,000 investible funds, he should not spend an inordinate amount of time, effort and money in fund selection! If a person is very busy and is not willing to spend time or does not have the willingness to go to an adviser, he is better off indexing. I have been an advocate of good funds (many large cap funds are 70% closet indexing) and SIP method of investing because of the following:
- Lower costs
- Low turnover
- Tax efficiency
- Easy to understand (when market goes down, so will your fund, but it will come back too)
- Transparency (fund manager integrity does not matter, he has to stick to a formula)
- Indifferent to fund manager joining or leaving
- You’re basically guaranteed to beat the majority of other investors over the long-term
- Beating the market is extremely difficult
There are many people out there who think that they can ALWAYS select a Hdfc equity Fund, Franklin Bluechip, Motilal Focused 35, of I Pru Discovery -and these will always beat the index in the immediate future. I am not sure that many of us have the necessary skills to beat the market. Maybe I am just a little worried. On the other hand I can also see the arguments of Prashant Jain, Naren, Sameer Aurora and of course the late Parag Parekh who are not such fans of indexing. In India indexing is difficult also because the index has too much of psu shares – and shares like NTPC have been wealth destroyers in the past decade – especially when you ignore dividends (which the index does). What really worries me are the following:
- Nothing succeeds like success – and the biggest cause of failure too is success. We are collecting about Rs. 300 crores a day in mutual funds – repeat Rs. 300 crores a day – and our markets may not be deep enough to take this kind of investments. WE have only about 125 companies in which to invest. Are we over doing a good thing? Will that alone hurt the returns?
- Investments are subject to market risks:Investments are subject to market risk No clue who has created this feeling among investors that “Sip investing can prevent losses”. Not true at all. The past 3/5 years have not seen too much of high growth – a steady nice growth has made people believe that volatility is a thing of the past. Not true. Not true at all. Investing is risky – direct equity or mutual fund investing are both risky, so be ready for that.
- Weak hands are in the market in a big way: the people buying equity today through mutual funds, ulip, etc. is not a very sophisticated investor. So these weak hands without much hand holding and guidance will bail out in the first signs of trouble. How the fund managers will handle this – a sudden stoppage of flow AND an outflow I have no clue. No matter what fund type is used there will always be some weak investors who will panic and sell or buy at the wrong times. These weak hands could certainly cause volatility as they pile into and out of mutual funds and in a big way! Performance chasing is an old problem which will not go away in a hurry. Volatility could rise as more and more investors buy into ‘SIP’ who have no intention of sticking with them over the long-term.
- Mutual fund industry’ies greed, and concentrating on fund gathering skills and NOT on fund management and client counselling skills is a big cause of worry- all over the world.
- Even Vanguard funds – “Vanguard had around $2 trillion in assets in 2014. They now have double that amount less than three years later. This is an unbelievable achievement and has but it’s right of Bogle to question whether there could be some drawbacks to this massive growth”. Bogle is worried that he is taking in $1 billion a day, and he does not know whether he has the skill to manage when the music stops.
- There are too many funds, but they all invest in the same pool of companies. Said this too many times, not elaborating.
- Most fund managers, trustees, directors, IFA think alike – and we do not have enough contrarian funds in India. Value funds, deep value funds etc. are not concepts very popular and that is also scary.
- Too many indices! Not all index funds track the sensex or nifty. We have junior, senior, we have psu ETF, etc. and creating a portfolio of appropriate index funds could also be a problem for the investor. Is is possible at all?
- If you are a real index fund specialist you should be investing 40% of your money in the American index funds and invest about 2% of your money in an Indian index fund – after all that is the weight according to market cap and MSCI weightage. Here we suffer from ‘Home Country Bias’ – just like Warren Buffett.
- I invest in direct shares, mutual funds, etc. and do not index. I will index in about 10 years time or shift to a bigger mutual fund portfolio soon, but till then I am as much subject to risks as you are.
With all these attendant risks, SIP in equity mutual funds is the way to go. Just telling you that risks in investing can come from anywhere. Mostly from NOT investing.
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