|»5 Minute Wrap Up by Equitymaster|
On This Day - 30 JANUARY 2012
Are large cap mutual funds safer than the others?
In this issue:
Ideally it should. After all mutual funds are nothing but a collection of stocks in a particular category. So a large cap mutual fund is expected to do better than the other categories of funds simply because it holds large cap stocks. Unfortunately this theory does not always hold true.
A leading daily carried out a study on the performance of mutual funds in 2011. In a year that was marked by high volatility, the mid cap and small cap funds delivered negative returns of about -25%. However, during the same period, the BSE Mid Cap and BSE Small Cap indices were down by nearly 31% and 42% respectively. Therefore, the mutual funds focused on the same indices outperformed the benchmark indices. Only 14% of the funds underperformed the benchmark in this category.
Jump to the performance of the large cap funds. Nearly 33% of the funds underperformed the BSE-Sensex during the same period. As a result, it is obvious that just holding on to the universe of large caps does not necessarily mean that your investment portfolio will deliver superior results. This study brings us back to the same point. It is not the size of the company that determines whether it is a good investment or not. It is its fundamental strength that determines its investment value. Therefore, it is essential that the investors study the fundamentals and compare it to the valuations of the company or mutual fund in question. Simply going for the largest, may not really be the wisest move.
All of this goes to show how populist politics could be at the centre of creation of such a bill rather than a concern for the fiscal situation of the country. Besides, the Government could have done the nation a huge favour by trying to find out how successful the previous social scheme like NREGA have been before coming out with the food security bill.
It should be noted that NREGA has not been the success story that it was intended to be. In fact, a lot of people are of the view that instead of improving employment situation in the country, NREGA has actually led to inflation of wages and has encouraged leisure and not hard work. We won't be surprised at all if the food security bill too backfires. After all, if financial aid and social security schemes were the answers to a country's economic woes, Africa would perhaps have been the richest region in the world.
But while developed countries offer lower rates or better terms if their credit scores are high, this is not the case in India. Indian customers continue to pay high interest rates despite having good credit scores. But we believe that a strong system for spotting errors and identifying defaulters needs to be in place first. Only then can bankers think about a differential rate system. So till then we will have to continue to deal with high interest rates. We will just have to wait for the Reserve Bank of India (RBI) to cut policy rates.
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