Mutual Funds: Look beyond returns performance

Updated: Jan 31, 2020 8:11 AM

Returns performance is an important starting point but other factors like investment process, portfolio characteristics, fund manager’s style and discipline need to be considered

Mutual Funds, LIC, Asset Management Companies, Portfolio Management Service, Nifty, mid cap, Sebi, PMS performanceMany mutual fund managers were comparing their returns with benchmark indices like Nifty but failing to calculate dividend those index stocks gave.

By Dinesh Thakkar

I recently encountered a gentleman who said that a majority of the doctors that he met prefer to invest in mutual funds. He is a LIC agent and was trying to diversify their portfolio stating that some of the money should be kept in debt. He was disappointed because mutual fund agents were stating that the market is good and they can get a return to the tune of 12-18% in a year.

Now, this made me think about all the scheme returns displayed by the Asset Management Companies (AMCs). Scheme return advertisements, also known as performance disclosures, are often standardised through regulation. Investors only look at return numbers and then select mutual fund schemes based on the best returns that are displayed.

Don’t look at just returns

Returns never tell the whole story. They do not even tell half of the story as mutual fund fund managers may advertise the returns in a way they think is best. Another reason for grief is that performance disclosures for Portfolio Management Service (PMS) are currently non-existent. The markets regulator, Securities and Exchange Board of India (Sebi) is trying to step in and recently published draft guidelines for disclosures on PMS performance.

Unregulated fund managers often advertise model performance instead of real performance. They may highlight those performances which look good on a sheet and would not disclose those schemes which may have underperformed or given negative return. They would calculate returns in such a way that beating the benchmark index would look easy.

Many mutual fund managers were comparing their returns with benchmark indices like Nifty but failing to calculate dividend those index stocks gave. So total return (price appreciation plus dividend) is always lower than price return. Thankfully, the markets regulator published amendments to mutual fund performance disclosure standards mandating AMCs to compare their schemes with total return benchmarks.

Look at other factors

Investors need to look at other factors too before deciding on which mutual fund scheme to invest. The advisor will show you the best returns or will push for the scheme where he is getting a maximum commission. Factors such as investment process, fund manager’s style and discipline, portfolio characteristics like how much weightage mid cap/small cap or large cap has also need to be considered.

If we look at mid cap/small-cap performance in the last one year, naturally they have underperformed large-cap so investors would opt for large cap thinking they have given best return. But large-cap has already performed and are looking stretched and expensive so smart money would be flowing into mid-cap and small-cap stocks. Most learning resources on performance reporting are an internet search away. So investors should not blindly invest in a scheme based on return advertisement as the numbers may not be telling the whole story.

The writer is chairman & managing director, Tradebulls Securities

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