Sunday, August 20, 2006

Mutual Fund Investments and the Sensex

Very often we see and hear the statutory byline .. Mutual Fund investments are subject to market risks ...

Its only a half-truth (the Ardh Satya) .. Mutual Fund investments are NOT subject to market risks ... they are subject to FUND MANAGER inadequacies !!!

They tell us that the Mutual Fund (MF) Net Asset Values (NAVs) will go up along with the markets (Sensex/Nifty) and come down also alongwith the markets .. but that these are relatively safer and one should invest in these rather than equities .. yeah, sure !

Yeah ?? Sure ??

Consider this ...the BSE Sensex made crazy highs in the month of April-May 2006, before the infamous "correction" took place. From dizzy heights of 12,500+ the Sensex crashed to 8,500 levels .. and now has crawled its way back up to 11,500 levels.

To be more precise, here's what happened over the past 4 months...
On April 18th 2006, the Sensex closed at 11,821.57
On August 18th 2006, the Sensex closed at 11,465.72

This is now, down just 3% from that April 18th closing.

So if I'm not mistaken, what these MF guys were (are?) trying to tell us is that if anyone has put money in MFs, well .. the value of that investment is also going to come down ... ok .. fair enough .. caveat emptor .. we've been warned !

The flip side being that since these MFs have well-educated and well-trained fund managers with loads of money (yours and mine!) at their disposal, in addition to a battery of experts working for them round the clock, our money is better off handled by them.

Cool, sounds very good.

Now, any "expert" will tell you that its next to impossible to "time the market" .. but it figures that if one has given himself (or herself) up to a multi-crore MF (Reliance, ICICI and SBI are by no mean small) they are probably better equipped to try to time the market, than say .... you or me !

Ok .. we're still cool ..

But, now brace yourselves for the crunch...

THE PROOF OF THE PUDDING
Given below is a brief summary of the performance of a few top ranking MFs (rankings given by www.moneycontrol.com in parentheses).

The first figure is the NAV on April 18th and then the NAV on August 18th ... and the difference.
Magnum Tax Gain (No.1) .... 47.98 .... 44.39 .... -7.5%
Magnum Global (No.2) .... 37.47 ... 33.89 .... -9.6%
Magnum Balanced (No.2) .... 32.6.3 .... 30.43 .... -6.7%
HDFC Tax Saver (No.3) .... 123.71 .... 140.34 .... -11.9%
Magnum Contra (No.3) .... 34.33 .... 30.91 .... -10%
Kotak Balance (No.4) ... 23.736 .... 22.17 .... -6.6%
Birla Buy India (No.4) ..... 17.66 .... 16.55 .... -6.3%
Magnum Multiplier Plus (No.4) .... 44.24 .... 40.62 .... -8.2%

I bet you're surprised, eh ?

If the Sensex is now, down by only 3%, how come the MFs are still down by 6-10% ???

Incidentally, if I'm not mistaken, none of these schemes had declared any dividends during this period either ! Atleast if one would have invested in equity directly, he would have received some dividends .. or some rights .. and maybe, even a bonus ! But here, zilch !

If you're a fund manager, you've already set sail with a barrage of reasons .. ok .. may be you DO have a reason .. but hey, isn't there a sucker born every minute !

Now, here's my question: If MFs are subject to market risks, then why don't they recover equally well ?

Investors in MFs are generally for retired persons with a low appetite for risk and the above data bares the great fraud being committed to them.

SEBI & AMFI should seriously consider taking strict action against MFs who are not able to "manage" OUR "funds."

SOLUTION
In case you are really looking for increasing the value of your investment, over the long term, you should invest half the money in front-line (Sensex/Nifty) stocks and the other half in Nifty Junior stocks .. and forget about it for 4-5 years. You WILL make money !

But I also have a suggestion for anyone trying to invest in Mutual Funds for the long term. Be your own funds manager. It's simple ! Here's what you do...
1. Open an online Demat account that allows you to purchase MFs online (www.icicidirect.com is a good one).
2. Identify which MFs are the ones you want to invest in (Visit www.valueresearchonline.com and www.moneycontrol.com for a good run down on these).
3. Decide how much you would like to invest in a calendar year, in each MF. Divide that amount by 52 and every week invest these amounts in the MF of your choice.

This is my own variant of the Systematic Investment Plan (SIP). The upside being that SIP does this once a month on a specific date - but by doing this 4 times a month .. you can get an even better "average" cost of purchase.

Unless, of course, you're just looking for someone to place the blame on !

Well ... and that's how I feel ...

2 comments:

Anonymous said...

I have already done the same for my funds.Actually Just started with this idea 1 month back.So what are the type of returns you see with this.

Anjali said...

Your insight is much appreciated .. thankfully it made sense to a newbie/layman like myself who feels quite daunted by everything at the mo .. I would definately like to try and learn more before making a final decision .. I was looking at straightforward MF's, but now want to consider and study your option of 'stocks' more seriously first .. but need some clarification.

Questions

1. Quote: "......you should invest half the money in frontline (Sensex/Nifty) stocks and the other half in Nifty Junior stocks........and forget about it for 4-5 years. You WILL make money!...."

Can a newbie like myself really learn how to do this, or does one need a vast experience of the industry first?.. I mean it's only been in the last 2 weeks that I've opened the door to alternative investment and have just started to get my head around what MF's are .. and regarding the stock market I'm still pretty much a blank .. For eg. to give you a gauge of my ignorance, I'm not even clear what Nifty and Nifty Junior is ! .. Are there any websites/forums you could recommend that would be a good read for a beginner, or is the "stock option' a waste of time for such a beginner ?

2. I was told that Mf's were miles safer than investing in stocks directly .. and "given' that I can learn about stocks/Nifty etc then my biggest question is how does someone as new to the game as myself, choose the RIGHT stocks for a long term investment ? .. Is it really as simple as it sounds ?

3.Quote: "..........also have a suggestion for anyone trying to invest in MF's for the long term. Be your own Funds Manager ....."

I don't understand what you mean about be your own MF Manager. For eg. Whats the difference if I fill a form for a SBI Magnum Mutual Fund and submit it to the SBI MF office, or do it through a dermat account? .. I thought that either way I'll be getting the same SBI Magnum Fund? .. Have a missed something ?

4. Quote: " If you're a fund manager, you've already set sail with a barrage of reasons .. ok .. may be you DO have a reason .. but hey, isn't there a sucker born every minute !"

I have tried asking one company about this: ICICI Prudential re their 'Life time Super' .. as I read in Outlook Money dated 2006 article by Sree Ram R. .. that it underperformed for the last 2 years .. ICICI P either deny underperforming (perhaps it's not the case in 2006 or after etc) .. or they say it's because they are playing really safe .. Or that Money control have a vested interest therefore give a negative report ....? ..?..?

What sort of excuses do the MF's give for this underperformance ? .. I want to arm myself better for when I do take it up with them.

Also please explain WHY you think they underperform ? .. Is it on purpose ? .. How do they benefit? .. then the 'fraud' will become clear to me.


My Needs and Situation

I'm a PIO (Persons of Indian Origin)and have been residing in India fulltime for the last 9 years, (I have left London for good).
I'm aged 37 have been doing free voluntary work here since.
I support myself by a regular guaranteed monthly income from my savings which are in Bank FD's.
I have a few extra lac to invest in MF's or stocks.
I have no other income now or till death, as I have commited my life to this voluntary work.
Therefore, I have to be extremely cautious re investment and so am very much like a pensioner in terms of risk.

Much obliged............. Anjali

email id: sritrinity@yahoo.co.uk