Author: shyam

More is less

According to SEBI regulations, mutual funds should disclose their portfolios at the end of every month. Typically, by the 10th of every month, the previous month’s portfolio is made publicly available. Investors and analysts use these disclosures to guide their allocation strategies. But should they?

First, these disclosures are mere snapshots of an actively managed portfolio. A fund’s performance could have nothing to do with the portfolio disclosed at the end of the month. The portfolio hides trading gains (or losses) and this skews the correlation between NAV returns and portfolio returns.

Second, since the fund manager knows that investors will be scrutinizing the disclosures, he may engage in window-dressing. He might temporarily swap out securities that are perceived as “risky” by investors with “good-looking” alternatives.

Third, the source of returns may not be the visible portfolio. For example, if the fund holds hedges or has holdings in foreign stocks, then NAV returns could be driven by deltas or currency depreciation rather than the visible part of the portfolio.

Portfolio Trajectory

With the above caveats in mind, we present the ability to browse through historical portfolios through our FundCompare tool. We have uploaded portfolios of over 200 equity funds for the last two years and given you easy access to all of them.

Collecting this information was a painstaking process. Every fund has its own format of disclosing this information – some in excel sheets, some in pdfs, etc. And none of them give you the ticker, we had to use Natural Language Processing (NLP) techniques to map the names of every line-item to an NSE/BSE ticker. If you find any bugs or you want us to add a fund to our coverage, please mention them in the comments section of the FundCompare tool.

The proposal

The Securities and Exchange Board of India (Sebi) is checking if ecommerce portals can be used to sell mutual funds. (ET)

Let’s see what the pros and cons are.

Pro #1: Increased Reach

Do you know what the fastest growing region for ecommerce sales are? Tier 2 and Tier 3 cities. (DNA)

The biggest problem with the distributor (IFA) driven model is that it has high fixed costs. IFAs rather have a small number of big clients than a large number of small clients. By pushing funds through ecommerce portals, which have typically traded negative margins for increased market share in the past, the number of small-ticket mutual fund investors could potentially explode.

Pro #2: Lower costs for AMCs

In the distributor driven model, the producer (asset management companies) bear a large portion of the marketing costs. For example, if HDFC is coming out with a new fund, they will take out newspaper and TV ads, send out fliers, etc. But ecommerce portals pay for their own marketing. Smaller brands (AMCs,) who cannot match the big guys in their marketing budgets might benefit disproportionately. I recently went shopping for some RAM for the laptop. I ended up buying ‘Dolgix’, a brand that I had never hear of before from some vendor in Nehru Place, because the specs matched and there’s a 7-day return policy in case it turned out to be a turd. Expect similar buying patterns to emerge when people go fund shopping.

Pro #3: More business to advisers

There are 42 AMCs in India with a mind-boggling number of schemes that have their own toggles and switches. There is a huge overlap between funds and schemes, mostly because of marketing reasons. With more investors being made aware of these choices, a significant portion of them will look for advice. If not on the first buy, then definitely on their next. Tech savvy IFAs/IAs will benefit for the increased mind-share.

Pro #4: Online-only Funds

We are yet to see a “direct-only” AMC. But if the digital channel finds wide adoption, then it is not a stretch to see a whole crop of online-only AMCs with a significant cost advantage over traditional AMCs spring up.

Cons #1: Herding

Unsophisticated investors herd into investments that have strong recent performance. Self-directed first-time investors might end up with lower long-term returns because of this. Which could lead them to abandon mutual funds subsequently. Also, AMCs might experience higher volatility in fund-flows as investors switch to “hot” funds.

Conclusion

Allowing ecommerce portals to distribute funds makes sense. The pros outweigh the cons.

Top 10 funds over the years

Based on our RS-Spead metric, we ranked mutual funds based on their relative outperformance vs. CNX 500 over a one year period. See if you can find a pattern here.

*We have stared the fund that made it to the top-10 list the previous year.

Thoughts

There is no unqualified “best” fund out there. Among the top 5 fund houses (HDFC, ICICI Pru, Birla Sun Life, Reliance and UTI,) all funds within a class (large-cap, mid-cap, Top-100, etc…) will eventually put in roughly the same performance numbers. They will all revert to mean. Investors are probably better served with a negative list of funds and fund houses to avoid than a list of the “best” funds.