Good thoughts about investing

Investments should be chosen on tangible, measurable parameters that can be quantified. Suppose there is one mutual fund which says that it will invest only in companies that have had profit growth for five years. There's another one which says that it will invest only in companies that have had profit growth for five years and whose board members think good thoughts every morning about how to make the world a better place. Which one would you invest in? To anyone who knows how the world works, the second one sounds like a joke, yet it's pretty much what ESG is.

In India, there will be lots of ESG mutual funds in the months and years to come, and this is something that investors need to be wary of. I'm not being cynical but merely a realist here. There is no doubt that businesses and individuals must conduct themselves in a manner that follows the ultimate goals of protecting the environment and general societal goals. However, that's the good thoughts theory. What we will end up with is a new self-appointed and self-promoting system that will stake a claim to being able to evaluate businesses on whether they are following these lofty goals or not.

So far, SEBI has allowed each AMC to have one ESG fund, but now there seems to be a proposal to expand that by five more - Exclusion, Integration, Best-in-class / positive, Impact, and Sustainable. Basically, earlier, an investor could invest based on only one type of good thought; now, there are five distinct types of good thoughts that you can choose.

Anyhow, what's worse, another aspect of the fund management industry is beginning to adopt ESG measures as an investment criterion. Isn't that a good thing, you might ask? While it sounds like a good thing to a hardened observer like me, it is just another way to make your fund performance hard to measure against any benchmark or a peer set. That, and to use as a sales tool. Over the past decades, all thematic funds have been launched for these two purposes alone. When a theme is hot in the markets, it can be used to hype new funds, like IT and infra, at different points in time. The other is to have an exotic theme that no one else has, which makes it non-comparable.

None of this should matter to equity fund investors if they invest in funds the way it should be done. That means ignoring ESG or any other thematic or sectoral story and choosing a diversified, general-purpose equity fund with a good track record. Such funds supersets all the stories that there are. There could be times when this or that theme or sector makes somewhat more sense than others. However, that doesn't mean that you, the investor, have to identify those times and then identify the right fund to invest in. All it means is that if most (or all) of your money is invested in a general-purpose fund with a good track record, then the fund manager will appropriately emphasise whichever kinds of stocks when it's the right time to do so. However, unlike a specialised fund, the manager won't go overboard with that theme and will stay within an overall diversification framework.

That's what mutual fund investing is all about. The ever-newer parade of new fund types serves the fund industry's needs but not investors'. As far as investors are concerned, five fund types are enough: one conservative and
one adventurous equity fund, one liquid fund, one income fund and one equity-income hybrid. All the actual needs of an investor's life can be taken care of by these alone. These can ensure that our savings needs are met predictably and understandably without being beholden to someone else's needs.

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