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No beating about the bush.
The majority of the investors buy when the market has already run up and is valued expensively. This often leads to disappointment when the market either goes down or sideways for years. If you avoid doing what others do and invest regularly in top fund schemes, you can easily make money from your mutual fund investments
Indian equity mutual funds have delivered excellent returns over the past 10 years or so. Their returns on a point-to-point basis may not have been great but investing in top funds through Systematic Investment Plans (SIPs) would have delivered good returns. And yet, over the last six months more than Rs10,000 crore has flowed out of equity mutual funds. Many are selling because they have made losses or meagre profits? It has been the same story in previous market cycles. Why do investors lose money in mutual funds? The main reason is that they put money into equity mutual fund schemes at the wrong time. In an interview with CNBC-TV18 on Friday, Prashant Jain, chief investment officer of HDFC Mutual Fund, said that “almost 80%-85% of the equity mutual fund inflows came in when the market was highly valuated at a price-to-earning (P/E) ratio of 17-18. This is one of the reasons investors tend to get disappointed when the market declines subsequently and it becomes frustrating for investors to hold on to their investments. So, when the market finally rises, after they have broken even or made some money, they pull out their investments. Therefore, we never see inflows at low P/Es and when the market begins to recover.”
Read about the outflows from mutual funds in November 2012 here.
Getting their timing wrong or going in and out of their investments is not limited to Indian investors. It is the same story in the US. One of the most widely cited studies on investor behaviour is a study by DALBAR, a research agency. DALBAR’s Quantitative Analysis of Investor Behaviour compares the investors’ returns against market returns. The most recent DALBAR study found that in the 20 calendar years ending in December 2011, the Standard & Poor's 500 Index had a 7.8% compound rate of return. In the same period, the average investor in US equity mutual funds earned just 3.5%. Even in the five-year period ending December 2011, mutual fund investors went in and out at the wrong times, resulting in inflows when the market declined and outflows when the market rose.
When it comes to systematic investing, the study showed that for the 20-year period the average equity investor earning $9,853 against a systematic investor’s earnings of $8,665, for a total investment of $10,000. This just the second time in history, since 1994 when the DALBAR study was first published, when the average equity investor outperformed the systematic equity investor. The average systematic fixed income investor overwhelmingly outperformed the average fixed income investor over the twenty-year period by earning over four times as much.
Buying when the market is rising and selling when it is down is true of every investor in every country and every period. Here is some information Thomas Gibson’s classic investment book titled “The Facts about Speculation”, published in 1923. Gibson found analysed around 4,000 accounts (a high number in those days) and states, “The most glaringly apparent cause of loss revealed by the investigation of these accounts was the almost universal habit of making purchases at high prices after a material rise had already occurred. This error is of a wholly psychological character” (emphasis ours). Fast forward almost 100 years later, it is exactly the same.
Gibson found out that majority of the investors bought right at the top of the cycle, with the average price of all purchases being within about 4 points of the extreme high. The price and value disconnect is so great that few investors pay attention to fundamentals and recognizing value and were solely focussed on price action. He found that 90% of the investors who relied on charts and other mechanical systems suffered losses. Investors usually bought on slight declines from high prices and sell on slight advances from low prices. This is a classic losing strategy.
Another folly, according to Gibson, is impatience. It is pertinent to note that humans are a fickle lot and overreact when markets crash (especially when it has been purchased right on the top). When the market is rising, everyone rushes in—investors, mutual funds, advisors and so on. Advisors erroneously tell investors to buy. Investors get carried away instead of thinking hard before putting bucket-loads of money into an investment.
The way to address this is to invest regularly, which is technically called SIP. While SIPs can sometimes lead to negative returns over a long period of time, over longer periods the number of periods of negative returns reduces (Read: SIP Smartly) Systematic investing also helps to navigate volatile markets and negate negative returns. Take a look at the returns over the past five years ended November 2012. Had you invested Rs20,000 in an index fund based on the Sensex in November 2007, your investment would be worth just Rs19,976 at the end of November 2012. The Sensex has moved nowhere from the start of November 2007 to November 2012. A quarterly systematic investment of Rs1,000 over this period would be worth Rs24,838, up 24.19%. Therefore one should not undermine the benefits of systematic investing and should continue even through the volatile market movements. However, according to the recent Computer Age Management Services (CAMS) data we have seen many investors exiting their SIP accounts before completion of the tenure. Net SIP registrations have been negative each month from April 2012 to September 2012.
The company offers a new investment strategy under its discretionary portfolio management services which is said to deliver superior long-term returns using a proprietary back-tested strategy to curtail volatility and downside risk. However, it is pertinent to check the details of the scheme.
Edelweiss Personalized Managed Accounts (PMA) has launched a new product Beta Overlay Over Mutual Funds (BO.O.M). Scheme with fancy names have not quite succeeded in the past. The strategy is designed to enhance equity mutual fund portfolio returns by strategically hedging the long-only component of equity mutual funds with Nifty futures when the markets are weak. This portfolio will comprise futures, options and units of equity/debt/liquid mutual fund schemes.
