So you thought that there is a bull run on the stock market and therefore buying equity mutual funds will fetch you high returns. Think again.

But first let us quantify the equity bull-run in the past one year. One year ago, on 3 August 2017, the SENSEX closed at 32237 and on 3 August 2018, exactly one year later it closed at 37556. This represents a gain of 16.4 % in one year. In this period the stock market also saw a high degree of volatility.

In the equity bull run, such as what we experienced in the past one year, technically speaking some mutual funds should have earned more than 16.4 %, while others would have earned less than 16.4 %. And if mutual fund investment managers all belong to roughly the same level of intelligence, market knowledge and competencies the distribution of those earning above 16.4 % and those earning less than 16.4 % should be roughly equal. At least that is what free market economics tells us.

So did the 16.4 % returns on SENSEX translate to high mutual fund returns?

Read on

Let us take a look at the mutual fund return data for the same 1 year (August 2017 to July 2018) as reported in https://economictimes.indiatimes.com/marketstats/pageno-2,period-r1week,pid-121,primaryobj-hybrid,secondaryobj-dynamic%20asset%20allocation,sortby-r1year,sortorder-desc.cms. Let us take the equity funds first.

Large Cap Equity

Some of you may have been reading in the newspapers where financial market experts are asking their readers to keep their investments in large cap funds, as they are more dependable in a volatile market. The data shows that the highest 1-year return of large cap funds was 21.93 % (Axis Blue Chip Direct – Growth). The lowest was ICICI Pru Value Fund – minus 1.55 %.

Out of 139 large cap funds listed, 60 reported less than 8 % 1-year return. In other words 43.2 % of the large cap mutual funds earned less than 8 %.!! Remember August 2017 to July 2018 was supposed to be the year of high returns on mutual funds, or at least that is what we are made to believe. Large cap funds are sold as being low risk, when in fact they are high risk.

Mid Cap Equity

A total of 57 funds were listed. The highest was Axis Mid Cap Direct – Growth – 18.31 %. The lowest was SBI Magnum Mid Cap Growth – minus 3.55 %. 47 funds were earning less than 8 %. That is a whopping 82.5 % of the mid cap funds were earning less than 8 %! So much for earning high returns in mutual funds!

Small Cap Equity

This category is the most risky of all equity mutual funds. Small cap shares are investors’ delight, especially those who enjoy risk-taking. There were a total of 56 funds in this category. Only 8 funds earned more than 8 %. The rest 48 earned less than 8 %. That is 85.7 % of the funds in small cap category earned less than 8 %!!

Lets take a look at Debt Funds.

Long Duration Debt Funds

We have heard over and over again that mutual funds are for the long term. This is a fallacy. Prudent financial decision making requires that long term investments should be relatively less risky. When we do not know what will happen in the next one year, how are we supposed to assess the risks over a period of 15 or 20 years. Mutual funds are short term investments.

There are 3 mutual funds invested in long term debt. For the past 1 year their returns were 1.23 %, 0.61 % and 0.53 %. Since this is a long term investment, let us take a look at the longest term data available which is 3 years. Their three-year returns were 8.7 %, 8.1 % and 7.8 %. So much for the notion that in the long term the returns on mutual funds are high.

Short Duration Debt

Let us take a look at the other end of the spectrum – short duration debt funds. There are 69 funds in this category and all funds reported their 1-year earning as less than 8 %. That is 100 % of the funds earned 1-year returns of less than 8 %. If we take the 3-year returns, only 10 are able to cross the 8 % mark.

What about hybrid funds – the ones that invest in more than one category?

Hybrid – Dynamic Asset Allocation Funds

There are 32 funds in this category. Dynamic funds give the fund’s investment manager a lot of scope to quickly change asset allocation in relation to market trends and the investment manager has the freedom to move across many asset categories. Theoretically he is better positioned to make higher returns. But what do facts tell us? The highest earner is IDFC Dynamic Equity Direct Growth – 10.06 %, which is less than the SENSEX growth for the same year. Only 7 funds earn more than 8 %, while 25 funds are earning less than 8 %. The lowest in this category is earning 1.6 %!

The current market scenario of a bull run coupled with market volatility makes mutual funds a very high risk and those who wish to protect their money should not invest in mutual funds. One does not know at the time of purchase which fund will give more than 8 % and which will give less than 8 %. Advice your customers to not fall for media hype and the gross mis-selling in the mutual fund sector. Bull runs do not automatically result in high mutual fund returns.

Mutual Fund Sahi Nahi Hai!!