Mutual funds in India are finally becoming popular as a household savings vehicle. Investors are pouring in money through systematic investment plans that give fund managers more elbow room to make steady investment calls than be constantly worried about selling pressure forced by hasty redemptions. That should ensure better investment return but ironically that is not the way things are shaping up. The rate of outperformance of mutual funds has been on the decline. That’s not surprising given that our market is becoming more mature making it harder for investors to find under-researched, mispriced stocks with huge potential for outperformance.
This year though has been a particularly tough year for fund managers. Apart from choppy global markets, Sebi’s diktat to reclassify schemes and set uniform standards for various schemes has been a dampener. One key worry managers express is about the performance of large-cap funds where bulk of the corpus resides. Their concern — the small universe of stocks in this category will limit the scope to generate excess return through superior stock selection.
That concern though seems misplaced as in large-caps, the alpha in performance, arguably, is not the primary driver of return. It’s the weightage each manager places on the key stocks in the portfolio that usually makes the difference. Even here, large-cap funds usually show little variance in performance compared to the peer set and with good reason.
As investment guru Jeremy Grantham aptly pointed out in an earlier interview to Outlook Business, a major impediment for managers while making large contrarian bets is career risk. Even if they are hugely positive or negative on a certain stock, most fund managers would not go the whole hog and place a huge outsized bet or reduce the weightage to zero if they do not see the majority behaving the same way. The norm is to stay closer to the benchmark with measured calibration to outperform the benchmark with boundaries set by their peers.
For investors, the way ahead if you’re looking for stable inflation-adjusted return may be index funds simply because they deliver at low cost. If you are however looking for more than that, you better be very sure of the fund manager you trust your money with. That’s where this edition should help.