Edelweiss AMC, a subsidiary of Edelweiss Financial Services, is the portfolio manager to Edelweiss PMA. For the new scheme, the AMC would be using a model to protect an existing equity mutual fund investor against a weak or falling market while still capturing gains during a rising market, thereby “curtailing volatility and downside risk.” “B.O.O.M follows a rigorously back-tested model, which has consistently delivered better returns over a 10-year period,” according Vikaas M Sachdeva, CEO, Edelweiss Asset Management.
Knowing the context in which a particular strategy has succeeded is essential for an investor. Therefore, even though the portfolio manager may be satisfied with the performance over the periods they have tested, it is crucial for an investor to know how the strategy has worked. Especially, considering the minimum investment amount is Rs25 lakh. If you want to invest in the product ask the following questions:
1. How has the strategy worked in the back testing in terms of benchmark related performance? For this, check the number of 10-year periods analysed, the returns over each period and the benchmark returns over the same period. If you are investing for the short term, check the performance over three to five years.
2. What are the fund management fees and entry charges and exit charges? The costs affect the overall performance of your investment. Remember, the portfolio consists of equity mutual fund schemes which charge an expense ratio as well. You would not want to pay for a PMS scheme which would eat away into your returns, investing only in equity mutual fund schemes would work out to be a better option then.
3. Which equity schemes would be eligible for BOOM? This is crucial. There are many performing mutual fund schemes and the portfolio manager should have a diverse portfolio of top performing equity schemes.
Though past performance is not an indicator of future returns, it does give some insight and a certain level of confidence before investing to know how the strategy has performed. There have been a few equity mutual fund schemes which have done better than the Nifty index in the last 10 years. Whether the PMS scheme has done better than these or worse, we do not know. No aggregate data of PMS performance is available.
Edelweiss mentions that the scheme is an ideal vehicle for an existing equity mutual fund investor who has a three to five years investment horizon. Experienced investors would know how volatile the market can be over the short-term, how the strategy has worked to negotiate the volatile movements of the market in three to five-year periods of the past is essential.
Performance details and management fees are essential for an investor to check and know whether to invest in a scheme or not.
Moneylife contacted the company in order to get the details of the performance during back testing, but no information was received at the time of writing this report.
To read more on mutual funds news and Moneylife analysis, click here.
Ultimately, Edelweiss claims to employ moving averages and other ‘technical’ indicators to determine whether the market is in a downtrend and create a hedge between 0% and 100% of the long-only equity investment value. Essentially, Edelweiss will use technical analysis to take a short position in Nifty futures to buy put options when it thinks that the market is headed down. It is a risky strategy and we are extremely sceptical of Edelweiss being consistently right about market declines based on mechanical and lagging indicators like moving averages. And remember, being wrong would inflict a cost. Edelweiss could lose money on Nifty futures and puts bought could expire worthless. The performance of the scheme would be benchmarked to the S&P CNX Nifty Index.
Subsequent to the publication of the article, Edelweiss provided us with the details, which are mentioned below.
Performance: “B.O.O.M. has delivered excess returns of about 6%-8% per annum, over a passively held portfolio of mutual funds, at about 2/3rd the volatility”, pointed out Mr Sachdeva. The returns have been post investment management & trading costs but before any applicable entry/exit loads. This is impressive and it would be interesting to see how the portfolio manager actually performs. There’s only one 10-year period that has been considered, viz. starting 2003 to 2012 (till 31st May 2012) in the back-test model, says Mr Sachdeva. This is primarily because of paucity of all relevant data being available for earlier times.
Charges: Entry load for this scheme is 2% of the initial contribution and all fresh inflows. Exit load would be 2% for withdrawal before one year from the date of activation. Management fees would be 2% p.a. excluding other charges such as, transaction tax, service tax etc.
Eligible schemes: Edelweiss has shortlisted a list of 41 schemes based on their low tracking error with the Nifty index. This is done to ensure the model works efficiently to deliver the stated objective.
SEBI has brought misselling of MF schemes under its norms on prohibition of fraudulent and unfair trade practices
Mumbai: Cracking the whip on the practice of misselling of mutual fund schemes, market regulator Securities and Exchange Board of India (SEBI) has decided to bring such activities under the ambit of fraudulent trade practices, reports PTI.
The move comes at a time when there are reports of rising instances of misselling of mutual fund products to customers.
SEBI has brought misselling of MF schemes under its norms on prohibition of fraudulent and unfair trade practices.
The SEBI has inserted an additional clause whereby misselling of MF schemes would be deemed to be a fraudulent trade practice.
In a notification issued on Tuesday, the regulator said that "misselling" would refer to sale of units of a mutual fund scheme by any person, directly or indirectly by making a false or misleading statement.
Among others, sales of a MF scheme by making a false or misleading statement or concealing material facts and associated risks or not taking reasonable care to ensure suitability of the scheme to the buyer, would be considered as misselling.
In this regard, the market watchdog has brought in amendments to SEBI's Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations.
They would come into force on the date of their publication in the Official Gazette.
The country's mutual fund industry has over 40 players managing assets worth nearly Rs7 lakh crore.
The SEBI, in recent times, has initiated a slew of measures for benefit of mutual fund industry, including provision for a new distributor cadre and incentives for reaching out to smaller cities.
Earlier in the day, CS Mohapatra, Advisor to Financial Stability Development Council (FSDC) at the Finance Ministry, said that misselling of products has "become synonymous with the financial sector".
He was speaking at an event in New Delhi.