Category: Mutual Fund

A couple of days ago, I read a blog post by a Distributor of Mutual funds showcasing the difference of what FII’s are doing and what DII’s are doing (in terms of buy / sell) since the beginning of this year. As has been the case most of the time (and even historically), most of the time, DII’s do opposite of FII’s. So, in months where FII’s are buying, there is a high probability that the sellers are DII’s and vice-versa.

In fact, since April 2007 to Dec 2015 (105 months), only in 29% of the months have both been on the same side (16 Months when Buying and 15 Months when Selling). The writer of the blog using the data of the recent past hypothesizes that Mutual Funds are “essentially bargain hunting; probably buying quality stocks at low valuations.”. In other words, the author seems to believe that FII’s are selling cheap (Idiots probably) while the funds are lapping them up (Intelligent folks, eh?).

Before we go further, lets first check what FII’s and DII’s were doing as the market tumbled in 2008. Yes, its true that we did recover from that fall (and unless the world is going to end), probability is very high that we shall recover from every fall given enough time, but if you were a investor during those times, its tough not to remember that many funds actually lost way more than what the Indices lost.

So, while its true that they eventually recovered and made it up, any investor who invested or was invested fully during those months had a wait a very long time before he could see the NAV’s he saw before the crash.

The above picture depicts the amount of selling and buying by FII’s and DII’s from Novemeber 07 – March 08. As can be seen, other than in December 2008 when both ended up being buyers, in all the other months, FII’s continued to dump which was picked up by the DII’s even as Nifty tumbled from 6350+ to a low of 2252 in October (a loss of nearly 64% at the bottom).

The next question is, are we expensive. If you are a reader of this blog, you will know that while I have many a time said that we weren’t extremely expensive, we aren’t cheap either. That was based on my reading of the PE ratio (I know, I know, its not accurate to depict the future given the changes it frequently goes through and is hence a broad indicator) of the Nifty 50.

The last year and half has been more about Mid and Small Cap than the Large Cap. While I have no data, I wonder if like in 2000 when IT funds were all the craze and in 2007 when Infrastructure funds were able to accumulate a lot of assets, this time I wonder if Mid Cap funds have got a pretty large amount of inflow given the strong 1 year returns most of them were able to generate.

Lets hence first look at the PE chart of Nifty MidCap 100

Nifty Mid Cap 100 Price Earnings ratio at the start of the year was at a all time high – a high well above the one we saw in 2008 and even after the current fall, it has just come back to its 2 Standard Deviation. Now, valuation in itself doesn’t mean anything. After all, high growth companies command a very high PE and still provide returns to investors (Example: Page / Eicher in the last few years). But are companies in the Nifty MidCap 100 Index growing at 25%+ is the question one needs to definitely ask.

Because if they are not growing, the future returns (even in the best case scenario) are pretty bleak. So, before we move to Nifty 50 PE chart, would you consider the above to be Cheap / Distress Selling??

Compared to the Nifty Mid Cap 100 PE chart, this is a bit more pleasing to the eye. We haven’t touched any of the peaks that we touched in previous rallies and in that sense, its good. But as I have emphasized earlier, we aren’t cheap even today. In fact, unless you believe there has been a lot of good things that happened since the coming of Modi, why should a investor pay anything more than what he paid earlier?

The reason to utilize charts is because we are clueless when it comes to the future. But historical insights give us a clue on what could be expected of the future (all being nothing more than probability).

In one of my earlier posts, I commented that just sipping month on month without accounting for market valuations will get you average returns. There are times you should buy more and times you should actually sell. Buying all the time is good for everyone other than your own finances as average returns means that you need to invest more to achieve a return which could have been achieved with just a little tune up in terms of how much to be invested at current juncture.

Investing all the time helps the distributor get his commission, but is he really hand holding you and informing you about the risks of investing (even in SIP) at high levels and investing the same amount when markets are historically cheap?

Caveat Emptor should be how you look when investing since bad advise / investments can take away many years of toil.

Lets assume that you are on a trip to reach a place which is 100 kms away. Now, lets assume that you need to make to that place in 10 hours. Would you ride 100 kms per hour regardless of road conditions or would you slow down on bad roads and make up the time by speeding on good roads (lets assume a 50:50 split between them).

Distributors of Mutual Funds want you to keep investing in good times and bad the same amount of money regardless of where the markets are (in terms of how expensive or cheap they are), they are suggesting that you ride along the road even though common sense will indicate that it makes a lot of sense to slow down on bad roads (to make the journey a better one) while making it up in good roads (when markets are cheap).

A 5 year return (End 2010 to End 2015) is bound to be disappointing since you entered the markets why they were pretty expensive. But stretch this to 7 years (another 2 years back) and it becomes one hell of a investment even if you did not do anything but sit as markets cratered 30% from its peak in 2011.

But what if you actually reduced your allocation on way up and added the same on way back down? The results thence is even more phenomenal. And before you think about whether I am just using hindsight bias to justify my view, I actually have build a model which reduced exposure as markets went up and added on the way down. And the returns were achieve without having caught either the high or the low.

In my opinion, regardless of what time frame you measure your returns, the overall returns should be not too jerky for even the best of minds can go crazy once we see our lifelong savings evaporating just because something bad happened in a country that one did not know existed before.

If you know your Risk Tolerance, do check out this sheet  (Asset Allocation ) which provides the output from my model. Due to the fact that changes can be frequent (once or twice a year at max), I like to use Nifty Bees and Liquid Bees as the instruments of choice.

Many moons ago when my Sister was born, a relative of ours recommended a financial scheme where we invested X and when she reached 18, we would get back 1,00,000.00. In those days, 1,00,000 was a very huge sum. In fact, the cost of building a simple house more or less was equivalent to that amount. That sum was assumed to be good enough for Marraige and more. But when she reached 18, forget getting married, her Engineering Fees was nearly 50% of that for every year.

Most investors invest with the best of intentions and hope that things work out as planned and enable us to meet our Goals. But do we really have a clue as to how the future unfolds and how best to prepare for them?

Equities are claimed to be the asset of choice if you need to beat Inflation and evidence does show that there is merit to that argument. But the evidence is nothing more than a look at the rear view mirror. While the logic behind is indeed sound, the fact remains that end of the day, there is no such thing as a Guarantee in the world of finance.

On Twitter (where I am active), I get into frequent debates with distributors of Mutual funds on whether Direct is the way forward or should one go through a Distributor. Both have their Pro’s and Con’s, but the unfortunate thing is that you are no wiser as to what is the right choice until its been too late to change.

While no one can guarantee about the outcome of investing today, a qualified financial planner can help you make the necessary changes as time goes by. A mutual fund distributor is not a financial planner in any sense. He is no more than a salesmen hoping to make a sale while in turn will provide him a Income.

While he will to ensure continuity try his best, the fact remains that he can only do as much as his knowledge enables him to. Any and every action of his has to be backed by evidence which in turn has to pass through the biases we frequently face – Survivor / Selection among others.

In the aftermath of the housing crisis in US, there were hundreds of stories about investors who lost everything and were forced back to working at a age when they should have led a comfortable retired life. While its easy to blame them for their greed and lack of understanding, its a story that is repeated across countries and across generations.

Fixed Deposits / Gold / Mutual Funds / Real Estate all have their place and time. While the proponents of Equity will have you believe that FD is the worst form of investing, if you had invested in a FD 5 years back and you were in the Zero Tax bracket, you would have made more money than investing in Nifty Bees. And all that without having to bear the pain of negative volatility.

End of the day, its your money and your future that is on the line. In times of need, its you and you alone who has to face the responsibility, blame game can only go so far.