Mutual Funds
Fund managers faithfully follow the benchmark stocks, making it hard to separate luck from skill

Even the best funds tie up the bulk of their money to the heavyweight stocks of the benchmark, making it hard for investors to separate market performance from stock-picking skill

The popular perception of fund management is that investment experts pick stocks that either reasonably valued or have strong earnings growth ahead of them or both. Some also believe that fund managers are experts at buying and selling. While all this is sometimes true, the fact is that most fund managers are happy to pick the heavyweights of the underlying benchmark indices and sit tight. This often leads to two results. One, the portfolios look similar and two, they perform in line with the overall market. In technical terms, they deliver a lot of beta (market returns) not much alpha (returns from specific stock picking).

Take the case of some of the largest and best performing funds. The recent portfolio of Birla Sun Life Frontline had Reliance Industries (5.2%); ITC (4.9%); ICICI Bank (4.4%); Bharti Airtel (4.2%); Infosys (4.2%); Tata Consultancy Services (3%); Larsen & Toubro (2.9%) and HDFC (2.5%) as the top holdings. Now, you don’t need anyone to tell you that these are blue-chip stocks to buy and would do well for the long term. But there is another reason these stocks find a place in the portfolio of this scheme. They are heavyweights in the BSE 200, which also happens to be the benchmark of Birla Sun Life Frontline. Now look at another portfolio: Reliance Industries (6.5%); ITC (5.2%); ICICI Bank (4.6%); HDFC Bank (4.37%); Infosys (4.17%); Tata Consultancy Services (3.2%) and HDFC (3%) as the top holdings. The stocks are almost identical to the Birla scheme. How and why? This is the recent portfolio of Fidelity Equity Fund. These stocks find a place in the Fidelity scheme for the same reason. Fidelity’s benchmark is also BSE 200, so the portfolio is remarkably similar. The difference in performance between one scheme and another lies in the fact that weightages and cash levels are different in different schemes.

We are neither for, nor against, this approach of tying up the fortunes of the fund to the benchmark stocks and sitting pretty—but this creates difficulties for investors to assess performance.

If superior performance is coming from changing the weightages (position-sizing) and varying the cash levels (market-timing), investors can never separate out these two factors and while assessing performance. Under the situation, the only approach for investors is to have faith—that funds that have a consistent record of beating the benchmarks must be doing something right.

User

COMMENTS

Nagesh Kini FCA

5 years ago

A message that is very aptly conveyed.
More of luck and less of skill!

sudindra

5 years ago

Do we have option of Short position in Mutual fund for the period upto 1 year..??????

We dont need fund manager to invest in those company stocks. I believe fund manager has to concentrate on all types of stocks in portfolio.

Sundaram

5 years ago

One more thought-provoking write-up from Mr.Basu.Thanks.

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Another MLM scheme: SMS World Biz is trying the SMS platform to snare customers

SMS World Biz claims it’ll provide daily income just for ‘reading’ SMS messages. And it sports all the typical features of a typical MLM scheme—binary returns, referral income, and of course, a business model that won’t hold water

Pesky SMSs are often ignored and deleted by many of us. But here is a multi-level marketing (MLM) company, ‘SMS World Biz’, making an unbelievable claim that you can earn just by ‘reading’ an SMS. Experts say that SMS advertising seems to be the new happy hunting ground for MLM schemes.

SMS World Biz claims to be a mobile marketing company and says that it provides SMS advertising services. It proclaims, “SMS World is a service that offers users the opportunity to read advertisements and earn money. Users can also invite other users to read ads and earn—thus building a community of consumers. The bigger community you build, higher are the rewards.”

The company has a typical MLM business model. According to the company’s claim, one is paid just for reading an SMS. SMS World Biz claims that it will pay higher compensation if its SMS universe is expanded with the addition of more members. In simple words, this firm is inviting more people to join it—a typical trait of any MLM scheme.

It has advertisement packages ranging from Rs5,000 to Rs50,000. And the registration costs Rs2,000. The company claims daily compensation (income on a daily basis) depending on the advertising package. For instance for the ‘Pack-I’ advertising package, the daily compensation is Rs50 for one year, which would increase to Rs500 for another package.

SMS World is no exception to other such schemes in promising binary income, which is paid once you successfully enrol two people (on the ‘left’ and ‘right’ side) and they join the company. Interestingly, according to SMS World Biz, there is capping on binary income. For a package less than Rs50,000, there is a weekly cap of Rs5 lakh and it is Rs15 lakh for a package more than Rs50,000. It gives referral income of 10% only once, when a person referred by you joins in.

According to SMS World, the income earned can be withdrawn on either 15th or at the end of every month.

Experts say that such a business model is unsustainable, at least over the long run, given its claims of generating high income. And since the number of mobile phone users is rising, with such a lure of high easy income by the company, many gullible people would be a target. Now will somebody take a call on this before it is too late?

User

COMMENTS

Sreedhar

5 years ago

Ponzi Schemes – Frequently Asked Questions

Who is Bernie Madoff?

What is a Ponzi scheme?

Why do Ponzi schemes collapse?

How did Ponzi schemes get their name?

What steps can I take to avoid Ponzi schemes and other investment frauds?

http://www.sec.gov/answers/ponzi.htm

tripathi

5 years ago

There are many other such programs on the internet which lure people and offer income in dollars against reading of adv. after depositing Rs in thousands, people are believing it for easy income.
Also there are many Indian companies collecting money on monthly basis with a premiss to return double to the depositor with a commission for recruiting others.

Das

5 years ago

Kerala : Chain companies back with a bang!

“Honest corporate citizen” Amway and “Transparent” RMP are heavily advertising in the newspapers about their “compliance” of the new Direct Marketing Guidelines of the Government of Kerala.

The General public still doesn’t know what the guidelines are. Public is really worried as the Government seems to be hand in glove with MLM companies and the chain menace may once again engulf the state of Kerala.

Patrick

5 years ago

Is this was really true just to receive texts to make money, everyone in the world would do it. I would be highly skeptical.

Kishore

5 years ago

The Binary Tree That flowers Crores !!


Dy Supdt. of Police (Crime Branch), Mr. P.P. Sadhanandan who was instrumental in solving many MLM crimes, especially Tycoon fraud, in Kerala recently wrote an article in a weekly (Malayalam Varika, The new Indian Express publication) captioned "The Binary Tree That flowers Crores" !!

There is also another article in the same weekly titled “Kerala – A paradise for Criminal Capital” written by V.K Suresh.

Great articles indeed.

Kishore

5 years ago

I am asking again an oft repeated question - why are regulators silent?

REPLY

Vikas Gupta

In Reply to Kishore 5 years ago

I also agree with Mr. Kishore that where are the regulators & what are they doing?

tripathi

In Reply to Vikas Gupta 5 years ago

There is not any regulator for this.

Das

In Reply to tripathi 5 years ago

MLM is illegal. Therefore there won't be any regulator for MLM. But there are other regulators. where are they? why cant they stop illegal MLM schemes?

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