VR Logo

The Pickle & Chutney Funds

Speciality funds are like pickles & chutneys, they are tasty but won’t fulfill your appetite

Let’s say you go to a restaurant and order a thali meal. The thali arrives, a shiny steel dish, lined with shiny little containers. However, there’s no real food. There are two types of pickles, two types of sweets. Three types of chutneys and some salt and pepper. You ask the waiter if there’s anything else, he says yes and gets even more chutneys, pickles and sweets. It turns out that this is all that the restaurant serves. They don’t have any actual food. So you storm out and find yourself another restaurant in the neighbourhood. However, here too it’s the same story. The thali is full of pickles, sweets and the like—no food! You start quizzing the waiter closely and turns out that there is real food but the restaurant is reluctant to serve it. Condiments are easier to make and have higher margins. They’re also easier to make lots of variations without much effort. They can also be made to look attractive very easily.

Of course, I’m not really writing about food here. There probably aren’t any such restaurants. Unfortunately, the Indian mutual fund industry has come to resemble such restaurants. Let me explain what I mean. In the world of fund investments there are broadly two kinds of products, which I classify as core and speciality. Core funds are those whose mandate is to stay diversified across different kinds of industries. They are funds that generally invest most of their money in larger, more predictable business that are well-understood. Speciality funds are those that focus on a specific theme or sector. An infrastructure fund or a infotech fund is a speciality fund. Speciality funds generally suffer from great extremes of performance. When the underlying sector is doing well, they look very attractive, when the sector stops doing well, they tend to become big loss-makers.

Fund marketing people find speciality funds easy to sell. It’s easy to create a marketing message that says, “Buy X sector fund, that sector is doing so well!” than to say, “Buy this general fund, it will invest in a balance of sectors that make sense at any point in time.” Moreover, investors seem firmly wedded to the idea of buying only new funds. As a result, there are no takers for older funds with a good track record. However, since most fund houses already have a number of core funds, newer funds tend to be speciality funds.

There’s also the perennial problem of chasing ideas that have done well in the immediate past. Most of us firmly believe that whatever has done well in the past will continue to do well in the future. However, markets operate in cycles. This leads to a situation where fund companies keep launching products that are designed to do well in the past. During the last bull run in 2000, we saw this happen with technology funds. In the recent rimes, we’ve seen this with infrastructure funds, gold, commodities and real estate. Earlier, investors who dabbled in the stock markets used to be accused to be chasing past performance. Now, funds help them do it.

Overall, the situation is has become so tilted towards non-core funds that of the sixty-odd equity funds that have been launched in the last one year, no more than 20 can be described as core funds. The rest have some kind of marketing-oriented twist to them. In effect, they are fit only to serve as condiments in your investment portfolio, not the real food.

As a mutual fund investor, you are being served only pickles and chutneys right now. To preserve your financial health, most of your diet you must be rice, roti, dal and vegetables. Sure, pickles and chutneys are tasty, but only in small quantities. You can’t make an entire meal out of them.