Mutual Fund Investing: Unsubstantiated Opinions!

Here is a list of unsubstantiated opinions about mutual fund investing. This is a follow up to the Do's, Don'ts and Myths of mf investing.

1) Date of SIP matters

No it  does not! You can find articles that it does in moneycontrol! Check for yourself. Go to the sip calculator at thefundoo.com and try out different SIP dates for any mutual fund you like. You will notice that the returns vary only the decimal points.

SIP when you like. Just don't SIP all your investible surplus. You will have trouble if you get an unexpected expense. Leave a buffer.

2) Daily SIP is better than Monthly SIP!

No it is not! Check for yourself: Comparing SIP Returns: Monthly vs. Daily vs. Quarterly SIPs

SIPS only average risk of buying. It does not average the risk of holding the corpus. The entire corpus is subject to full market risk whether you buy every day, month, quarter or year!

Just imagine the length of an account statement of a daily SIP!

3) SIPs reduce investment risk!

No they don't! For someone with no access to a lump sum, SIP or periodic investing is the way to go. As mentioned above, SIPs average the entry point of the next installment. Sometimes you buy more units and sometimes less. So there is an averaging here.

SIPs do not average risk of the accumulated corpus. It is subject to full market risk.

SIPs make you invest systematically. That is a fact. SIPs do not make you disciplined though!

4) ELSS funds perform better because of the lock-in

No they do not! There is not proof of that! See: The Myth About ELSS Fund Lock-in 

The trouble with active funds is that they depend way too much on fund management. It is not possible to compare two different fund managements, one with a lock-in and one without.

Some people claim that Quantum tax saver is a clone of Quantum Long term equity. If this is so, and if the notion about ELSS lock-in is true, the tax saver should have beat QLTE. Sorry, ain't so.

5) STPS are better than a lump sum investment

No they are not!  Whether you invest a lump sum in one shot or stagger it over a few months, some months later, it is just the same amount which will be exposed to full marker risk. Not convinced? Check for yourself: Comprehensive Mutual Fund Investment Mode Comparator

6) AUM of a fund affects performance

The jury is out on this one. When it comes to large cap funds, I dont think we have reached AUM sizes where size affects performance. Size affects churning ratio. That much can be said with confidence. See this case study

The trouble is, how do you define performance? With respect to benchmark to with peers? Benchmark is easy, peers is tougher as there are multiple ways to choose peers.

When it comes to mid and small-caps, it is difficult for the fund to remain style pure if the AUM increases. That much we can say from history.  We cant say for sure if this affect performance or not because of notion no 7.

I think we can say this much: beware of over exposure to funds with extremely narrow mandate (Franklin Smaller companies, DSP Microcap etc.). When the going is good, everything will be hunky dory. When the markets tank, the low liquidity of the holdings will bring down the NAV of such funds higher than other categories.

7) Mid and Small-cap funds return more than Large cap funds

Not enough data to state this. We only have 18  mid/small-cap funds which are at least a decade old. Among them, only about 3-5 funds* (eg. ICICI Value discovery, Sundaram Select Mid cap and Reliance Equity Opportunities) have managed to beat large cap funds for lump sum investing. For the SIP route, things are a lot worse!

You can check lump sum returns at VR online or use the SIP calculator at thefundoo to quickly check this for yourself. This is something that I show in the investor workshops. Not all funds in a category are there. Just whatever I could get at thefundoo. This was prepared about 5 months back. I will post an updated version soon.

  • This depends on when you analyze for both SIP and lump sum routes.

So just because I invest in select mid and small cap funds that have beat others, I cannot assume that the category itself will beat large caps. Perhaps that his can occur in future. Until then there is substantiation.

Do not over expose yourself to mid and small caps in the name of aggression. They could scar you permanently. I  prefer a folio with about 70-60% of large caps.  It is certainly possible for a mid and small cap fund to beat large cap fund. To ensure that you have such funds in your folio, you will need to monitor and perhaps switch funds or shift profits from time to time. There is no free lunch.

As regards  notion (6) even a large mid and small cap fund with large cap exposure to maintain liquidity can beat a style pure mid and large cap fund. So no generalizations can be made.

