In MFs Vanilla is the Best Flavour

 

 

Dhirendra Kumar,

Mutual Fund Analyst and CEO,

Value Research India Pvt. Ltd.

I’ve always thought that investing in mutual funds was about getting a decent return on one’s investment without having to go through the complexity of investment management oneself. You write a cheque and that’s that. After that, which sector or industry is doing well or badly and what to move in or out of is no longer your headache. All that is the fund manager’s problem. In fact, this offloading of decisions to a professional fund manager is the whole point of investing in a mutual fund. However, when I look at the kind of funds that are being offered to the public and the kind that the public is buying, I see a very different picture.

During November and December so far, 11 new equity mutual funds have been offered to the public. Out of these one-exactly one-is of the type where the fund manager will be taking the entire gamut of investing decisions. In all others, you-the investor-will have to lend him a helping hand. Let me explain. Almost all funds that are launched nowadays are specialised in some way. There are real estate funds (ING Global Real Estate Fund), infrastructure funds (Kotak Indo World Infrastructure,), energy funds (Sundaram BNP Paribas Energy Opportunities), small companies funds (JP Morgan India Smaller Companies Fund), emerging marketing funds (Franklin Asian Equity Fund), and so on and so forth. Per se, there’s nothing wrong with the idea of specialised funds. I am sure many of these will be well-run and provide great returns to their investors. I also accept that there’s no harm in a small percentage of one’s investments in such specialised funds.

However, when almost the entire market for mutual funds gets converted to specialised funds, then there’s a problem, because deciding between these funds is a herculean task by itself. When you invest in a well-run generic equity fund that can invest in any kind of company, then it’s the fund manager who decides what type of sector, industry or size of company to invest in. It’s his job to analyse trends and figure out how much of your money needs to be in technology or oil companies or infrastructure or real estate or whatever. But when you invest in specialised funds, then that analysis and that decision has to be made by you. You must take a call on what percentage of your investments to put in what industry and when to put it in and when to pull it out and switch to some other industry or type of company. (And just to remind you of what I had wrote earlier; I believe-that businesses routinely hide or obscure information that they are required to reveal. Companies are supposed to reveal a great deal of information but the sheer quantity makes it easy to hide or disguise facts. Even if the information is not actively obscured, its sheer mass means that selecting what is relevant is a task.) Now, does this sound like a good deal to you? At least, it doesn’t sound like one to me.

By investing in such specialised funds investors are losing out on what I believe is the major advantages of investing in mutual funds. And yet if you look at the hype being rolled out by the fund companies’ marketing machinery, you would think that these specialised funds were the only things that make sense. And the reason is that for that for the marketing machinery, this strategy does make sense.

Talking about the reason for the same, all marketing people know that unless you differentiate your product from the competitors, you’re going to have a hard time selling it. Now there are two ways of differentiating a fund from its competitors. Either you can differentiate by showcasing the actual track record of the fund manager, the fund company and the fund itself. Or you can invent some meaningless features and specialisations on basis of which you try to sell your product. Now it's a child's play to guess which one of the above two ways is easier to do?

I know it’s hard to avoid something special and choose a simple alternative. But when it comes to mutual funds, Vanilla really is the best flavour.