Is the mutual fund industry a big scam?

Aug 16, 2011

In this issue:
» Rating agencies to be managed by public funds?
» US dollar losing its sheen
» Global food prices near 3 year highs
» Government to ramp up infrastructure
» ...and more!

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One may not have heard much of Yale's noted investment guru David Swensen, but he had quite a dramatic statement to make recently. Mr Swensen shred the reputation of the US mutual industry by saying that the industry is a huge scam that cost investors billions of dollars a year. According to him, the performance data clearly showed that the vast majority of funds lag low-cost index funds every year. Moreover, investors relied a lot on rankings made by other agencies when choosing funds, which is tricky given that the rankings are highly subjective.

One of the things that matter according to Swensen is costs. Indeed, the lower the cost of a fund, the more likely it is to do well in the future (relative to other funds). Further, he opines, that index funds tend to do better than 'actively managed funds' simply because in the case of the latter most managers aren't good enough to offset the cost of their salaries and their employer's profits. This results in relatively poor returns.

Although Mr Swensen is referring to the US mutual fund industry here, the criteria for choosing mutual funds applies to India as well. For instance, Indian investors have to give importance to the costs involved when choosing funds since it has an important bearing on the returns ultimately generated. The track record of the fund is important in that it gives an idea of how consistent the fund has been in outperforming the indices. That said, depending solely on the past record without giving due consideration to the process involved behind stock selection does not bode well either. What essentially matters is the kind of stocks that the mutual fund chooses to invest in. If the portfolio consists of stocks that have sound fundamentals then there is no reason why the fund should not outperform the broader indices from a long term perspective.

Whether Mr Swensen's comment on the mutual industry being a scamster is applicable to the Indian mutual funds is highly debatable. What is important to note at the end of the day is that investors will have to be more proactive in ensuring that their money is well managed by mutual funds be it in India or in any part of the world.

Do you think that mutual funds are doing a good job managing your money? Share with us or post your comments on our Facebook page.

 Chart of the day
Travel for citizens of certain nations is a piece of cake, while not so for others. Today's chart of the day shows that India does not enjoy the benefit of visiting many countries without a visa at least as per data for August 2011. That distinction goes to Sweden, whose citizens can visit around 78% of countries without visa and other paperwork. As far as comparison with BRIC countries goes, India lags Brazil and Russia quite significantly but manages to pip China.

Data Source: The Economist

There is a grave problem facing the world. And it has to do with the credit ratings agencies. Their consistent failures over the years in identifying credit excesses have indeed baffled the experts. And in cases where they have indeed done so, they have been hopelessly behind the curve. Take the most recent of downgrade of the US debt by S&Ps, one of the biggest credit rating agencies in the world. Interestingly, the downgrade amounted to too little, too late as everybody knows that the US has been knee deep in debt for quite some time now. Thus, the ineffectiveness of the ratings agencies stood exposed one more time.

Ironically though, inputs from ratings agencies are still relied upon by financial market intermediaries. And it looks unlikely that dependence on them will go away any time soon. In such a scenario, how should one ensure that ratings agencies perform their roles satisfactorily? If the former RBI Governor, Mr Y V Reddy, is to be believed, ratings agencies should be managed and owned by public funds. He further observed that there is an attempt towards this in China where already, a ratings agency is owned by the state. We believe that while there is some merit in Dr Reddy's idea, who is to say that conflict of interests would be entirely eliminated? Thus, doing independent research and forming one's own opinion looks like the best approach as of now.

Just around this time 40 years ago, gold was taken off the dollar's back. This was after the US government headed by Richard Nixon defaulted on its gold convertibility obligation. The shutting down of the gold window marked a radical shift in the global monetary order. It made clear that the US could slyly shirk away from its commitments for the sake of its own domestic agenda. Like an overriding bully, the US has always been able to get away with its mischief. After all, the US is the biggest economy and correspondingly, the US dollar has been the global reserve currency.

Despite the mounting debt and the recent downgrade by credit ratings agency Standard & Poor's, the US dollar still remains the most important currency. It plays such an important role in determining international exchanges rates and liquidity that the world cannot do without it.

From a long term perspective though, US dollar is losing its sheen as a reserve currency Steadily, central banks are diversifying into other currencies. However, given the absence of any major currency that could take over the reins from the US dollar, the decline of greenback as a reserve currency will be a definite but gradual process.

Most people either become extremely happy, or start salivating at the thought of food. Not World Bank President Robert Zoellick however. He has an extremely gloomy outlook on the state of the world's food situation."Persistently high food prices and low food stocks indicate that we're still in the danger zone, with the most vulnerable people the least able to cope," he states.

Global food prices were near their 3-year highs in July. The price of maize was up 84% YoY in July and sugar increased 62%. Global food stocks were at an alarming low, putting pressure on the world's poorer population. The outlook for 2011-12 also doesn't bring comfort to our ears either. The global output of grains is projected to be 3% higher than the estimated output for 2010-11. However, this is contingent on normal weather conditions. If the weather takes a turn for the worse, especially in food exporting countries, prices can once again see double digit increases. Thus, inflation is a bug bear which most countries have to still continue dealing with.

