Buzzword funds don’t do investors any good
December 22, 2014, 6:07 AM IST Economic
Times in ET
Commentary | India, Markets
| ET
By Dhirendra Kumar
Make in India appears to be the latest theme on which
equity funds might be launched. Do such funds make sense for investors?
Last week, I saw this headline of a news story ‘Domestic mutual funds
launch schemes to support PM Narendra Modi’s ‘Make in India’ campaign’.
That’s amazing, no? What a patriotic thing to do. When I saw the headline,
I assumed that it meant that the employees of said mutual funds would leave
their jobs and set up factories, or something of the sort. However, the
article was actually something different.
After reading the article, I thought that a more appropriate
headline would be ‘Mutual Funds to exploit Make in India publicity to
create and sell more funds that no one should invest in’. My opinion of
this professed determination of mutual funds to help Narendra Modi has
nothing to do with the Make in India idea by itself. I completely agree
that India needs a manufacturing revolution, and that the government needs
to act in a focussed manner to remove the obstacles that have held back
(and indeed, destroyed) Indian manufacturing for decades.
However, that has utterly nothing to do with whether an
equity fund investor should invest in a mutual fund that limits itself
to manufacturing, or even emphasise it. If some listed manufacturing companies
are going to be good investments, then there is nothing to stop any competent
fund manager to invest in them through diversified equity funds. After
all, that’s the whole logic of diversified funds — to move investors’
money in and out of various industries, sectors or stocks based on whatever
is best for investors.
No one is stopping a fund manager from investing in a
manufacturing company in a diversified equity fund. One unalterable truth
of mutual fund investing is that no investor should invest in any sectoral
or thematic fund.At any given point, some sector, or group of sectors is
always doing better than the stock markets in general. That’s in the nature
of markets. Therefore, some set of sector-specific funds are always doing
better than others.
Over the last many years, the favoured sector has rotated
through technology, autos, infrastructure, FMCG and perhaps some others,
too. In its day, each of these was doing better than diversified equity
funds. This is not a coincidence but almost a mathematical certainty.
Since diversified funds invest in a number of sectors,
their performance is always a weighted average of those different sectors.
Therefore, the best of those sectors are individually always doing better
than diversified funds. Therefore, if you look at mutual fund performance
at any point of time, it always looks foolish to have invested in diversified
funds rather than the X sector. However, it’s only when you take a long
period into account, you realise that the identity of X keeps changing
in unpredictable ways. There are plenty of former fans of technology and
infrastructure funds who will vouch for this. However, what this does is
to make it easy to promote the idea that the right way for fund investors
to choose a fund is to identify which sectoral or thematic fund to invest
in at the moment. But there can only be so many sectoral funds. Which is
where these vague thematic funds come in, generally based on any idea that
can give the marketing people a handle. In the past we’ve seen liberalisation
funds, globalisation funds, ‘young consumers’ funds, and many more. Now,
it seems to be the turn of Make in India.
In fact, a hyperactive government can generate many more
ideas than a moribund one can. We might see also some Swachh Bharat funds,
who knows even some GST funds. Investors should steer clear of these idea-of-the-month
investments. India’s manufacturing story has come at a difficult time
when not just the business and economics but many of the fundamental technological
underpinnings of how things are made play a role in it. To understand how
deep this change will be, just Google for the news story ‘NASA emails
wrench to International Space Station’!
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