Are you better off without your fund manager?

Oct 21, 2011

In this issue:
» India's exports to Bahamas too good to be true...
» If inflation goes down, diesel prices will go up
» Why are auto companies constantly engulfed with labour unrest?
» Govt infra debt funds just for Indian investors this fiscal
» ...and more!
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Often when we hear the term 'fund manager', an image of a stock market wizard emerges into our minds. We feel that the guy must be a maverick stock-picker with great knowledge of fundamentals and value. However, more often than not it is difficult to tell whether the performance of a mutual fund was attributable to market performance or to the genius of the fund manager.

But then they are all humans. Managing a huge corpus, and that too money that belongs to someone else can put them in a tight situation. They do not have the luxury of making as many mistakes as retail investors who invest their own money. There is the added pressure of comparison with peers which Warren Buffett rightly calls the 'institutional imperative'. Moreover, frequent monitoring of performance against benchmark indices makes it difficult for them to stick their neck out and place contrarian long term bets.

On account of all these factors, the performance of a majority of funds is often in line with the overall market performance. Many fund managers find it convenient to park funds in the heavyweights of benchmark indices. And there you have the mutual fund performance almost in sync with the index performance. In other terms, the returns of most mutual funds are often market returns and not the result of a stock-picking strategy.

If the performance of majority of the funds mimics the market, then investors would do well by asking one important question. Is there enough merit in paying someone else to invest your money in popular 'blue-chip' stocks that everyone knows about?

Do you think retail investors are better off without fund managers? Share your comments with us or post your views on our Facebook page.

 Chart of the day
One of the major challenges that India is confronting is that of financial inclusion. As per Federation of Indian Chambers of Commerce and Industry (FICCI), 'financial inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular, at an affordable cost in a fair and transparent manner by regulated mainstream institutional players.' Without achieving that, India's economic growth will not only be fragmented but also unsustainable in the long run. Today's chart of the day shows that banks have opened banking outlets in 100,183 villages by March 2011. This is almost double of the number of villages covered in the previous year. The number is expected to grow rapidly over the next two years. Whether India achieves financial inclusion in the real sense of the term is something we need to wait and watch.

Data source: Reserve Bank of India

What could India possibly be exporting to the Bahamas? In just two years, exports to this island nation increased 1,000-fold to a whopping US$ 2.2 bn in 2010-11. This number doesn't tally with the Bahamas' official global import records, wherein the imports from India in 2010 were just US$ 200 mn. Clearly there is something fishy going on!

The Bahamas are not only known for their scenic beauty, but are also a major tax haven. Thus, there is a strong suspicion that these exports are just one big scam. The islands recently signed a tax information exchange agreement with India. Some of the others who signed the same include Bermuda, Isle of Man, British Virgin Islands and Cayman Islands. If there is a suspicion of a tax fraud in any of these countries, they are immediately required to supply information to India. It is little wonder then that money is quickly exiting these nations and flying back home

To all the hopefuls that prices may come down some time in the future, here's a bit of a shock. If inflation rates do come down, prices may still remain high. Why? Because the government would increase the prices of diesel! The reason for this is the huge amount of losses that the oil marketing companies (OMCs) are suffering due to higher crude prices. The diesel prices are currently regulated by the government so as to offer a subsidy on the same. However, with crude prices soaring upwards, the OMCs have suffered an under-recovery to the tune of Rs 12,157.1 bn. Therefore, if and when inflation rates do come, the government would look at increasing the prices of diesel to help offset some of the losses for the OMCs. In a nutshell, the common man would suffer for the government's mistake of offering ridiculously high subsidies on the fuel. Therefore the subsidy, which was offered to ease the burden of the common man, would be borne by the common man in the form of higher prices.

The Indian auto industry has not had a particularly good year so far. With interest rates and fuel prices rising, demand has dampened especially for passenger vehicles. And the ongoing labour unrest at Maruti's plant in Manesar has only made matters worse. That said, the labour problems that Maruti is facing is not something new. The auto industry especially has witnessed these kinds of strikes in the past. So the question to be asked is why such labour problems have repeatedly occurred in the auto space.

The answer lies in the lure of contract labour and the difference in pay and working conditions for these workers as compared to permanent ones. First of all, the ratio of permanent to temporary employees in the auto industry is as high as 60:40. Secondly, though the wage difference between permanent and contract workers is Rs 10,000 or sometimes a little higher, the delivery expectations from the two are almost the same. Thirdly, apart from the salary, a contract worker is not entitled to other benefits like a bus service, paid leave, medical benefits etc. There is also a difference in the uniform that the two wear. The auto sector is attracted to contractual labour because it wants to curtail production costs and also have the option of laying off workers during a slump. It has contended that all such strikes typically have political interests. Whatever be the case, the industry will have to give a long and hard thought to these problems and come out with a more meaningful and long term solution if such issues are to be avoided in the future.

