Some thoughts about Mutual Funds in India
The 'Responsible Investor' is generally skeptical of investing in Mutual Funds, whether in India or elsewhere in the world.
The aim of any diligent investor would be to outperform market averages over the long term. Mutual Funds are for want of a better term more like investment herds and usually track mass investor psychology and cannot consistently take decision independent of underlying market conditions. For instance in US it is common for more than 90% of the MF's to underperform the market average.
While it can be argued that this is not the case with Indian MF's so far, it could be just a case of the law of averages not yet catching up with our MF's.
It can be safely predicted that given adequate time, Indian MF's will equal or surpass US MF's in underperformance
Most of the impressions about Indian MF's perfomance are based on recent history and the bull market of the last 5 years has a lot to do with that
There is one aspect in which Indian MF's are probably far worse than US MF's and that is expense ratio. The average expense ratio of Indian MF (If we believe Money Life) is 2.5% which is almost twice that of US.
Then there are a lot of hidden and non-transparent charges which are calculated as part of NAV in India, which cause the net return to the MF investor to fall further and cause a lot of damage to his/her long term return. I suppose this is case with US as well, but there appears to be better disclosure in US. These are the silent killers for MF investors
In India, there are quasi-MF instruments like Unit Linked Insurance Plans (ULIP) and MF's bundled with Insuarance schemes which are more detrimental to the investing objectives than vanilla MF's. Bundling with Insurance gives an impression of a fixed income instrument to many consumers of this kind of products
The fact there are so many Insurance companies that are pitching these kinds of products is in itself a red flag. In India, apparently it is easier to sell an MF as against individual stocks. There is a strong probability of these gaining enough critical mass to eventually cause deterioration of investment results for the consumers of these financial products.
Look hard before investing in any kind of MF
The aim of any diligent investor would be to outperform market averages over the long term. Mutual Funds are for want of a better term more like investment herds and usually track mass investor psychology and cannot consistently take decision independent of underlying market conditions. For instance in US it is common for more than 90% of the MF's to underperform the market average.
While it can be argued that this is not the case with Indian MF's so far, it could be just a case of the law of averages not yet catching up with our MF's.
It can be safely predicted that given adequate time, Indian MF's will equal or surpass US MF's in underperformance
Most of the impressions about Indian MF's perfomance are based on recent history and the bull market of the last 5 years has a lot to do with that
There is one aspect in which Indian MF's are probably far worse than US MF's and that is expense ratio. The average expense ratio of Indian MF (If we believe Money Life) is 2.5% which is almost twice that of US.
Then there are a lot of hidden and non-transparent charges which are calculated as part of NAV in India, which cause the net return to the MF investor to fall further and cause a lot of damage to his/her long term return. I suppose this is case with US as well, but there appears to be better disclosure in US. These are the silent killers for MF investors
In India, there are quasi-MF instruments like Unit Linked Insurance Plans (ULIP) and MF's bundled with Insuarance schemes which are more detrimental to the investing objectives than vanilla MF's. Bundling with Insurance gives an impression of a fixed income instrument to many consumers of this kind of products
The fact there are so many Insurance companies that are pitching these kinds of products is in itself a red flag. In India, apparently it is easier to sell an MF as against individual stocks. There is a strong probability of these gaining enough critical mass to eventually cause deterioration of investment results for the consumers of these financial products.
Look hard before investing in any kind of MF
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