Monday, May 5, 2008

LIONS, TIGERS ….. and MONKEYS

This post is about the maze that we wade through in the mutual fund jungle.

Like monkeys we jump from one fund house to another buying a few LION and some TIGER funds along the way. I forgot to mention about funds called CHINA – INDIA , HIFI, SMILE, TIPS, COMMA, ACE :-)

This post is not about the level of innovativeness that fund houses display in naming their funds (maybe not as much in picking their stocks).

This post is also not about how we pay 6% initial issue expenses out of a Mutual Fund NFO to send our friendly neighbourhood advisor on a jungle safari in Kenya.

Its not about how a Rs 10 NAV is not cheaper than a Rs 200 one.

Its not about how we pay 2.5 % of our portfolio to the same friendly neighbourhood advisor everytime we move from one fund to another.

It is about something more sophisticated ……

Its about how intelligent and informed mutual fund investors like me look at equity fund investing.

On an average a fund manager holds more than 25 stocks in a fund. Its called diversification so as to reduce risk ( A latter post on how I m not such a strong proponent of diversification. Once upon a time Warren Buffett put 40% of his portfolio in Amex and the rest is history ).

An average mutual fund investor like me would have spread his mutual fund investment across 10-12 equity funds. Partly because we get enamoured by TIGERS and LIONS and partly because we want a flavour of Large Caps, Small caps, Micro caps etc. Of course the friendly neighbourhood advisor helps with his persuasive skills.

I was aghast to see that my mutual fund portfolio currently has about 26 different equity funds across 8 fund houses.

So if each fund has a minimum of 25 stock and one is invested in about 10 equity funds, on an average one would be invested in atleast 100 – 150 stocks cumulatively after taking out duplication.

At 100 -150 stocks with no stock being more than 1-2 % of portfolio, I don’t see how on a average the mutual fund portfolio can beat the benchmark index. It is as good as the benchmark index. And we pay 2.25% yearly as management fees for active fund management.

Time for me to stop monkeying around and clean my mutual fund portfolio.

2 comments:

rajind said...

Well, I've been thinking that I was doing great fund picking. This article just hit me on my head. Very well written.

Ninad Kunder said...

Hi Rajind

Thanks. Trust me it hit me on my head when I was writting it.

I realised how mismanaged my own mutual fund portfolio was.

Cheers

Ninad