Mutual Fund Mayhem

Mutual Funds have historically been an relatively safer avenue for the faint hearted who is averse to the kind of risk pure equity brings. But though they have been the choice of investment for the last decade or so for the common investor, the industry is seeing the worst days ever and the most dismal performance recorded till date. Out if the top 55 funds across 11 categories, which means top five funds in each category, 33 funds have given negative returns in the last 1 month and most of these as low as -0.20%. Of the remaining, 17 funds have less that 1% or marginal returns and only the funds in the Gilt Fund category have give returns of 5%+ on an average during the 30 day period. This is not shocking keeping in mind the negative correlation Gilts have with Equity based funds.

Out of the 303 registered Equity Funds (Including tax saving & sector funds), only 10 have positive returns for the last 6 months. That a depressing performance rate of 3% across all existing equity funds.

(Data as per www.mutualfundsindia.com as on 5th November, 2008)

The demand for Mutual Funds is expected to fall by as much as 30% in the next 2 months and 4 out 10 funds will face massive redemption pressure. It might take as long as 2 years or more for the industry to see the kind of buying frenzy it recorded in December 2007.

Mr. Smarty Pants Fund Manager

Mr. Smarty Pants fund manager works hard on analysis and insider information and makes his fund a multi-bagger. A smart Fund Manager is the one who has insider information, contacts and can judge global cues and rides the rise without falling for the pits. A smarter Fund Manager is the one who knows about such a fund manager.

Enter Fund of Funds and you get the best of both worlds. A scheme may say that it is going to mobilize funds and issue units to the investors but investments would be made not in shares in the bourses or in IPOs but in the units of existing mutual fund schemes. This is a variant of diversification.

What does a Fund of Funds manager do? He spots all the Smarty Pants working their ass off and invests in their funds. By putting, say, 10 per cent of the funds each in ten different equity schemes of mutual fund houses one can savour the mixed fruit of the efforts of fund managers belonging to all these ten houses. But the charge against such schemes is that they are too passive, reducing the mutual fund house to the role of a docile intermediary. Whatever be the case, I’m sure the investor won’t complain as long as Fund of Funds keep providing returns the way they have been doing in the past.

(Based on an extract from Baron’s)