I had an interesting discussion with a close friend who is working for a financial advisory company in Mumbai. She is brilliant and very focused on customer service. She probably carries that focus from her Kotak Bank days. She is also very aware of new products being launched in the markets and identifies the best for her clients.
We were one day discussing about how the stock market down turn would also have an effect on Mutual Funds and their returns because end of the day a Mutual Fund(MF) is nothing but collective investment in stocks. And their might be a flight of customers or stoppages in SIPs leading to a cascading effect in the markets. The differentiation is very little between various MF schemes. And to prove my point pick up the annual report of HDFC Bank and you will see two glaring things:-
A. Today it is a foreign owned bank by proxy. The majority holding is of various FIIs. A large number of Indians missed out buying into this wealth creation machine.
B. Every MF worth its salt has invested its funds in HDFC Bank. Therefore, if share price of HDFC Bank falls, it not only affects my sister who owns shares of HDFC Bank but also the NAV of the unit of MF which her son has bought into and which has HDFC Bank in its portfolio.
70% shares held in almost any MF portfolio are common. So, by simple logic, 70% of returns of all MF shall be same. The alpha or delta or gamma or theta , whatever greek mumbo jumbo alphabet you wish to assign to the variable returns will be the result of those 30% different stocks held in various portfolios.
So when we were discussing that MFs shall also see a dip in their performance and may have an effect on SIPs/subscriptions, she differed from my views. And we have a long term understanding of agreeing to disagree on issues. Her view was that MFs are different and SIPs of her clients will not be affected. My view was that the MF SIPs and investments in direct stocks are same thing. We stuck to our guns at that moment. But I guess I was wrong because I did not include the behavioural angle of investor psyche into it. Psychologically, direct investments have a bigger involvement for us and those losses pain us a lot, as Kahneman has proved. The responsibility of the good or bad decision is solely mine. So the pain is more. Whereas, MFs because they are a diffused product where in the investment decisions are taken by a third party and either I do not remember or have never cared to find out the portfolio of stocks which it has invested in, the process establishes a barrier for me. I never ever get a real sense of loss due to three reasons:-
A. The quantum of loss in NAV of a MF unit is spread out over a large basket of stocks and is therefore 5 to 20 paise per unit on a daily basis. Although, if I hold 1 lakh units, even a 20 paise reduction in NAV will imply my value reducing by Rs20000/- in a day, but that we ignore.
B. I don’t monitor the NAV of a MF on a daily basis whereas through various apps available, I track my portfolio value of direct stocks, five times a day leading to more discomfort and pain.
C. There are a large number of schemes of MF in my basket, thus they further cushion the loss/fall. And mentally I disregard the loss as being too big.
If I were to take an example, Yes Bank or Piramal Enterprise are live examples of this phenomenon. The value erosion which has happened due to commission and ommission of the Board or by speculators (check out the physical delivery %age of these stocks to tell you who drives the prices– gamblers or investors) makes us regret our decisions. Whereas the same stocks held by a MF / off loaded from the portfolio would not lead us to so much of a regret.
The lesson therein is that in case you do not have the stomach for bearing pain, stick to Mutual Funds. Or ask for advice from someone like my friend’s company. Your regret will be less and Happiness and financial performance hopefully better. For the time being, I concede. So long my friend…… 🙂