8) Index funds will eventually beat all active funds so invest in them now!

This is not exactly an unsubstantiated notion. It is an irrelevant one for least the next few years.

So you have read the writings of Warren Buffett and John Bogle?! Fantastic. Treat yourself to another book by them from Flipkart and invest in active funds!

The alpha generated post-expenses is to large to be ignored. As of now beating indices is child's play for fund managers. More than 80% of them managed to do this. This is the exact complement of the situation in the US. It will take a while to get there. In the meanwhile I am going to enjoy my alpha, rebalance periodically and lock the gains in my debt holdings.

Ultimately what matters in life is, how much I have? and not how much is my XIRR?!

9) Closed-ended funds will out-perform open-ended funds because of no redemption pressure

We need data over several years to conclude one way or the other. Until then, it is a sales pitch.

10) Time in the market is more important than timing the market

Surprised?! If you make this statement from the point of view of behavioral finance, that is, if you have study the investing habits of say, 100 people, then I will agree, time in the market (those who held on through ups and downs) is better than timing the market (those who tried to make tactical calls).

As an investment strategy, this one is tough to prove or disprove in the Indian context and even in the US  context. For every article that claims one, I can find one that claims the other.  Hence I categorize it as an unsubstantiated notion.

That said, the trouble is, one can always 'find' a strategy with back-testing that would have beat the market in the past. Since there is no guarantee that it will work in future, it is best not to take such strategies too seriously, unsubstantiated or otherwise.

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42 thoughts on “Mutual Fund Investing: Unsubstantiated Opinions!

  1. Kirubakaran

    HI Pattu Sir,

    Really useful article. I have been following you since I joined AIFW. You are the only reason which till now I have not started SIP in mid-cap 🙂 (have only in diversified).
    You have mentioned that there is no more data >10 years for mid caps. But, what about globally. Are mid-caps not better that large/diversified caps in US also.

    Thanks,
    Kirubakaran

    Reply
  2. Kirubakaran

    HI Pattu Sir,

    Really useful article. I have been following you since I joined AIFW. You are the only reason which till now I have not started SIP in mid-cap 🙂 (have only in diversified).
    You have mentioned that there is no more data >10 years for mid caps. But, what about globally. Are mid-caps not better that large/diversified caps in US also.

    Thanks,
    Kirubakaran

    Reply
  3. Deepomouli Ghosh

    In US institutional investers own 70% of the market i.e mutual funds,etfs,pension funds,hence it is difficult to beat the index(s&p 500).In India DII still own less than 10% .Secondly in last 10-15 years three large sectors which today probably make 50% of the index(sensex) were not part of the index or very small presence.They r financial services,IT,infrastructure.Active managers could easily pick this big emerging sectors to generate alpha.Such emergence of new large sectors in future if not impossible ,but chances r very remote.

    Reply
  4. Deepomouli Ghosh

    In US institutional investers own 70% of the market i.e mutual funds,etfs,pension funds,hence it is difficult to beat the index(s&p 500).In India DII still own less than 10% .Secondly in last 10-15 years three large sectors which today probably make 50% of the index(sensex) were not part of the index or very small presence.They r financial services,IT,infrastructure.Active managers could easily pick this big emerging sectors to generate alpha.Such emergence of new large sectors in future if not impossible ,but chances r very remote.

    Reply
  5. Meena Shivram

    Point 7 of the post is very, very true at least in my case. My MF portfolio is 72% Large cap, 20-22% mid-cap and 5-6% small cap and the annualized return over the last 8-10 years is almost 15%.
    Do not be swayed by the short-term fantastic returns of mid-cap and small cap funds

    Reply
  6. Meena Shivram

    Point 7 of the post is very, very true at least in my case. My MF portfolio is 72% Large cap, 20-22% mid-cap and 5-6% small cap and the annualized return over the last 8-10 years is almost 15%.
    Do not be swayed by the short-term fantastic returns of mid-cap and small cap funds

    Reply
  7. Gopinath CJ

    Thanks . Enjoyed it.
    WRT to notion 8 , dont you feel total return index is a better benchmark than price index. How many diversified funds would be still be generating higher alpha is a point to ponder.

