History is a great teacher for those who are willing to learn from it. And it is in history that we take recourse to understand whether mutual funds offer an attractive investment proposition at all. The learnings are an eye-opener.
Read on if you really want a wealthy future….
Numbers do not lie
Ultimately the benefit of an experienced fund management team and a disciplined approach to investing must reflect in the numbers over the long-term. A rational investor expects to earn the best return he can, given his appetite for risk and desire to hold a quality portfolio at all times. He is definitely not looking to invest in a well managed fund which is a perpetual laggard amongst its peers.
So, we decided to let the numbers do the talking. And to ensure that the numbers are meaningful, we have taken a sufficiently long period over which we have witnessed both bull and bear markets i.e. a 10-Yr period, starting 1997.
We identified the flagship equity schemes from all the Asset Management Companies (AMCs) that existed in 1997 for the purpose of this study.
Here are some startling numbers
The same money invested in all the 14 flagship equity schemes, in equal proportion, would have returned Rs 984,512.
What this tells us is that an average equity fund outperformed the BSE Sensex by a significant margin over the last ten years.
But, averages mask reality
Let's be clear. Averages carry little significance as they cover up the reality of their components. An investor does not invest in 'all' schemes out there; he chooses what he thinks are the best funds. So depending on the investor's choice, the performance differential could vary from great to disastrous. And this is what a more detailed look at the numbers throws up.
Now, some shocking numbers
On the contrary, if you had invested in the worst performing scheme (which mind you was from a then respected fund house), the maturity value would have been only Rs 303,785.
That's a difference of Rs 2,295,972 i.e. 2,296% of the initial investment value!
If you doubt that this result is due to some clever selection of schemes, then read on for another stunning number. Take for instance the difference between the second-best and the last but one worst performing scheme. It was a stupendous Rs 1,879,666 i.e. 1,880% of the initial investment value!
How not to lose 2,296% returns
You now know that the cost of making a poor selection is very high. And you, an investor with long-term needs, cannot afford to make such mistakes. Especially if a mistake stands to lose you 2,296%!
To ensure that you do not lose out on an opportunity, this is what you can possibly do -
Become an expert yourself - since you are busy with your work, this is not a feasible option
Employ the services of an honest financial planner - to be honest, this is easier said than done. It is not impossible; but not easy either.
Get access to independent recommendations i.e. those that are not linked to commissions - given that this does not involve changing distributors, folio numbers et cetera, it seems to be the most feasible option.
source: Internal Research credit goes to study done by PersonalFN in '07
