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Is your mutual fund outperforming sensex?

Sunday, November 25, 2007 Leave a comment Go to comments

Read this story to understand how mutual funds are hugely under performing the sensex. Sensex has created 5 times more wealth than the MFs. I feel that this shall trend shall continue as “buy and hold” strategies on some stocks might no longer work. Do you know that Infosys was one of most over owned stock in MF portfolios?

Mutual funds have long stopped innovating because they were getting easy money into the funds. This is good for guys like us who are individual investors and have more flexibility.

Categories: News Analysis, NIFTY Strategy
  1. sagecapital
    Monday, November 26, 2007 at 1:26 pm
    Reply

    Krishna- you ca buy any of the index funds but looks like many such index funds are deviating from their mandates. Otherwise how can one explain such under performance by index funds?
    Looks like many went underweight on Reliance Industries and held a lot of funds in cash!

  2. Krishna Kumar
    Monday, November 26, 2007 at 1:07 pm
    Reply

    Hello,

    I am curious to know if there are any funds that reflect Sensex and nothing more or less. Just the 30 stocks in exactly same proportion. No innovation required!

    Actually, I was thinking of creating a simple portfolio with stocks (exactly same as Sensex in same proportion). If I look back, I feel I would have been better-off just following this 🙂 If Sensex is expected to touch 40,000 in the next two years… may still be a good bet

    Krishna

  3. Hari Swaminathan
    Monday, November 26, 2007 at 6:07 am
    Reply

    I think you’re right, only 30% or perhaps less MFs do better than the indices. The funds that I named are all in that 30%. In fact, 30% maybe too high a number considering how many funds there are. I periodically perform an analysis on MFs, so I can allocate or re-allocate my MF quota of investible money. I find that I can at most choose about 10 to 15 funds that pass the criteria of beating index funds and then of course you also have to ask if these funds will be “in flavor” going forward for at least 1 year.

    I also agree there are all kinds of “exotic” MFs being dreamed up today. AMCs are getting drunk on Entry loads and Fund fees. In fact, if you look at the portfolio companies of many of these MFs, they mirror 75 to 80% of some other existing MF by the same AMC. In fact, many AMCs have the same Fund manager for several MFs. I think this is totally unacceptable, but it happens in India a lot. MFs have caught the attention of the mass market, and AMCs are milking that opportunity..

    Hari –

  4. sagecapital
    Sunday, November 25, 2007 at 10:24 pm
    Reply

    Hari- You are right. May be they should be talking about median returns from index funds!But if the highest return fund just manged to keep pace with the index,not too sure how the median return of these funds look like.
    I was also reading somewhere that only 30% of all diversified funds have been able to beat the index in the last 12 months. That number might fall further in the coming quarters.
    These days MFs are spending more money on marketing and distribution rather than on enhancing returns.
    All kinds of new funds are being launched with “different names” which sound cool.Essentially it is the same old wine in a new bottle!And in the name of innovation, they are offering many “Asia” funds which want to invest in Asian economies! I somehow don’t find it logical as to how will the exposure to these funds provide “diversification” to my portfolio!At the same time economies are at greater risk than India because of slowdown in the US economy.
    I’d rather ask someone to invest in commodities and currencies to seek portfolio diversification rather than invest in Japanese or Korean equities!
    Anyways it shall be interesting to see how MFs perform when average returns from Indian markets tone down to 15% per annum in the coming years and the Asian economies take a knock on account of US slowdown.

  5. Hari Swaminathan
    Sunday, November 25, 2007 at 10:01 pm
    Reply

    In Point # 2 above, the return is actually (311 -100) = 211%. This makes sense since its an Index fund, and the indices returned 213%. Index funds have to match the Indices (barring minor differences in fund manager performances), otherwise the fund is deviating from its “index” mandate. That reporter needs to be fired for his gross incompetence.

  6. Hari Swaminathan
    Sunday, November 25, 2007 at 9:48 pm
    Reply

    There are 2 problems here.

    1) The article compares Sensex and Nifty to “Index” funds, and its true that these Index-based MFs may have underperformed the indices. But the argument does not hold good over the entire universe of MFs. I can tell you from my experience with generic MFs that they have far outperformed the indices. Some funds I can name that have returned 300 to 400% over 3 years are Reliance Diversified Power, DSPML Tiger, UTI Infra, Magnum Contra, JM Basic. There are more funds as well.

    2) The article is also not accurate. It quotes the best index fund Tata Nifty return at 46%, and misinforms the reader that this 46% is the return over 3 years. IT IS 46% CAGR (or per annum compounded). If you had Rs 100 at the beginning of 3 years, this works out to (100 x 1.46 x 1.46 x 1.46) = 311%

    There is a legitimate place for MFs as an asset class, in an investor’s portfolio, provided chosen properly, and entered at the right time. Having said that, I agree that if an investor were to choose to enter today, MFs will have a very tough time matching these returns. Investors today have better opportunities to trade the market judiciously than what MFs can offer in the next 2 to 3 years.

    Hari

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