Is it still worth investing in mutual funds?
Mutual funds need to watch out! Too many investors are turning against them. The typical comments received over the past couple of months in my sessions are…
* Mutual funds have high fees and one can easily replicate the portfolio
* Mutual funds are boring and don’t make enough returns or cannot beat investing in direct stocks
* Stocks give quicker returns than funds
* There are so many stock investing videos and tips available but choosing a fund is very difficult
In every bull market, investors get overconfident about their ability to trade successfully due to quick gains being made. Replicating fund holdings is easy, but figuring out an exit is not.
Many investors are of the opinion that fund managers don’t add much value, and with low-cost broking platforms and the plethora of information available on the internet, one is better off constructing a stock portfolio. This may work, but most investors don’t really have the ability to analyse or have the time and resources to research companies. With limited capital, it is not possible to diversify and unlike mutual funds, investors do not have limits on stock and sector exposures. Further, institutions have a stock exit strategy, but individual investors rarely have a rebalancing plan. This is why retail investors are left holding overhyped stocks such as DHFL and Suzlon even though institutions have exited.
I constantly hear investors lament about the high fees in mutual funds and often wonder why they don’t assess the costs of investing in international stocks, insurance policies and other investments. With the currency exchange margin, the cost of buying an international stock is 3-5%. Yet, investors continue to flock to platforms providing access to overseas stocks. The media scrutiny on mutual fund fees has got investors’ attention, but they tend to disregard higher in-built costs in other instruments.
Stocks may give quicker returns, but how many such stocks can be identified by a lay investor on a regular basis? And is the allocation to these stocks big enough to make an impact on portfolio returns? People tend to invest in trending stocks and that, too, after they have rallied 20-30%. Nithin Kamath of Zerodha recently mentioned that less than 1% of traders beat fixed deposit returns over a three-year period. Not to forget the taxes that need to be paid for every transaction.
