India’s largest equity mutual fund is something called Reliance Diversified Power Sector Fund, and I think that’s a problem. The problem is not with this fund as such, but in the fact the Indian investor has chosen to bestow this rank upon a fund that is narrowly focussed on a single sector. This is a problem because the core investment of every mutual investor (without exception) must always be a general diversified fund that is not constrained to invest in any theme or sector.
More than the Rs 5,300 crore managed by Reliance Diversified Power Sector fund, this problem is highlighted by the aggregates of the entire fund industry. In all, India’s equity funds manage Rs 1.68 lakh crore and an absurdly high Rs 58,000 crore (31%) is in sectoral or thematic funds. This is way too high. How high? Well, I would venture to say that it’s too high by a margin of about 100% or so. The truth of the matter is that it’s difficult to visualise an investor who should be investing through a mutual fund and yet who should be taking sector calls himself.
The very idea of mutual fund is, one is of hand off investing . You pay a fund company because you don’t have the time or the expertise to judge where to invest. An important facet of this decision-making is to decide which sector to invest in. When you decide that say, 25% of your investments should stay in a power or an infrastructure or a technology fund, then you are making decisions that you shouldn’t . The way to make mutual funds work for you is to put your money only in diversified funds and then let their fund managers do their job of choosing which sector makes sense and when.
Of course, I’m being a little disingenuous here. No investor sits down and actually decides how much to invest in this or that sector. No, that decision gets taken for them by the manner in which funds are marketed and how investors react to the message.
Even the name of the fund plays an important role. According to its name, Reliance Diversified Power Sector Fund is both a diversified as well as a power sector fund. That’s a complete contradiction in itself. If you are a sector fund then you can’t be diversified. And in any case, how the average investor is to figure out what the name actually signifies.
Consumer goods style naming is not uncommon in mutual funds. We have a DSP Blackrock T.I.G.E.R. fund (which supposedly stands for The Infrastructure Growth and Economic Reforms), Sundaram BNP Paribas S.M.I.L.E. (Small and Medium Indian Leading Equities), ING C.U.B. (Competitive Upcoming Businesses), Morgan Stanley A.C.E (Across Capitalisations Equity), Canara Robeco F.O.R.C.E. (Financial Opportunities, Retail, Consumption & Entertainment), and ICICI Prudential Ninja (Nifty and Nifty Junior Advantage).
These are only some of the more fanciful names that have been thought up to sell funds. Clearly, fund companies have a very different idea of what works than what a thoughtful investor should be doing. But I guess that is a comment both on how investments are bought and how they are sold.
More than the Rs 5,300 crore managed by Reliance Diversified Power Sector fund, this problem is highlighted by the aggregates of the entire fund industry. In all, India’s equity funds manage Rs 1.68 lakh crore and an absurdly high Rs 58,000 crore (31%) is in sectoral or thematic funds. This is way too high. How high? Well, I would venture to say that it’s too high by a margin of about 100% or so. The truth of the matter is that it’s difficult to visualise an investor who should be investing through a mutual fund and yet who should be taking sector calls himself.
The very idea of mutual fund is, one is of hand off investing . You pay a fund company because you don’t have the time or the expertise to judge where to invest. An important facet of this decision-making is to decide which sector to invest in. When you decide that say, 25% of your investments should stay in a power or an infrastructure or a technology fund, then you are making decisions that you shouldn’t . The way to make mutual funds work for you is to put your money only in diversified funds and then let their fund managers do their job of choosing which sector makes sense and when.
Of course, I’m being a little disingenuous here. No investor sits down and actually decides how much to invest in this or that sector. No, that decision gets taken for them by the manner in which funds are marketed and how investors react to the message.
Even the name of the fund plays an important role. According to its name, Reliance Diversified Power Sector Fund is both a diversified as well as a power sector fund. That’s a complete contradiction in itself. If you are a sector fund then you can’t be diversified. And in any case, how the average investor is to figure out what the name actually signifies.
Consumer goods style naming is not uncommon in mutual funds. We have a DSP Blackrock T.I.G.E.R. fund (which supposedly stands for The Infrastructure Growth and Economic Reforms), Sundaram BNP Paribas S.M.I.L.E. (Small and Medium Indian Leading Equities), ING C.U.B. (Competitive Upcoming Businesses), Morgan Stanley A.C.E (Across Capitalisations Equity), Canara Robeco F.O.R.C.E. (Financial Opportunities, Retail, Consumption & Entertainment), and ICICI Prudential Ninja (Nifty and Nifty Junior Advantage).
These are only some of the more fanciful names that have been thought up to sell funds. Clearly, fund companies have a very different idea of what works than what a thoughtful investor should be doing. But I guess that is a comment both on how investments are bought and how they are sold.
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