Despite its lax execution of infrastructure projects during the 11th plan period, the government seems to be well inclined to raise US$ 1 trillion for infrastructure investments during the 12th plan period (2012-17). For this it has also outlined plans for the launch of its first infrastructure debt fund (IDF) with a corpus of US$ 3 bn. This is part of the government's plan to bring in long-term debt into the sector. But what is interesting is that the find will be restricted to only Indian investors for the time being.

Infrastructure funding in India that seemed like the apple of every investor's eye until a year back seems to have lost its glamour. And here we are not just referring to the infrastructure linked thematic mutual fund schemes. Even foreign direct investment (FDI) into critical infrastructure capacity building has almost dried up. Hence, funding of India's ambitious infrastructure plans seems to be falling way short of target. While a lot relied on private sector participation, policy inaction and a gloomy return outlook have kept interested players away from the sector. Further, while bank lending to these projects was expected to fill in the gap, NPA (non-performing assets) risks have dried up that pipeline too. Also, the RBI believes that concentration to this sector could lead to a huge balance sheet mismatch for banks. Hence, the government is left with little option but to hope for participation of individual retail investors for the buildup of infrastructure corpus.

In the meanwhile, the Indian stock markets were very indecisive through today's trade. They opened in the red, bounced back into the green and were again trading weak. At the time of writing, the benchmark BSE Sensex was down by 35 points (0.2%). Most of the sectoral indices were in the red led by realty and IT stocks. Asian stock markets were trading mixed while Europe opened on a positive note.

 Today's investing mantra
"Never invest in any idea you can't illustrate with a crayon." - Peter Lynch

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14 Responses to "Are you better off without your fund manager?"

Pulin C Barthakur

Oct 27, 2011

actually not necessarily. it is easier said than done; managing your demat a/c, participating in an ongoing stock auction, updating one with the latest and the immediate future for the fundamentals of even the blue-chips requires considerable skill, time, attention and experience on the part of the retail investors which an average retail investor may not be capable of managing.



Oct 23, 2011

If fund managers all follow the Herd menatlity, maybe better to invest in some Index funds--at least the expense ratio is low. regds


koshy sunny

Oct 23, 2011

In India, the fund managers can still find alpha and beat the sensex unlike the west where majority of the fund managers underperform the index over a long period of time.

But I feel as the India markets grows and matures the fund managers will find it increasingly difficult to beat the index over a long period of time.



Oct 22, 2011

For those who are good at buying stocks but get paralysis when it comes to selling,I think a fund manager is a boon.It is also a fact that the fund manager will have research and data readily available to help him which an ordinary investor would have to spend a lot of tima to ge t to if at all.


Kedar Raykar

Oct 21, 2011

If we take a really long term view and want to build wealth , its very unlikely that a single fund manager or the same fund will outperform the market consistently. In this scenario, the best bet is to invest regularly in a low cost index fund without chasing hot/best funds , which is anyway going to be futile. However, this simple approach is unlikely to be suggested by any expert/analyst for obvious reasons.


mary stanley john

Oct 21, 2011

Yes.I have learnt this the hard way.



Oct 21, 2011

Regarding your note on Bahamas. This is just a tip of the iceberg. It is easy to understand that Indian politicians are part of a major racket of hoarding money outside. Indian public are too naive in this matters, they just know that there is fraud and corruption, but dont know the extent of it and how it happens. People talk about Swiss accounts, but one should remember there are many offshore tax shelters and privacy laden banks, and centres like Dubai, that attract a lot of corrupt (black, or money to be laundered) money from corrupt politicians worldwide. Exports (and under-invoicing/over-invoicing) are just one of the many means to take money abroad. Another route is through the super market chains - one of which is run by an Indian front man in Dubai and other parts of the middle east. Of late, he has been opening several new malls in different countries in the middle east which is unbelievable for someone to achieve in such a short time span except with a lot of such unaccounted money. I am sure money from Bahamas, Switzerland and St Kitts is flowing in here as the government is delaying the Jan Lokpal and set on breaking the anti corruption drive in India. Wish we had an autonomous CBI with good teeth to catch the culprits - to catch their bluff.


sureshchandra B Shah

Oct 21, 2011

To some extent yes.


Paul Thomas

Oct 21, 2011

Very correctly said. Fund managers are not magicians. They park funds with blue chip companies and hope for market returns. Retail investors can do this as well. If done directly it gives the investor mote flexibility



Oct 21, 2011

Should not the mutual funds require to look into the fees paid to these so called fund managers? I think the fees paid to the fund managers must be linked to the rate at which the fund performs over and above the current market level.

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