Tag: mutual funds

Predicting is a losers game

We have always maintained that financial prognosticating is harmful to your wealth (see: Prepare – Don’t Predict!) But the lure of prediction is too strong for most investors to ignore.

One recent example is the RBI’s “surprise” rate cut. The media went gaga over it, some pundits did a “I told you so” dance and you probably went and subscribed to a newsletter hoping that you too will be clued in when it happens next. The question is: did you make money?

Positioning your portfolio

Back in September last year, we had pointed out that with the consensus behind RBI rate cuts happening in early 2015, its time to look at long duration bond funds. We had picked the UTI Gilt Advantage fund as our favorite. Between 2014-10-01 and 2015-01-15, UTI – GILT ADVANTAGE has returned a cumulative 11.08% with an IRR of 43.61% vs. CNX NIFTY’s cumulative return of 6.90% and an IRR of 25.85%.

Heck, with the RBI getting serious about trampling down inflation, bonds have been rallying for almost the whole of 2014. Between 2014-01-01 and 2015-01-15, UTI – GILT ADVANTAGE has returned a cumulative 21.90% with an IRR of 21.01% vs. CNX NIFTY’s cumulative return of 34.79% and an IRR of 33.31%.

Good investing is boring

From the Wolf of Wall Street:

The difference between trying to predict market events and positioning your portfolio is in the level of excitement you feel. If you feel very smart while putting your money to work, then you are doing something wrong. If you feel that your investments are a “sure thing”, then you are doing something wrong. Good investing will feel like a boring routine that you keep doing – like flossing your teeth – because it is good for you.

Process vs. Outcome

The end result of process oriented investing is a well positioned portfolio. Investors should give up on trying to figure out what the outcome is going to be. Who knows what the NIFTY IRR is going to be this year? Who knew that plain old bonds will give 20% returns in 2014? What is the one-day price target for anything?

Positioning your portfolio would have allowed you to actually realize the returns that the market gave. The alternative is all Fugazi.

Sometimes, when you are comparing funds from different AMCs, you stumble across a pair of them that are so similar that it becomes a tough call choosing between them. For example, Religare Invesco MID N SMALL CAP Fund and ICICI Prudential Value Discovery Fund are right on top of each other. Try to spot the difference here (Jan-2012 through Jan-2015):

Between 2012-01-02 and 2015-01-07, Religare Invesco MID N SMALL CAP Fund has returned a cumulative 172.88% with an IRR of 39.49% vs. ICICI Prudential Value Discovery Fund’s cumulative return of 170.32% and an IRR of 39.05%.

Their drawdowns are similar as well. And since the NAV is quoted after all expenses, Religare’s expense ratio of 2.97% vs. ICICI’s 2.34% is factored into the returns.

In terms of metrics, Religare is marginally better than ICICI. However, there is nothing there to swing the decision one way or the other.

Run the FundCompare tool and have a look for yourself.

Large-cap stocks

Large-cap stocks are less volatile, ceterus paribus, compared to mid-cap and small-cap stocks. For most first-time investors, the set of Top 100 Funds offers a straight-forward way of adding equity exposure.

Picking the right scheme

As an investor, you should care about two things: risk-adjusted returns and expenses. While the Birla fund gave better returns, it charged a higher fee compared to UTI. But are those higher returns sustainable? Investors should be willing to pay more for more. This is where the FundCompare tool can help.

Birla vs. UTI

Between 2009-07-01 and 2014-12-29, Birla Sun Life Top 100 Fund (Growth Option) has returned a cumulative 155.00% with an IRR of 18.56% vs. UTI TOP 100 Fund (Growth Option)’s cumulative return of 108.35% and an IRR of 14.28%.

On the face of it, Birla’s higher fees seems worth it. But it looks like higher returns came at the expense of higher risk. Birla’s beta (vs. CNX 100) is 0.90761 vs. UTI’s 0.83478 and the latter had deeper drawdowns as well. However, the Sortino Ratio tilts the scale towards Birla’s fund: 0.10762 vs. UTI’s 0.09043.

Conclusion

If you are looking for large-cap exposure then go for Birla Sun Life Top 100 Fund.

The dilemma

Ownership of a diversified, un-correlated set of assets remains the touchstone of a well crafted portfolio. We had discussed how adding bonds to your equity portfolio reduces volatility before. However, comparing correlations between funds within the same asset class is a challenge.

For example, say you already have the Reliance Equity Opportunities Fund in your portfolio and your agent is pitching the Sundaram Select Midcap fund, how do you figure out whether to add to your existing holding of the Reliance fund, add an extra line item or switch to Sundaram?

Comparative returns

Between 2006-04-03 and 2014-12-19, Reliance’s Fund returned a cumulative 280.08% with an IRR of 16.55% vs. Sundaram’s cumulative return of 290.44% and an IRR of 16.91%.

As you can see, the wealth charts are almost on top of each other. The correlation chart confirms it:

Except for a few outliers, they are almost the same fund packaged differently.

Histogram of returns

The FundCompare tool also gives you the histogram of fund returns and the associated skewness. In this case, the Reliance Fund has a skew of -0.15 vs. Sundaram’s +0.22. Given that the average returns are more-or-less the same, this means that Sundaram’s Fund is better. Besides, it also appears that Sundaram’s Fund has a better Sharpe ratio.

Given that Reliance’s Fund has an expense ratio of 2.29% vs. Sundaram’s 2.26%, I would say “switch.”

Compare Your Funds

Before pulling the trigger based on what your fund broker/adviser tells you, get a free quantitative analysis of your options on our FundCompare tool.