Mutual fund investors do not want the truth! They want fantasies of guaranteed returns!

/ M. Pattabiraman / 11 Comments

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pattu author each postBy M. Pattabiraman   

I have been posting one video a day for the last 40 days and YouTube has taught me about what mutual fund investors want during this time that Facebook (Asan Ideas for Wealth) did in years. Mutual funds investors do not want to listen to the truth about the risk associated with their investment in equity funds. They believe or want to believe everything will be okay and if they wait long enough, it guarantees them to good returns.

Naturally I am not referring to every mutual fund investor but a big slice. Forget about rolling lump sum returns, rolling SIP returns, etc. The simple and standard statement,  

Past performance of the schemes is neither an indicator nor a guarantee of future performance, and may not be considered as the basis for future investment decisions – Axis MF

is the first causality. It is like everyone understands what the words stands for but are refusing to understand what they mean. Like smokers who see a cancerous lung in each pack they open, but ignore it. The attitude seems to be: mutual funds are risky, and they do not guarantee returns but if we wait long enough, it guarantees returns!! 

Mutual fund investors do not want the truth! They want fantasies of guaranteed returns!

Good job, dear AMCs, sales guys and the media. The mis-selling is grand and complete. So what happened? Why am I ranting? You Tube happened!

On 13th Dec 2018, I published a video of what I have mentioned here multiple times: mutual funds have no compounding benefit. A CAGR or a XIRR or an annualized return is purely artificial only because we want to measure growth like a fixed deposit. Real growth is a mutual fund is severely volatile and has nothing to do with compounding. Article link: Don’t get fooled: Mutual funds have no compounding benefit!

The number of comments that followed was shocking! I am motivated by what many of them implied.Then I followed it up on Dec 14th with SIPs will not work without timing luck where rolling return SIP data presented to show the risks of an unmanaged SIP. Article link: How the fate of your mutual fund SIPs is decided by “timing luck”

In both videos, I only said (as regular readers will know) that buy and hold in hope is wrong. Manage risk because if you look at the CAGR of past returns, you are forgetting the actual journey. Simple SIPping will not help, and you will need to systematically manage risk.

The context!

In what follows, I shall reproduce comments from both the above videos. Many comments, a couple were hateful, e.g. targeted at my mom and YouTube removed these (or I did).

What is my intention here? Many people who call themselves experts focus on “behavioral aspects” of investing and harp about why people do not stay invested for long. I think it is important to also harp about the same behavioral aspects in staying invested with wrong notions (often propagated by the same experts).

When my ideas are exposed to a new audience, it is like gold. Regular readers or those with whom I interact with on AIFW may not be so eager in declaring their confidence.

While I do not agree with the comments below and am of the opinion that they are wrong (with proof), my intention in reproducing them here is not to insult any YouTube user. Unlike many of them, it is possible to point out someone is wrong without trading insults. I would like to use them for studying behavior and also offer proof against their stance for freefincal readers who may also be of the same opinion that if we hold, things will become okay.

I am also not disappointed or insulted. In today’s world, popularity is judged by hate. The more the hate, the more popular you are.

The comments below are proof that in terms of financial literacy we seem to have jumped from the frying pan of safe endowment policies to the fire of safe equity. RIP financial literacy

I am disappointed that many who agreed with be that there is no compounding and SIPs will not work without luck felt that mutual funds are like gambling and a fraud. They assumed that I am recommending to stay away from mfs.

Then there are many who claimed I am discouraging people to invest in mfs! As if it is a noble task that everyone should take part in.

Then many asked, “if not mfs, what to do?”. Their logic is simple, if something does not compound, then it is not possible to make money there! It is a pity that the human brain wants the walking stick of “power of compounding” to believe in equity or wealth

A challenge to sales guys: Is it possible to sell equity mutual funds without using the phrase: power of compounding? 

What you see from this point on are the actual comments (sometimes sections of them). Note that these are public YouTube comments made on my channel and I reserve the right to anonymously reproduce them here with attribution. If you want your comment removed from below, then delete them from the video first.

I have highlighted sentences to point out the confidence of the person that equity will work for sure although there is no evidence it will (see proof section). As mentioned read the comments to get a feel of what investors are expecting and how far removed it is from the truth.

The comments (you can see the full list at YouTube)!

… after the long term MF gives the effect of compounding , (at the long end of waiting) and gives big money(assuming positive fluctuation when we come out) long-term inverters could take advantage

Well common man is not bothered about this as long as he makes decent profit after invested for long period.what u said is also applicable for real estate,gold,shares etc.sometime price will go up and sometime it will come down.but in long run overall returns will be better than FD

… Mutual funds have market risk, that does not necessarily mean you will end up zero capital. Last one year most of the Mutual fund returns have given negative returns or small positive. It is advisable to do SIPs which will buy more NAV units when market is down and buy less NAV units when market is going up. So Mutual funds are safe investment as long as you are not worried about negative to postitve or positive to negative fluctuations.

