MF bashing

Recently, I came across an (actually, I should say “yet another”) article bashing mutual funds. I am in no mood to attack those who write articles bashing mutual funds, but it is important that certain things are clarified.

Mutual funds are very easy targets for bashing. It is easy to find faults with the various practices and performance numbers. Any day you open a financial newspaper or a financial website or the financial pages of a mainline newspaper, you see some story talking about problems with mutual funds. Ever wondered why people love to hate mutual funds or ever wondered why no other industry gets so much “hate reporting”?

Well, that is because of something that psychologists call “availability heuristics”. Availability heuristics means that people make judgments based on knowledge that is easily available. The availability of information is actually the biggest benefit mutual funds offer. No other investment option comes anywhere close mutual funds in terms of transparency.

We will take examples of three areas from where mutual funds get the maximum attack: insurance, stock broking and PMS (or portfolio management services).

Let us start with PMS or portfolio management services. This is quite similar to mutual funds as both employ professional managers to manage their investors’ money. Both can be called “managed accounts” while mutual funds are “pooled investments”, portfolio management services are “separately managed accounts”.
• Often PMS providers claim their ability to get out of markets before a crash. They cite examples of mutual funds whose NAVs fell.
o I would like to draw the attention of investors that NAV data for mutual funds is available to the world on a daily basis, which allows one to track the performance on a very regular basis. The data for PMS performance is only selectively available.
o In the absence of NAV data, even a savvy investor cannot check performance over various periods, risks in the portfolio, etc.
o The calculation of NAV happens as per SEBI guidelines, which is in line with ICAI guidelines.
• The fee structure of mutual funds is extremely transparent. SEBI has guidelines for the same and the structure is constant irrespective of who the investor is. That for PMS is negotiable and can be different for different investors.
• Mutual fund portfolios are available on a monthly basis (at least the top 10 holdings). The portfolio disclosure in case of PMS accounts is another dark alley. It is difficult for a prospective investor to take a decision without getting in touch with the PMS provider.

Broking firms keep talking about their superior ability to find the future winners, those multi-bagger stocks. Here again, the track record is either not available (on a daily basis) or it is available only selectively. The broker makes money when you do a transaction – either buy or sell. It is in the interest of the broker that you are excited to make a trade.

Ah, that brings us to PMS offered by brokers – they claim to be interested in your benefit but the portfolio does so many transactions that the broking division makes lots of money.

And finally, insurance industry – the less said the better. Most are negligent and do not know that they do not know. Yes, there are some stars, some good insurance advisors. But remember stars can be seen only during the night, when there is darkness all around. Ask a few questions and the agents have no answer. Even many insurance company executives have no answers to certain basic questions and then they hide behind the regulations.

The only request to all the MF-bashers is to come to the level of mutual funds in terms of transparency, flexibility, affordability. Jesus said, "Let he who is without sin cast the first stone."

Whenever I have raised this issue with some players, the reply has been that these are not regulatory requirements. Well, I believe transparency, ethics, customer-centricity are some things that need not wait for the regulator’s order.

Next time ask your stock broker how much money has the broking firm made through the buy-sell transactions you made in a year. Compare it with the money you have made (or lost). Ditto for the PMS provider. But in case of PMS, please ask for both the portfolio management fees as well as brokerage. Ask the insurance advisor to explain the “tables” in plain simple English – or whatever language you are comfortable with.
I request all the readers that whenever you come across a negative article about mutual funds, try to find similar information about the other investment options. The transparency of mutual funds is a great boon for the investors. Use it for your gains.

Finally, remember to also check if the writer has any axe to grind by writing against mutual funds.

From my side, let me make it clear that I make money by doing training programs for mutual fund companies and investment advisors. If someone wishes to consider that as my “interest” so be it. I am only suggesting that mutual funds have done it – let the others imitate.