Investments Turning Paradoxical

While mutual fund investors may be feeling buyer’s remorse about their investments, some of those who have gotten into the fund business recently are feeling even deeper buyers’ remorse. A few days back, a senior executive in the business said (referring to a fund company which has been acquired not too far back for about Rs 800 crore), that it wouldn’t have fetched even Rs 80 crore today. It was intended as a joke, but it didn’t sound like one. Retail equity investments are just 25 per cent of the assets managed by Indian mutual funds but probably account for 65 per cent of profits. Large fund companies like to boast of the huge assets they are managing but managing short-term debt assets is a business with razor-thin margins.

In the last few months, fresh investments into equity mutual funds have almost completely dried up. Even in the stock markets, long term equity investments of all sorts have dried up (if they were ever there). Whatever buying and selling one sees on the stock markets is by traders who are trying to ride short-term movements of stock prices.

One side effect has been that there are practically no new equity fund issues. In India, most equity fund investments come only into new funds. This is lamentable, but the reality is that only a small proportion of fund investors understand that newer funds don’t make any sense. As equity fund inflows dry up, this has led to a complete standstill in mutual fund investments.

Curiously, even in this dry-season fund companies’ emphasis is on features rather than basics. I guess that given the feature-centric style that fund companies’ marketers have learned by heart over the last few years, they see no possibility of attracting investors in any other way. Recently, a major fund company has launched a branded product which allows you to manage your money between their funds based on how the Sensex is doing. The idea is that you associate various types of transactions with various ‘trigger levels’ of the Sensex and when the triggers are hit then those transactions are carried out. These triggers would then switch your money from debt funds to equity funds or back.

I can’t even begin to count just in how many ways this concept violates the basic percepts on which mutual funds are based. I thought the main function of a fund is to manage the investors’ money. ‘Manage’ here means decide when and how and where to invest the money. However, this product is based on a different meaning of the word ‘manage’. Here, the investors figures out what to do and gives instructions and the fund companies just carries out the instructions. Not quite what fund management is supposed to be about. What strikes me as the worst aspect of such an investment product is that when the investor loses money, then in some sense its not the fund’s fault but the investor’s.

I’m sure there’s a market for such products. I guess there are people who love complex products and do-it-yourself kind of activities. It’s just questionable whether these have a place in mutual fund investing. As I’ve written earlier, the whole idea of investing in mutual funds is to get a decent return on one's investment without having to go through the complexity of investment management oneself. In fact, this offloading of decisions to a professional fund manager is the whole point of investing in a mutual fund.