Is it ok for your mutual fund to lose your money?

Tue, 17 Jul Pre-Open

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Mutual funds are typically open-ended investment vehicles that are managed by a fund manager or a group of professionals. They are comprised of any number of stocks, bonds and other investment securities. People invest in mutual funds because they are considered less risky. However investing in a mutual fund is not necessarily less of a risk. What makes a mutual fund less risky than a single stock is that the risk is spread out amongst many more companies.

As most investors have little understanding of the way the markets behave and companies are run, they put the onus of stock selection on the fund manager, a person whom they believe to be qualified, with access to a deeper knowledge base and resources, tasked with the full-time responsibility of managing assets held by the fund. Thus in a mutual fund an investor takes all of the risk, puts in all of the capital, but most of the earnings from the Mutual Fund go to the Fund manager while losses are borne by the investor. Thus they expect that their money will be handled skillfully and grow over time. Unfortunately, some fund managers have made a habit of falling short of expectations.

There are several mutual fund schemes like J M Basic, Taurus Discovery, SBI Magnum Midcap and many others which have been consistently underperforming their benchmarks for quite some time, and which show no signs that they will improve in future. There are several reasons for the underperformance. One reason is that some of these funds never recovered after the market crash that occurred during 2008-09. Another reason is that, the Indian equity markets have been quite volatile over the past few years. As a result those funds which have not been able to protect the downside risk have typically underperformed.

This has caught the attention of the market regulator Securities and Exchange Board of India (SEBI) who is considering denying approval to new offerings from fund houses whose schemes have been underperforming consistently. Although the regulator's wake-up might be too late for those invested in some of these underperformers, it is none the less a step in the right direction.

If this is implemented then it would definitely lead to higher accountability of mutual fund companies towards their investors, and they may be forced to alter their processes and be more concerned about the performance.