    Hope SEBI mandates TRI to be used as benchmark

    Reply
  8. Gopinath CJ

    Thanks . Enjoyed it.
    WRT to notion 8 , dont you feel total return index is a better benchmark than price index. How many diversified funds would be still be generating higher alpha is a point to ponder.

    Hope SEBI mandates TRI to be used as benchmark

    Reply
  9. Sriram Srinivasan

    Great article. It would be great, if you can demystify the following points:

    1. Are Index funds (like Nifty ETF) better than Equity MF's considering the heavy overlapping between the two and the low expense ratio of Index funds? Though it is covered in point#8, please enlighten us more.

    2. Relevance of the Nifty PE (especially greater than 20) for MF Investing or SIP's. Should we invest in MF/SIP when the Nifty PE is greater than 20 or not? Though it is covered in point#10, please enlighten us more.

    Reply
  10. Sriram Srinivasan

    Great article. It would be great, if you can demystify the following points:

    1. Are Index funds (like Nifty ETF) better than Equity MF's considering the heavy overlapping between the two and the low expense ratio of Index funds? Though it is covered in point#8, please enlighten us more.

    2. Relevance of the Nifty PE (especially greater than 20) for MF Investing or SIP's. Should we invest in MF/SIP when the Nifty PE is greater than 20 or not? Though it is covered in point#10, please enlighten us more.

    Reply
  11. Senthil

    Thanks Sir for this post. I was trying to calculate my portfolio composition and a bit confused about Reliance Tax Saver fund and HDFC Balanced fund. As far as I know, I should include these in Large Cap and Mid Cap category, can you confirm if my understanding right?

    Reply
  12. Senthil

    Thanks Sir for this post. I was trying to calculate my portfolio composition and a bit confused about Reliance Tax Saver fund and HDFC Balanced fund. As far as I know, I should include these in Large Cap and Mid Cap category, can you confirm if my understanding right?

    Reply
  13. Pattabiraman Murari

    Thank you.
    1. Even a small change from index composition can result in alpha. So active funds are indeed better as of now
    2. For the long term investor, Nifty PE is not relevant. See my post on this

    Reply
  14. Pattabiraman Murari

    Thank you.
    1. Even a small change from index composition can result in alpha. So active funds are indeed better as of now
    2. For the long term investor, Nifty PE is not relevant. See my post on this

    Reply
  15. sundararajan

    Thank you:
    2. For the long term investor, Nifty PE is not relevant. See my post on this - I read your blog on this as well. But it is hard for me to convince to invest when PE is above 22/23, esp. I am planning to do lump sum.
    The bull run is almost 7 years and expecting a big / decent correction - crossing fingers.

    Reply
      1. sundararajan

        To begin with I never was an active investor in equity markets. Twice burnt fingers (in US) and never went back. In India I did invest some in 2010 , lost in paper, but once recovered I sold it. Big mistake, I didn't know about your site at that time. Once I know about your site, I did open 4 MFs recently based on your MF selection blog and waiting to invest. So to answer your question, I am not waiting for long. And hope the wait won't be longer.
        I would really wish that I would have known your site couple of years back though.
        Thanks,

        Reply
  16. sundararajan

    Thank you:
    2. For the long term investor, Nifty PE is not relevant. See my post on this - I read your blog on this as well. But it is hard for me to convince to invest when PE is above 22/23, esp. I am planning to do lump sum.
    The bull run is almost 7 years and expecting a big / decent correction - crossing fingers.

    Reply
      1. sundararajan

        To begin with I never was an active investor in equity markets. Twice burnt fingers (in US) and never went back. In India I did invest some in 2010 , lost in paper, but once recovered I sold it. Big mistake, I didn't know about your site at that time. Once I know about your site, I did open 4 MFs recently based on your MF selection blog and waiting to invest. So to answer your question, I am not waiting for long. And hope the wait won't be longer.
        I would really wish that I would have known your site couple of years back though.
        Thanks,

        Reply

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