There's a strong need for a self-conscious and aggressive minimalism in investment planning. Choose, two or three general purpose mutual funds with a good record and stick to them
11-Jun-2007 •Dhirendra Kumar
'Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away.' This idea behind this quote, originally attributed to French writer Antoine de Saint-Exupery, appears in a surprising diverse range of activities. The great American writer Ernest Hemingway was said to have crossed out parts of his writings till he arrived upon the smallest size that still said what he wanted to say. Many architects and graphic designers have employed this minimalist approach to great success-as have web-based businesses like Google.
What, you may ask, is the connection between minimalism and investments? A very close connection, I think. When I look at the market for investment products today, and see the kind of investment portfolios that people are collecting, I think there's a strong need for a self-conscious and aggressive minimalism in investment planning. What is happening now is the very opposite. The loudest messages about investments and savings that reach people are advertising about the launch of new mutual funds. These collective impact of these messages is to fabricate the idea that your investment needs are best met by portioning out little bits of your savings into a large number exotic and specialised mutual funds.
Here's a sampling of just the last few weeks. There are funds specialising in different sizes of companies-large, medium, small and micro (although none for what a fast food outlet would call a 'regular' size). There's a fund for companies that are facing 'unique' situations, which are apparently different from 'special' situations. There's a fund for investing in companies that will benefit from increased infrastructure spending and one for only companies that will benefit from increased consumer spending. There's a fund for investing in companies that are growing fast and another one only for companies that will grow fast in the long-term. There are even some funds that specialise in companies of all sizes although that's clearly a meaning of the word 'specialise' that's not there in any dictionary that I have seen.
If you add up the collective impact of this marketing message, you end up with an investor who is desperately trying to figure out a portfolio that will perhaps consist of three to five per cent each of maybe thirty funds. That's not an exaggeration. I've seen people whose portfolios contain more than a hundred funds, most of them less than a per cent each. Basically, people end up buying into each new fund's pitch from a salesman and invest a few thousand rupees every time a new fund comes out. The very idea of a mutual fund makes sense only so that the individual investor does not have to figure out which companies to invest in. If the problem of choosing companies is to be replaced by that of figuring out whether a given bit of money should go into this exotic idea or that one, then nothing much has been achieved. This kind of investing doesn't help anyone except the salesman and the fund company. A portfolio of even twenty funds, each based on a different idea, is impossible to track and organise and in any case has no connection with what is needed to meet your own investment goals. But there's isn't any grand solution to this problem. This is the way it's going to be. Fund companies are going to keep up a stream of new funds which are differentiated from earlier ones by ever more meaningless features. And perhaps a majority of investors are going to fall for each new story. If you would like to be part of the minority of sensible investors, then you should stick to a minimalist approach. Choose, two, perhaps three general purpose mutual funds with a good long track record and stick to them, leaving all other thinking to the fund's investment manager. I've never come across any savings need that needed much more than that.
Trust me, you don't want to spend your time worrying about whether funds which invest in amazing companies are a better investment than those that invest only in unusual companies or the other way around.