It is a well known fact that India's infrastructure is abysmally poor. Time and again we hear that various steps are being taken in this regard. Be it setting up of the debt fund or relaxation of financing norms. And here we have another recommendation to add to that everlasting list. On Monday, Prime Minister, Manmohan Singh, said that the government will increase investments in physical infrastructure during the 12th five year plan. In fact, the planning commission plans to double the investments during the 12th plan. We believe that this is a step in the right direction considering funding constraints were impacting the overall growth of the sector as well as the economy. However, we are not too enthused by this number game. There have been many optimistic announcements like these in the past. However, India has failed miserably on the execution front. Take the case of the Indian power sector for instance. Despite scaling down the initial capacity addition targets, the government is finding difficulty in meeting them. Bureaucratic impediments and policy bottlenecks have impacted the execution cycle. So, unless steps are taken to improve the overall administrative process, any announcements made would just be another number to the long standing recommendation list!

In the meanwhile, the Indian stock market lost some of the morning session gains but continue to trade in the green. At the time of writing, the benchmark BSE Sensex was trading up 77 points (0.5%). Most of the sectoral indices are trading in the green led by the software and technology space. Bharti Airtel and Bharat Heavy Electricals Ltd (BHEL) were seen gaining the most amongst blue chips. Major Asian indices performed mixed today with stock market from South Korea leading the pack of gainers. However, Europe has opened on a weak note.

 Today's investing mantra
"Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor." - Warren Buffett

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11 Responses to "Is the mutual fund industry a big scam?"


Aug 18, 2011

I dont agree that indian MF is a scam as pointed for US MF industry. Actively managed funds have done much better than just the passive or index funds. ofcourse, there are good fund house & bad ones too. But while selecting, we need to be careful.

Like (2)

Pinaki Roy

Aug 17, 2011

I completely agree to the fact that most of the mutual funds do not deliver. We tend to forget that the investor has to bear the overhead of the fund. Wherever you come across an advosor wearing a tie, be on your guard. I have personal experience with Citibank, Tata AIG and of course ICICI & Reliance take the cake as the smoothest and biggest swindlers. Retail investors should not, rather must not fall for these glib talking so called fund managers. Rest assured almost all of them cannot read a balance sheet, let alone analyze it for your benefit. He/she is, rather naturally, interested in their target and commission. You can't fault them on that count. I would have done the same. Tell me how many fund managers, including the greats like Udayan Mukherjee insisted that you sell out in Dec'08 or in Oct'10? None. Why should they? Lonely voices like Simi Bhowmick, Shankar Sharma get drowned in the silk smooth con-talk of the wolf pack circling for your hard earned money.Richard Nixon, in his defense to Watergate reasoned that most of the people hate to take their own decision, they would rather out-source it to politicians. So, retail investor friend,-- take your own decision,at least you will have the consolation that it's your decision. You are not held a sucker by a mutual fund manager of dubious integrity.

Like (2)

Ganapathy Sastri

Aug 17, 2011

Indian MFs charge relatively MUCH HIGHER fees compared with most US funds - Average of over 2% vs 1.1% for US funds and this despite paying lower salaries.

Also MFs keep starting a plethora of funds with fancy names. This in a world where you can only LEND or BLEND. The large number of confusing MFs is not for the benefit of investors but the fund houses.

Like (3)


Aug 17, 2011

resurch, really???

Like (2)


Aug 17, 2011

I have immensely benefited out of Indian Mutual Funds. They are doing a great job of managing money and generating good returns. Sticking on to few good funds makes lots of difference. Hat's off to all these fund houses.

Like (2)

Manish Sehgal

Aug 17, 2011

Article on mutual funds is not new. You want to benefit from investing in mutual funds do it continuoustly and do it for a longer period of time. Stick to the known AUCs and funds which has been performing consistently. It also depends upon an individuals objective as to why and how much he needs.

Like (2)


Aug 17, 2011

Nice resurch

Like (2)


Aug 16, 2011

Mutual funds are saprophytes sucks the blood of investors, their should be some kind control over it.any way poor middle class is here to getting cheated swindle their earning up to their bone. Nothing is going to happen other than attractive empty advertisement and continues cheating.

Like (2)

Ganesh K

Aug 16, 2011

Not only US mutual funds are scam,same is the case with Indian MF too. I have learned it hard ways. MF are only for giving fat salaries and perks to the fund managers and other staff,and agents irrespective of whether the investor gets return or not. One should do his own study and invest in good A group companies. at least one will get dividend however minuscule it may.

Like (2)

anupam garg

Aug 16, 2011

don't know what xactly happened 40 years ago, but the blame for dollar's position also goes to rest of the world along with US...domestic commitments take priority towards global ones, US did what it had to do

As the world watched in spectator mode with noone even tryin 2 step fwd towards truth, the inevitable was supposed to happen...the confusion prevalent now is a ramification of world's default of shying away 4m truth

Like (2)
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