The Hindu Business Line : Investors are too concerned with current flavour

Mutual fund investors, in their attempt to outsmart the market, either flit in and out of asset classes or, if their surpluses are hefty enough, buy just about everything, notes Mr Prasunjit Mukherjee, CEO of distribution firm Plexus Management Services. "Either way, it is sub-optimal", he adds.

Excerpts:

Not all sorts of equity funds get sold. Index funds, for instance, have microscopic AUMs. Isn't the situation quite one-sided?

It is the intermediaries who link mutual funds to investors. So an intermediary would sell the `thing' that fetches him the most. Index funds have a significantly lower cost structure than actively managed funds. So the pass on to intermediaries is also quite low. Thus the skew towards active management. Also, active funds have shown more growth over the years than index funds. This prompts investors to buy actively managed products.

However, as markets mature, generation of alpha (the degree of over-performance over the chosen index) diminishes. This has started happening and the trend would intensify.

So it is hoped that collective maturity - I am referring to investors, distributors and fund managers - would ensure that the skew would recede.

Large-cap funds have lately staged a comeback even as some mid-cap funds are yet to make up their losses. How should investors react in such a situation?

Investors should believe in quality. The capitalisation story is for fund houses to sell their wares. Every fund house attempts to ensure a well-rounded bouquet of offerings. But an investor should ensure that his asset allocation is in sync with requirements. It is important to grasp a key dictum: money for the equity markets is finite but the number of stocks is large.

So, at every point, there would be more interest in some stocks or select categories only. But with right selection and consistent allocation, some parts of your portfolio would perform better than the rest.

Mid-cap stocks had over-performed large-caps in the last two years but not so over the last few months.

But if you reallocate your portfolio every time by following the market, your returns would be sub-optimal to the broad market.

"Investors, in their bid to time their entry/exit and with their focus on only a few asset classes, are not getting diversified enough." Do you agree?

Yes, most investors are too concerned with the current flavour. Only a few make asset allocation strategies. In their bid to outwit the market, they either shift from asset classes or, if the portfolios are large enough, they buy everything. Either way, it is sub-optimal. In the first case, costs run up. So do taxes. In the second, average exposure to any asset class is small. Even if there is a substantial growth in one, it translates to very little in the total portfolio. So the issue is not only the frequency of the movements but also the absence of correctly determining one's investment goals.

Would capital-protected funds truly appeal to investors? How should investors see these?

Capital-protected funds are a new genre within the industry. Just a few have been mooted so far. I believe that it is a good way for expanding the market.

But it is important to understand that we do not have the traditional capital protected funds as the advanced markets have where the principal in insured. I do hope that investors are not in for some rude shocks.

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