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Lure of the 'Latesht'

The idea that 'latesht' stuff is good and un-latesht is ungood is deeply embedded in all our psyches. Unfortunately, this has also spread its tentacles deep into the selection of investment avenues, where it makes even less sense than it does for music and wine

The word 'latest' holds a special position in the psyche of the Indian shopper. 'Latest', sometimes pronounced 'latesht', is the quintessential Inglish word. It's known to and used by even streetside vendors in small towns who hardly know any other English. The idea that 'latesht' stuff is good and un-latesht is ungood is deeply embedded in all our psyches. So much so that music, movies and--as I recently discovered--even wine can be sold in our country by the virtue of being latest.

Unfortunately, this Lure of the Latest has also spread its tentacles deep into the selection of investment avenues, where it makes even less sense than it does for music and wine. For around two years now, investors in this country have been resolutely investing only in the latest funds. It is a basic rule of any kind of investing that the track record of an investment is the most important thing in evaluating it. When you invest in a mutual fund, you have nothing to go by than how well it did in the past. For funds without a past, you have nothing to go by.

Anyhow, there's little point in all this talk of a sensible approach to investing. As investors, we have clearly decided that the newer the better. The kind of money that new funds are collecting lately is simply flabbergasting. Three years ago, new equity funds used to collect maybe 100 or 200 crore rupees. A year ago, the most successful funds started picking up as much as a couple of thousand crores and that seemed like a stunning amount. Earlier this month, a Reliance fund collected close to Rs 6,000 crore. Being surprised by a fund collecting a thousand crores now seems as quaint and ancient as the Sensex being at 5,000 points.

So given that we've all invested in these shiny new 'latest' funds, what should we now do with our investments? If the markets hiccup now, or after these funds have gained a little bit, what should investors do? Should they get out and run or should they stay for the long-term. Of course, the sensible approach will be to stay in for the long-term but if those who haven't been sensible on the way in hardly have any obligation to be sensible on the way out.

My suspicion is that a good majority of investors who have invested in these funds see them as proxies for speculation. Very large funds are unlikely to give returns that are significantly better than the major indices since they will be unable to build portfolios that are distinct enough from the indices. These people will rush to redeem their money if the going get tough and the markets turn downwards for a sustained period. The best thing that could happen is that the markets stay strong for a long period and they do make money. If anyone has invested in these huge new funds so that they get better returns than the markets, they'll need lots of luck to achieve that goal. For better or for worse, your returns are going to be whatever the indices' are.