I have 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, energy funds, small companies funds, emerging marketing funds, and so on and so forth. Per se, there?s nothing wrong with the idea of specialised funds. I?m sure many of these will be well-run and provide great returns to their investors. There?s no harm in a small percentage of one?s investments in 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 job 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. Does this sound like a good deal to you? It doesn?t sound like one to me.
By investing in specialised funds, investors are losing out on what I believe is the major advantage of investing in mutual funds. And yet, if you look at the hype being rolled out by the fund companies? marketing machinery, you?d think that specialised funds were the only things that make sense. And the reason is that for the marketing machinery, this strategy does make sense. 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. Either you can differentiate by the actual track record of the fund manager, the fund company, and the fund. Or you can invent meaningless features and specialisations. Guess which one 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.
The author is CEO, Value Research
