Category: Investing Insight

Investing insight to make you a better investor.

Selling Mutual Funds through e-Commerce Portals

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.

Mutual Fund Top 10 Lists

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.

Mutual Fund Alpha Charts

Charting Alpha

Most mutual fund investors chase recent performance. However, experience shows that alpha, or out-performance, is rarely sustained in the fund universe. To visualize how alpha fluctuates across different time-periods, we extended the relative strength spread notion of stocks to mutual funds. By normalizing performance across multiple funds vs. a single benchmark, the CNX 500 index, we can get a sense for how stable the alpha is.

Exhibits

Have a look at the RS-Spread chart of the HDFC Growth Fund:
hdfc.growth.mf.relstrength

Notice how 1-year alpha was below zero between Oct’2012 and May’2014 and is now back below zero again. This should indicate that whatever strategy the fund is employing is not that great in generating sustainable alpha. Now compare that to the Birla Sun Life Frontline Equity Fund:
birla.frontline.mf.relstrength

Notice how the fund has managed to outperform over the last 5-years. Here’s the MNC fund’s RS-Spread chart:

Birla.MNC.mf.relstrength

The FundCompare Tool

We update these charts daily for more than 100 funds. You can access them through our FundCompare tool. If you have any questions, give us a call or Whatsapp us!

Relative Strength Spread Charts

What is Relative Strength Spread?

Relative Strength Spread of a stock is the relative cumulative performance of the stock vs. the CNX 500 index over the same period.

We had discussed how the Relative Strength Spread Index is a coincident indicator of momentum earlier. With a new update, we are publishing charts of relative strengths of individual stocks over multiple lookback periods. This can be found under the ‘Quant’ tab of the equity pages.

How to interpret Relative Strength Spread?

Relative Strength Spread is a measure of historical out-performance. By observing the RS-Spread over different lookback periods, investors can get a sense of future direction of momentum. For example, if you look at the RS-Spread of TATAMOTORS, you can observe how the stock lagged the broad market for the better part of the year before suddenly turning around in the last few days.

TATAMOTORS.relstrength

Now contrast that to BHARATFORG:

BHARATFORG.relstrength

Unlike a price or return chart that looks at an individual stock, the RS-Spread chart incorporates information from a broad set of stocks and compares it to the market average. It has more information content than the ‘Relative Momentum’ chart as well.

A quick note on bonds

We compared the total returns from the short-end of the curve to Nifty. Here’s what we found:

  1. IRR over the last 10 years for bonds was 6.53%.
  2. Biggest drawdown was -5.04%.
  3. Only two years of negative correlation with NIFTY.

Annual returns:
nifty.vs.0-5.bonds

Equity curve:
0-5's vs. NIFTY returns

Drawdowns:
0-5s.NIFTY.drawdowns

The right place for bonds in a portfolio is for regular income. From a returns perspective, you are better off investing in equities. Bonds are no less volatile when compared to the returns they give, and are mostly correlated with equity volatility.