There is No Fate But What We Make: Mutual Fund - 1

Wednesday, October 19, 2005

Mutual Fund - 1

Some Mutual Fund Gyan I have gathered over the years:

First, Index vs. Actively managed funds - I have not made up my mind
on whether active always performs worse than Index funds over long
term. Personally, i am sticking to actively managed funds. All that is
written below applies to actively managed funds.

Absolute value of a Mutual Fund's NAV has no meaning. Only %
difference over time with its own NAV matters.

How to judge a Fund ? Past performance (though, there is no
guarantee that it will be repeated), expense ratio, churn ratio
(transaction cost of fund), loads, fund manager style. NAV
value plays no role. Never look at a fund in isolation. Look
at the complete asset allocation plan
- what % will be in equity ? What % in larrge cap ? mid cap ?
Then look for good funds/stocks in each category.

Children's mutual fund schemes are the ideal way to assure your child's
future - Bogus !
These funds are the same as plain balanced funds (which invest in
equity as well as debt). Just marketed differently as "children's fund"
so as to cash in on people's concerns for children.

Mutual Fund IPO investing is good - absolutely wrong ! Fund IPO
investing is very bad !
In fact, technically there is no such thing as an IPO for a Fund.
Authorities are going to ban the use of the word "IPO" for funds.
Because this word confuses investors.
Here are the reasons why you should not invest in a fund "IPO":
1. Since mutual fund NAV absolute value has no meaning and only %
difference matters, there is no special reason to buy units at 10/-.
It is not "cheaper" at 10/-.
Agents and media try to fool people by saying this value is "at par".
There is no such thing as par value for a fund unit. Value of a fund is
the value of underlying stocks - no more no less. A fund unit selling
at 30/- is not more expensive than one that sells at 10/-.
Given this, why should someone invest in a fund just because
something is selling at 10/- ?
Purchase/Sell decisions should be based on your financial plan and
asset allocation plan. Not based on what has come for IPO.
2. There is no entry load during IPO - this is another fraud by the
agents and fund houses.
True, there is no entry load. But the higher initial expense (upto 6%)
is charged to the fund over the first 3 years of a fund's life. This is
from your money ! So in a way there is a load ! Besides, no-load
feature has a "lock in".
If you sell within that period, you have to pay load. "No load" benefit
can be had by investing in SIP as well.
3. You have no information about fund's performance or fund
manager's capabilities when investing in an IPO.
4. From the day of payment, to the day of purchase of stocks by the
manager, funds are idle, generating no returns. (Why do you think
many of the recent fund IPOs opened at an NAV of below 10/- ? )

Fund IPOs are different from stock IPOs. Stock IPOs are when a
company sells its equity to the public. Since they are selling a large
number of stocks, they have to make it more attractive by pricing it
lower than real value of the company/stock.
But fund units have no "real value". Their value is sum of underlying
stocks. So why should there be any attraction for IPO ? Why do we
expect a jump in NAV after IPO (like it happens sometimes with
stocks ) ?
The reason why agents try to sell fund IPOs so much is that they get
higher commissions. Funds give them higher commission because,
being a new fund, that's the only way it can attract money. Guess
where this high commission comes from ? That's right, from your
money.

Wait for my next installment:
For anyone with even average brains and an iota of discipline,
any isnurance policy other than a term policy is not worthwhile.
In other words, say goodbye to ULIP, Endowment, Whole Life,
Money Back policies

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