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Mutual fund: Which one is best !

     A few weeks ago, I was reading a research report on the mutual fund industry, uploaded by one of the best brokers, Motilal Oswal. Though I am not a big fan of mutual funds, as I am in the same industry, sometimes I read some reports. I have come to know that the best performing fund in a particular year will not be on top in the next 3 to 5 years. This is the reality of the Indian fund industry.

    If we look at the history of the Indian mutual fund industry, the best performing fund in 2009–11 was ranked 162nd in 2012–14. The best performance in 2010–12 was 123rd place in 2013–15. The best performance in 2011-13 was 172nd rank in 2014- 16. If we see the performance of the funds, it will be clear that the top 10 funds of a particular year will not be in the top 50 in the next 2-3 years. Now the question is: why does this happen?

    It is human nature for everyone to want to be with the best. So, when we have lots of options in the mutual fund industry, we will always choose the best-performing one just by looking at the history of the fund. We made a mistake here, and we will become trapped in that fund. After looking at lots of reports and lectures by various fund managers, I came to the conclusion that it’s all about ALLOCATION. A special thanks to the director of o3 capital, Mr. E. A. Sundaram, for explaining this topic so well to people like me.

    Yes, it’s all about the allocation of the funds. The stock market is all about cyclic businesses. One group of stocks does well in a particular period, and another one does well in the next round. If we see Indian history from 1990-1992, mainly the cement boom, 1997-2003 IT boom, 2004-2007 banking and NBFC boom, and 2008- 2013 real estate boom, If we see closely every time a new theme does well. So, we should be very careful when choosing the best fund for us. Basically, it is advisable to take help from an expert. Other considerations when selecting a fund include fund type, expense ratio (especially important for long-term investors), exit load, risk involved, lock in period, and so on. Now coming to today's topic.

    Assume we are in 2008.We have 2 funds in front of us, A and B having a different allocation. A has an 80% allocation to real estate and B has an 80% allocation to small cap. In 2009 and 2010, we saw a real estate boom in the stock market. Mutual Fund A will perform well. So, the fund will be at the top of the list. So, everyone will go and invest in that fund. But what will happen in 2 years? After two years, the real estate boom has blast and the fund will underperform. But in this period, fund B will perform well in 2013-14. So, it’s all about allocation. We can not say this fund manager is good or this one is bad. Everyone is highly educated and has a deep understanding of the market, but their allocation is different.

    So, what should ordinary people like myself do? I thought, first we have to evaluate ourselves. What is our goal and time for that? If we see that if someone has 100 bucks and needs 120 bucks in the next 6 to 12 months, we cannot invest in the sector that did well in the last 6 to 12 months. Furthermore, we are unable to invest in a fund with a one-year lock-in period. Lots of funds have a high expense ratio. Such a fund is not suitable. Also, some low-cost funds exist. But such funds are very rare in India. As we can see, such a fund exists in the United States. If the fund manager makes a profit for you, he will receive a small commission from us, if his fund does not perform well, he will not receive a commission from us. One such Indian-origin fund manager is Monish Pabrai, who lives in the US and runs such a fund in the US market. In India, we also have some funds like this. Consult your advisor and choose the best fund according to your goals. Indian MF has created wealth for Indians and will go on creating wealth for us. So, choose the best one and invest for the long term. Happy Investing.

-Shaishab

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