Indian Mutual Funds and The Art of Ripping Off Investors
Mutual funds are supposed to act in the best interest of their investors. That mutual funds fail in their fiduciary duty is a well-established fact for more than 50 years.
Indian mutual funds are no different from their global peers. As well-telegraphed in SPIVA reports, more than 80 per cent of equity funds routinely underperform the index returns.
Compared to their global peers, the expense ratios of equity funds in India are very high. One reason for this divergence is that the size of Indian mutual fund industry is smaller versus their US and European peers.
Regular plans of Indian equity mutual funds have higher expense ratios as compared to direct plans. Regular plans have the benefit of financial advice. Investors who have financial knowledge invest in direct plans of mutual funds, avoiding the advisors and higher fees.
-------------------
Read more:
Savers' Curse and Low Savings Rate and Liquid Fund Returns
India Second Quarter GDP
Global bond yields and Interest rates
Do Paint Stocks and Crude Oil Tango?
BSE Broad and Sectoral Indices Returns
Real Estate Stocks and REITs
When Will Federal Reserve Raise Interest Rates?
Weblinks and Investing
-------------------
It is almost nine years since the introduction of direct plans in India. Investors have access to direct plans since the beginning of January 2013. Due to compounding effect, investors who invest in regular plans lose heavily in comparison to direct plan investors.
Imagine
the fate of regular plan investors who invest for periods of 20 or 25
years--their losses would be humongous due to the power of compounding!
This fact was brought out by me in a tweet thread a few years ago. Still, there is a lot of ignorance among gullible investors about the loss they suffer due to high expense ratios, especially in regular plans.
I've taken a fresh look at the net asset values (NAV) of 15 randomly chosen equity mutual funds and compared how much regular plan investors have lost in the past nine years or so.
Table 1: Nine-year data showing the returns of direct and regular plans since Jan2013 (please click on the image for a better view):
As can be seen clearly from the above table, the loss suffered by regular plan investors is between 6.7 per cent and 14.6 per cent in the past nine years, in these 15 equity mutual fund plans.
For example, the NAV of Invesco India Mid-cap fund as on 01Jan2013 was Rs 17.70, which was the same for direct and regular plans. As on 06Dec2021, the NAV of the fund's direct plan grew to Rs 99.35, whereas the NAV of regular plan grew to just Rs 86.67--which means, the direct plan delivered a superior return of 460 per cent vs regular plan's return of just 390 per cent.
Put differently, as a regular plan investor you would've lost about 14 per cent of the money generated by a direct plan investor. Suppose, you had on 01Jan2013 invested Rs 500,000 in the regular plan of Invesco India Mid-cap fund at the the NAV of Rs 17.65. As on 06Dec2021, your initial investment would have grown to Rs 24,55,200.
On the other hand, your friend invested Rs 500,000 in the same fund and on the same date but in the direct plan, her money would have grown to Rs 28,04,900 as on 06Dec2021. Her direct plan investment would have generated excess return of Rs 349,700 or 14 per cent over and above your maturity amount.
In the case of SBI Small cap, JM Tax gain and Canara Robeco Consumer Trends funds, the direct plan investors would have generated nearly 10 per cent more than the return generated by regular plan investors (please check the above table).
As a regular investor, you're losing on two fronts--on the one hand, active fund managers have been failing to generate superior returns (versus passive funds, such as, index funds and exchange-traded funds or ETFs) and on the other hand, you're getting ripped off due to higher expense ratios.
It's better to learn more about the basics of mutual funds and build up your competence and beware of the shenanigans of the asset mustering companies (aka AMCs), who have been pulling wool over gullible investors for long.
- - -
References:
My tweet thread 22Jan2018 dated on Direct vs Regular plans
Point-2-Point (P2P) returns of mutual funds - Value Research
advisorkhoj historical NAV of mutual funds
SPIVA reports - S&P Indices Versus Active reports
No comments:
Post a Comment