Mutual funds in India had had a tough time through the last round of stock market gyrations. Most equity funds lost value in tune with the SENSEX and NIFTY when markets crashed in May '06. However, when the markets recovered later on and surpassed earlier highs, most of the funds struggled to keep pace. Why did this happen?
As most savvy equity investors noted, the market recovery was not broad-based and many leading stocks are still below their May highs. Mutual funds in general, failed to catch the upturn sectors and stocks and many were sitting with dead picks all through. Midcaps and Smallcaps are still to play catch up and many such stocks are still trading at significant discount to their 52 weeks' highs.
Another major reason was that many aggressive funds played cash and were sitting on cash piles when the markets recovered, catching them unawares. Fund houses which sticks to investment strategy of being in the market all the while did better on this count, the notable example being Franklin Templeton.
Still, in the last leg of the rally as seen in October and November '06, most funds have come up nicely and are quite close or even higher than index returns.
Lessons to be Learnt
1. Beating the indices has become quite a norm for Indian Mutual Funds. This may not hold good for all periods, especially as the market matures. Index funds may become a viable, low cost alternative to actively managed funds.
2. When market valuations are on the higher end of the spectrum, it pays to stay with bluechips. Mid and small caps may fall in line with or even heavier than the market and they usually take more time to come up.
3. As always those who keep their cool and stayed through market gyrations always benefit. As the living legend Warren Buffet once noted " stock markets are designed to transfer money from the active to the patient."
SO IS IT TIME TO SWITCH FROM MF TO DIRECT STOCK INVESTING ?
A big no, according to me. Indian markets are still dangerous waters for individual investors and most investors would have done worse than the best of funds in making money from the markets. The only difference is that we sometimes ignore losses and harp on the gains a few stock picks have made. The overall returns will be in most cases, below par. You can gladly pay the 2.25% entry load and annual charges around 2% for the expertise mutual funds offer. STAY INVESTED FOR THE LONG TERM TO REAP THE MAXIMUM GAINS.
Another major reason was that many aggressive funds played cash and were sitting on cash piles when the markets recovered, catching them unawares. Fund houses which sticks to investment strategy of being in the market all the while did better on this count, the notable example being Franklin Templeton.
Still, in the last leg of the rally as seen in October and November '06, most funds have come up nicely and are quite close or even higher than index returns.
Lessons to be Learnt
1. Beating the indices has become quite a norm for Indian Mutual Funds. This may not hold good for all periods, especially as the market matures. Index funds may become a viable, low cost alternative to actively managed funds.
2. When market valuations are on the higher end of the spectrum, it pays to stay with bluechips. Mid and small caps may fall in line with or even heavier than the market and they usually take more time to come up.
3. As always those who keep their cool and stayed through market gyrations always benefit. As the living legend Warren Buffet once noted " stock markets are designed to transfer money from the active to the patient."
SO IS IT TIME TO SWITCH FROM MF TO DIRECT STOCK INVESTING ?
A big no, according to me. Indian markets are still dangerous waters for individual investors and most investors would have done worse than the best of funds in making money from the markets. The only difference is that we sometimes ignore losses and harp on the gains a few stock picks have made. The overall returns will be in most cases, below par. You can gladly pay the 2.25% entry load and annual charges around 2% for the expertise mutual funds offer. STAY INVESTED FOR THE LONG TERM TO REAP THE MAXIMUM GAINS.