Sir no offence but the agents also state that mutual funds are always for long term. By which I mean around 3 to 5 years and hence they give annulazied return. And never can markets be stable. You are totally misleading people

… When we invest in mutual funds, we are basically investing in the economy of the country. Now on Y-o-Y basis, the GDP may vary, but over a long period of say 30 years, that gdp follows an approximate growth curve of 8%. And since you are investing in the economy, with an added factor of inflation of 7%, your annual growth rate over a long period tends to be around 15%. While that may not be guaranteed in the short term, barring catastrophes like world war, Zombie apocalype and armageddon, your growth rate of 15% over long period is pretty much guaranteed

Sir Do u invest in mutual funds If no Then where do u invest for compounding. If yes U also believe in one . So don’t discourage others. If mutual funds r selling And some one is earning commission Only thing u can argue is the is he or she is giving u right advice or not. By your analysis No one should buy vegetable from vegetable seller because he is earning profit from u . U should grow ur own .
How about debt mutual funds e.g. liquid funds which more or less has the same annual return? (sorry, no compounding there too!)
If I have 10k and 40 years in my hand…. the risk is marginal if, if and only if you have time actually I do…..
I believe you mean to say the past returns shown on MF websites like CAGR will not have compund effect as they are already compunded. But affcourse regular investments on MF will have compounding YOY returns. Your messgae is not clear you should mention this clearly.
Your argument is rigged!! You took just lumpsum example… If you take SIP, the results are exactly what they claim!! And in long term even the lumpsum performs lot better than FD!! You can stick to your FD of you don’t see the power of equity or equity linked investments!!!
Totally wrong concept. Yes, the returns do fluctuate. But over the long run, they give high returns which is a result of coumpounding of yearly volatile returns. Thats why they say to invest for the long term. Totally, wrong concept this guy has.
I agree that, we should not just compare with the FD returns and MF returns in a same scale. But over time, MF manager books profits and reinvests the money in another company and the cycle continues. Eventually the NAV value shows up a higher value. If a investor takes money to reach his goals, he gets the profit, otherwise his investments keeps growing as long the MF manager bets on the right companies. In my view, compounding works in MF.
Compounding effect in Mutual funds works like below. Here is an example. When HDFC top 200 growth fund the NAV in 2006 Nov was 86 Rs. Today the unit price is 445 Rs. So compounding works for every unit prices. If compounding is not there 86 will not became 445. Even if market goes down by 50% NAV is not going to go down to 86. This prove compounding exists in MF.
What a stupid video, wasted my 10 minutes , can someone tell this person that only the end result matters.Why are you worried what happended in between if you are a long term investor. If you are getting return more than FD then who cares of ups and downs. Did Ramesh damani , Radhakrishan Damani , Chandrakant Sampat got rich by putting there money in Bank FDs?
Negative minds never create wealth, be positive thinker to be wealthy from the market.
Volatility is the name of the game. Otherwise sensex would be a lakh now. Price will go up and down. That is how the economy works. Average people need not understand these technical details. One just have to keep following their fund and switch once in three years if it underperforms. Would u rather suggest people to invest directly in shares? They will go bankrupt in a few years. They will gamble instead of investing. It is better to trust a qualified manager to manage your money. I respect your views, but average new investors do not need this. We have to start. Start early. Keep an eye on your investment. Take a decision after three years.

The proof

I have written several articles on why buying and holding will not always work over the “long term”. Here are a few. If you study these with an open mind, it will be clear enough that there is no guarantee that equity funds will beat FD returns!!

The response and solution

More Entertaining comments

Typical Indian professor who is in love with the concept more than the application or results. MFs always say invest for long term and that there is risk and if u are invested for longer term then u are inclined to make more than FDs. Thats it. Here i was waiting to see something groundbreaking and all i heard in 10 mins is repeated barrage of what is essentially a pedestrian concept i.e compound interest

