Gold, Real Estate & Mutual Funds – We behave differently !

These days, the debate is between active management and passive management.  Without doubt, a worthy debate.  But there are other interesting findings that demand our attention.  I had observed on many occasions that there is a huge gap between returns delivered by an equity mutual fund scheme and the returns realised by unit holders.  If you had been a unit holder of a mutual fund scheme, I trust you would have experienced this with a few schemes if not all.  If you had been distributing mutual fund schemes, I trust you would have noticed this with a few portfolios if not all.

An article in livemint, pointed to a study by Axis MF.  The study spanning a period of 16 years from 2003 to 2019 showed investor returns were far lower than corresponding fund returns.  It was also observed that this is not unique to one Asset Management Company (AMC) but across the Industry. 

The study did not end without commenting.  It highlighted three key reasons for this gap in the returns.  In my opinion, all three reasons were very valid but they were not suggested solutions to bridge the gap. 

After going through the reasons, one would be left with the following questions.

  1. How to ignore the latest performer ?
  2. How to live with short term performance of a scheme ?
  3. How early is early enough ?

Before attempting to find answers to above questions, let me bring to your notice another interesting data point.  

Excluding categories like Fund of Funds, Retirement Funds, Index Funds, Global Funds, Hybrid Funds, Balanced Advantage and Dynamic Asset Allocation Funds, there are a total of 322 schemes classified under various categories like Large, Mid, ELSS, Focused, Value etc., Should I say that these are pure equity schemes with different objectives of investing ?

Out of these only 3 schemes have lost money (meaning NAV is lower than 10 as on date).  In addition to the three, one scheme that was launched in 2010 managed to deliver just 0.35% return since launch.  

What this means to you is less than a percentage of schemes have lost investors’ money.  To be exact, 0.932% of 322 schemes lost money.  I also excluded schemes that were launched recently. I intentionally avoided names of the 4 schemes, mentioned above.  

Let us for the time being ignore inflation, opportunity cost and other thoughts running in your minds.  While everyone, including your 6 year old kid, understood that “Mutual Fund investments are subject to market risks…”, we were never told that money managers have not lost money.  What got registered in everyone’s mind was the market risk but not facts.

Mr Benis Kumar of Final Mile, a behavioural architect, highlighted in a recent talk that instead of tracking NAV of schemes, unit holders should track the units they were accumulating.  This, in my opinion, is a tremendous shift that can aid in bridging the gap between investor returns and scheme returns. 

An investor in Real Estate, always shares the number of acres / square feet he owns, proudly !

An investor in Gold, always shares the total number of grams he owns, proudly !

A unit holder in MF, always forgets the total number of units he holds, sadly !

Prices are volatile not just with MF but with other assets too.  Unless you and I move away from NAV to units, the gap between investor returns and scheme returns will continue to remain or widen.  

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