mutual funds: Prashant Jain on why most retail investors can’t outperform MFs


NEW DELHI: Short-term returns of India’s equity-linked mutual funds are anything but positive currently.

Smallcap, midcap, ELSS and multicap fund categories have fallen 3-10 per cent in last one year and by a similar percentage in last three months, underperforming the Sensex, which has declined 5 per cent in last three months after climbing 7 per cent in last one year.

This has made some investors wonder whether one should dump their fund managers and make their own portfolio of diverse stocks.

Industry veteran Prashant Jain of HDFC Mutual Fund says these short-term hiccups should not deviate investors from their long-term goals.

“Mutual funds allow better handling of non-systematic risks and quality of diversification for retail investors,” Jain said.

Buffett or Bogle?


There are two contrasting views: One by John C Bogle, founder of the Vanguard Group, who believes in index funds, which are a passive form of investing; while Warren Buffett advises value discovery through active investment.

“I think both are correct. There is no conflict between what they say,” said Prashant Jain, ED and CIO at HDFC MF.

Bogle, Jain says, said if you look at active managers as a group in the US, where mutual funds own almost half of the market, it is a simple mathematical conclusion that they cannot outperform the other half of the market.

Buffett, on the other said, said stocks are driven by emotions in the short run. He said human beings are very emotional and the market is always creating excesses. “When you create an excess, you also create an opportunity,” Jain noted.

“If you think long term, if you are disciplined, if you understand elementary valuations, you can outperform the market. I do not think the emotional aspect of the market or human beings is going away. Not everyone can outperform the market. But someone, who is able to rise slightly above emotions and think logically, the market does throw up opportunities for them every now and then,” Jain said.

In India, mutual funds own just about 5 per cent of the market. It is far away from the US situation, where funds own 10 times our market, Jain said.

“The average active manager in India has a far better chance of outperforming the benchmarks than what their counterparts in the US,” Jain said.

In equities, one faces two types of risks. One is systemic risks, when the whole market goes up or down, which is a risk that can be reduced only by holding stocks for longer period. You cannot do anything about it, Jain said.

Also, there is a non-systemic risk, which every business faces at different levels. If oil prices go up, if interest rates go up, if currency depreciates – these are good for some businesses and not good for some others, he pointed out.

20 stocks in a portfolio isn’t diversification

“Mutual funds maintain the discipline of diversification, which is what retail investors fail to do. Having 20 names in the portfolio is not diversification. In 1999, people used to have 10 IT or TMT names, and they thought it was diversification. There are high correlations between various businesses at a point of time. If you bought a few sectors which were highly correlated, you are not effectively diversified,” Jain told ETNow.

There are individual investors, who are outstanding, but a bulk of investors tend to get carried away with the market, Jain said noting that in 1999 almost everyone was overweight IT and very few were focussing on other sectors.

“Around 2008, you could see the same preference for real estate or capital goods. No one was talking about FMCG or pharma in 2008. A similar focus has been seen in last few years on certain sectors or certain market-caps. What does this tell us? It tells us that people are simply extrapolating the last few years’ performance over the next few years. What has gone up sharply is likely to be more expensive,” he said.



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