There is a person in America who is researching on the equation to prove the world that earth is not nearly circle it is plane like plate. May be he will succssed but in this gental man case, it is quit different he is failed to tell us that return 22.5% is an average of all year not assurance of same each year.
He’s taking way too long to explain the difference between arithmetic returns and geometric returns. But if you recite simple math with an accent, I suppose some dolts believe that mutual funds do not provide compound returns just because their return pattern isn’t as stochastic as an investment that pays a fixed rate of interest.
From your videos, I understand you are worried about only one thing, “managing risk”. You are not worried about, return%, reaching goal early, etc, etc. You invest in “EQUITY” only for managing risk. It’s like, Playing a football game just for showing defensive skill. Not worried about scoring goals, not worried on winning or loosing. As per you ‘Rebalancing your portfolio’ is the way to reduce risk. How often we need to rebalance? ‘Once in a year’. So do we need to think everyday about something that we do once in a year? As per you “YES”. Don’t think about return, don’t think on any thing else, always think on “risk”. Do you think people invest in equity just for managing risk? If risk is your primary problem, stay away from equity. As per my understanding even FDs are not risk free. Can we keep our money in the shelf, is that risk free? There is risk involved in every action in life. Walking though the Chennai street is also risky Pattu. As per Govt data 56 pedestrians getting killed everyday in India, out of that TamilNadu is in second position. The real data may be much much higher than this. So my point here is, there is risk every where. We need to manage risk, but don’t give primary impotence to it. For most of the people, the primary goal of any investment is generating returns. Money is not risk free due to inflation. So if you are not generating return then you are in risk. Only way we could beat inflation is by investing in “Equity” though it is risky. Note: I am not a sales guy, I am investing in MF from 2006 onwards. I invested in HDFC top 200 fund. Some of my initial SIPs turns to 5 times today. My CAGR is 12%. I don’t know where you invested for getting -ve and 0 return. Please don’t come up with some graph that shows 0, -ve unless you could publish those XLS publicly. You know, I can also draw a graph in XLS that is going down and can tell to the world “See this graph is down, so MF is not compounding”. We don’t know whether it is Nifty data or it’s your blood pressure data. 😊

What are your thoughts on these comments?

Would you like to sit and assume time will heal the wounds of market volatility or do you believe in risk management?

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. “Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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11 Comments

  2. Mutual funds are meant for long term growth of your investment. Stock market works on liquidity. Once inflow of money dries up in stock market, it starts falling and so are mutual funds. Once panic starts investors start deserting both cash equity and mutual funds. You have no control.Even mutual funds in USA don’t fair better than India. Protecting capital from erosion is more important than returns.

    Reply

  3. An entire industry survives on misselling and they have done a great job of making newbie investors feel like in the long run, MF is a safe haven.

    You sir instead of selling these mutual funds on a commission or recommending top 10 mutual funds have taken the ethical route of increasing people’s financial literacy.

    The ignorant , the ones living in la la land and those whose livelihoods are at stake are bound to hue and cry about it because if investors become educated, their bread and butter is at risk because apart from commissions, they aren’t provided any kind of value add.

    Higher the risk, higher the likelihood of returns and similarly higher is also the likelihood of losses.

    People who don’t want to risk capital should put their money in FDs, plain and simple but it will never grow your money.

    Reply

  4. Dear Pattu Sir,
    Commenting after a very long time ..
    1) I really liked your switch to video mode from blogging. can connect with you better ( vs your blog)
    2) I am of the opinion that we as a nation are more concerned about being literate than educated. Hence, the refusal to learn/unlearn & stick to “hearsay” bias ( though technically this bias doesn’t exist)
    3) Keep continuing your excellent work in trying to educate others.
    4) Youtube should consider making a revenue system out of comments thread. it is definitely an entertainment forum in a way..

    Reply

  5. I am really happy with the learnings and imortant of risks in mf from your blogs. If we only go through by the portals who publish trailing return as sole parameter of performance one will never come to know that balance advantage fund can also beat return of a smallcap fund . Usual advice come on channels like for longer period just go with small cap fund and 20% return is guarantee.

    Reply

  6. I still think most of our investors don’t need to understand every nitty-gritties of MF investing. Because majority of those people have come from “LIC policy purchasing” background where the word “guaranteed” is used in every sentence so brutally. The more we talk about risks in MF there is more chance they will go back to buy LIC policies.
    For these people, a return of even 10% in MF (including all the volatilities) is better than 4% from LIC policies.
    I do believe many investors will run away if we encounter a 2008 like situation. But then understanding all these concepts won’t stop them as well.

    Reply

  7. I still think most of our investors don’t need to understand every nitty-gritties of MF investing. Because majority of those people have come from “LIC policy purchasing” background where the word “guaranteed” is used in every sentence so brutally. The more we talk about risks in MF there is more chance they will go back to buy LIC policies.
    For these people, a return of even 10% in MF (including all the volatilities) is better than 4% from LIC policies.
    I do believe many investors will run away if we encounter a 2008 like situation. But then understanding all these concepts won’t stop them as well.

    Reply

  8. ” In today’s world, popularity is judged by hate. The more the hate, the more popular you are.”

    Exactly!

    If you talk of ethics and (bitter) truth, the trolls, lowlives and “sales/commission agents” and uneducated (many with college degrees) will come out of their hiding places and spew venom.

    I see this same abusive behavior in other YT channels (Vegan) too.

    Maybe you can turn off commenting on YT so that useful discussion can happen only on AIFW

    Sad, but I guess you have to live with these wasps, mosquitoes and flies.

    Reply

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