Paytm will make investing in Mutual Funds easier, but is it setting up new investors for disappointment

While investing directly in a mutual fund was offered more than 5 years ago, it was a child that no one wanted. Asset Management Companies offered it just to ensure compliance with the rules rather than see it as a way for individual investors to avoid the middle man.

While even today, Mutual Funds are easier to access than say an Exchange Traded Fund, investing in Direct funds wasn’t something that was easy. Yes, we did see new fintech companies come up with a flat fee based subscription, but if you were good with technology, you anyways could have easily bought the same from the mutual fund house website directly.

The first real attempt to reach out to normal mom and pop clients out there was to me enabled by the launch of Zerodha Coin. By providing the ability to buy direct funds through the brokerage interface, it made life much simpler than it was earlier.

Last week, Paytm launched its own offering – Paytm Money which allows anyone with a Paytm account to seamlessly buy mutual funds from its app. With growing usage of smartphones, this can trigger growth like no other.

In fact, Paytm expects to see more than 1.5 Crore investors using its app to invest in mutual funds. Nilesh Shah, managing director, Kotak Asset Management has gone to record to say that he expects Paytm to double the number of investors in a couple of years.

Over the last few years, money has flown into mutual funds like they never had seen earlier. Strong advertising has ensured that even those who may not have been inclined to invest in mutual funds at least have a understanding of what it means.

Ease of buying can always trigger irrationality like no other. The simple way you can buy on Amazon for example means that many of their customers end up buying far more than what they desired to buy or were required to buy in the first place.

Unlike in United States where interest rates are so low that equity makes sense for almost all categories of investors, in India, Interest rates is pretty high and doesn’t really require a massive dose of equity exposure to help you reach your targets.

But Debt funds, especially short term funds where no prediction of the Interest rate cycle needs to be made has always seen fees that are barely there. Mutual Funds are more than happy to sell Equity as the panacea to all ills given that even Direct funds charge on an average 1.5% to manage your money.

The huge inflow of funds in such a short span of time in a market that is not really deep has meant that mutual funds continue to chase the same set of stocks regardless of whether it makes sense or not.

So, we have Tyre companies which historically used to trade at single digit or low double digit valuations now trade twice their historical mean.

We have Fast Moving Consumer Goods companies which can at best growth at a bit higher than GDP + Inflation; selling at valuations that many a stock saw during their peaks in earlier mania’s.

Page Industries, the leader in the premium undergarment segment trade at triple digit valuations even though its unlikely the company can deliver that kind of growth even if everyone is made to buy 2 pairs – one for the morning and one for the evening.

The biggest physical retailer in the world – Walmart for a very long time traded at low valuations below the 20 times earnings. Our biggest listed retailer on the other hand trades at a price to earning ratio greater than 100. While for now, its growth is able to provide some semblance for the valuation, can retailers really grow at 100% or even 60 – 80% as the market expects it to for a long time to come?

Literally everything out there in the market seems expensive and the continuing inflow of funds have meant that they have either stayed expensive till our brains got fried and we joined the herd or have become even more expensive making anyone who used valuation as a measure to justify investing look inept.

The other day, I was at Karvy for some work regarding transfer of securities and happened to overhear the conversation of a couple who had come there to redeem their mutual funds. They seemed unhappy that even though they had been invested for some time, they barely got the returns they expected (or assumed).

The last 10 years has been incredible for funds given the fact that starting point is now closer to the bottom we made in 2008. This seems to suggest that investing for the long run can be very fruitful indeed.

But ten years ago, markets were pricing in more for bankruptcy than for growth. Today, markets are pricing in anticipating that India will grow at record pace. The key reason for such exuberance has to be seen in the light of the fact that while inflow of funds into the markets has shot up big time, the number of investments that are available haven’t.

Abnormally high valuation is clearly not sustainable in the long term. If zero risk debt assets can get you 8% and low risk debt assets can get you close to 10%, the expectation of returns from risky assets such as Equity tends to be much higher and that itself can be a source of disappointment.

Among Large Cap funds, Nifty 100 Total Returns Index has given a return of 12.50% over the last 10 years. The category average return was 11.23%. The last 10 years has been one hell of a bull market in hindsight, will the next 10 years pan out similarly?

The category average return for Ultra Short Duration funds over the last 10 years has been 8%. This means that equities have generated 3.25% more returns which is substantial but one that required a lot of things to come together.

While my recent posts seem bearish in nature, I am not really bearish when it comes to investing with close to 50% of my assets sitting in equity. But my expectations are tempered given the historical experiences I have had.

New investors on the other hand attracted by fancy returns generated by funds in recent past will turn out to be disappointed even though the returns maybe comparable to what should be expected going forward.

For anyone who entered real estate before it became the hot subject of town, returns have been fairly good even though markets have stagnated in last few years. Those who looked at short historical returns and ventured into real estate though have been a disappointed lot owing to setting themselves to wrong expectations.

More new investors I expect will end up having a disappointing experience in equities unless their expectations are tempered to begin with. But in the never ending race to gather assets, who is really looking to bell the cat.



1 Response

  1. Prashant Joshi says:

    This is an excellent article, and I am sharing it with all my friends who are very bullish on Equity MFs. It is high time they understand that when they read/hear “Mutual Fund Sahi Hai!!”, it is followed by “Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing.”. I have heard my friends/colleagues/neighbours discussing (and advising me) that even if you just invest in Index fund for X number of years, you are guaranteed to get YY.ZZ% return. I have never heard of them talking about Debt funds as they tend to have <10% returns over the period of a long time, and that is nothing as compared to Equity Funds.

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