Funds for play
Dec 09 2012 , New Delhi
Given the wobbly nature of the Indian economy, it's time our mutual fund industry embraced dynamic investing, lest a steady decline in investor interest makes it tough for it to grow to its fullest potential
Look at the communication you received, if any, from your fund house in the late 2007 or 2010. None of that would have warned you that market conditions then were best for selling stocks, and not for buying them. For, if it is not the time to buy stocks, it is not the time to buy equity schemes of mutual funds either. It is not that these people are born bulls, rather it is the nature of their business which forces them to come out with bullish statements even when deep inside their heart, they know the market is overheated and it is not the time to buy equity. For, they would still need to sell their equity schemes to the unit holders.
If they speak the truth, investors would be tempted to withdraw their money from equity schemes and fund houses, which run these schemes, would be losers. So, never expect any fund house or fund manager to ask you to sell your units and invest in some other asset class.
The decision of selling has to be taken by unit holders, and that is where trouble begins. If unit holders had the ability to take buying and selling decisions on their own, then why would money be entrusted to a professional fund manager? This is the problem, the solution to which will have to be found by investors by educating themselves about economic cycles and their relationship with the performance of the equity market.The most common tool used to sell or mis-sell at a time when the stock market is overheated is use of the term “long-term perspective”. Luckily for them, over the past 15 years, there have been a number of instances when even this mis-selling was covered. Because after a fall, the indices recovered within a year or two, and the broader market gave decent returns to even those investors who were victims of this mis-selling.
Things have been different over the past five years. First, it was a strong bear phase and then a prolonged range-bound movement in which even the best of the blue chips has not performed well. This has put the concept of long-term investment under a threat. Returns on most equity schemes have been far below satisfaction, and there is no way a fund manager can now justify his/her stand of investing with a long-term perspective.
At the risk of committing a sacrilege, we would say in an emerging market like India, we have not reached a stage where even long-term investing can be rewarding.
The logic: the Indian economy is going through a process of macro-adjustment as it tries to integrate itself with the global economy. It is going to take one more decade or so before that process reaches anywhere close to getting completed. Corporate laws are getting amended taking into consideration the scams that have come to light. The changes in the laws are threatening business models of some of the large companies and to take refuge in “long-term investing” in such a situation can be a big mistake.
Let’s take a look at the hard reality of the Indian market. For the majority of India companies, which are listed on the Indian stock exchanges, there is no way one can predict the fundamental performance over next three years — forget five years. In such a situation, what is the point in investing in a company with a five-year perspective. In these five years, there is a high probability that any company will see both the good and bad phases of an economic cycle. Investing has to be done taking into account the ground reality, and because uncertainty is very high in the Indian market, most fund managers have not been able to judge these economic cycles correctly.
Let’s look the situation that the Indian market is going to confront very soon. Nobody at this point of time can say which party will come to power when the general election takes place in 2014. If the election results in a situation where a party or a coalition partner that comes to power is opposed to reforms, then it can be well imagined what would happen to the economy, which is already facing so much trouble. So what happens to corporate bottom lines in 2015 is not just tough to predict, it’s in fact impractical to do so. It is high time fund houses adapt to the concept of dynamic investing; when a stock gives a certain result, move out of it. To some, it might sound strange, as dynamic investing has some elements of trading involved in it. But the fact is unit holders give money to fund managers to get returns on it, and not to hear excuses which have become a common practice in our industry. It’s high time the industry does some introspection, lest a steady decline in investor interest makes it impossible for an young industry to grow to its fullest potential. zz