As the New Year comes close, finance newspapers and media channels are awash with expert analysts and mutual fund advisors writing and talking about the best mutual fund portfolios for the new year. And like a herd of sheep, we toe the line and make the changes to our mutual fund schemes because they know best.
But do they?
Let’s be honest; no one can predict which stock or which mutual fund is going to be the best performer whether for the next 1 year or next 5 years. We all have our theories and biases but they don’t come with a 100% money back guarantee if we’re wrong simply because investing does not come with guarantees.
Let me quote the famed investor Benjamin Graham here, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Complicated? No. It just means that the market is quite irrational in the short term and is similar to outcomes of a popularity contest – think election outcomes based on what’s popular then; but in the long run, the market ignores this noise and gains in value based on how well the economy and companies actually do. So, in the short run, no one knows and it’s best to not try and assume that you know either.
But we still resort to the simplest way to choose a fund - performance. We check what the fund has done in 1 year; that’s the short run. If we’ve been reading up, we say that 1 year is too short and we should look at a longer period of 3 years and 5 years. Or we rely on those star ratings which just look at the past performance anyway. And then, the fund you choose falls out of this elite ranking just when you invest in it.
But you wait; the performance does not pick up and you finally sell it. Suddenly, it starts to do well and you end up tearing your hair out. Ta da, your performance is now worse than what the market has delivered.
This is what a recent article in the Economic Times had to say – ‘around 160 out of 323 equity mutual fund schemes failed to beat their benchmark in 2019. In 2018, 76% of equity mutual fund schemes couldn’t beat their benchmark.’
Two things should stand out – the number of equity mutual funds which you have to choose from and how beating the benchmark itself in the short term can be difficult. Do you still need more to tell you more about why these lists shouldn’t be your holy grail? I’m not saying that you avoid them completely, you can still use those lists as a filter. And sometimes the lists make for fun reading too.
Like this one article which said that economic growth is going to recover in 2020 and certain stocks in the infrastructure theme are set to generate stupendous returns. After all this, I’ll let you decide what to make of that.
Maybe, I’ve been a little harsh. Looking into the future is indeed very hard. But it doesn’t stop us from trying. Just like how Sybill Trelawney, the Divination teacher from Harry Potter kept trying despite only getting a couple of big visions right. And just like her, the creators of these yearly lists genuinely believe that the funds on their list will be ‘the chosen ones’ (aka the best performer) every year. And that’s the problem. Maybe, just maybe, rather than having a ‘list’ for the year, a couple of lines explaining the why could lend some rationality to it too.
So, you see a list with 20 or 30 funds and you are tempted to just buy them. The question is how many funds do you need? No one knows the right number. But if you pick 20 schemes, the chances are that you will get a couple of great performers and a couple of duds, and the rest of them are middling performers. So, you end up with average returns and you might as well have just bought an index fund. Exactly.
If you don’t know what to do and how to choose from the hundreds of funds which are available in the market, look at index funds. This way, you don’t have to bother about these lists, you still continue to invest in the market (equity and debt) and also you don’t go chasing the best performing fund and actually end up being a loser.
The vision you get right in 2020 must be to save and invest and not find excuses to wait.
So, here are some suggestions for you:
- Instead of looking at the list for 2020, consider evaluating your funds from a broader list of funds which has been researched keeping the long term in mind.
- Remember, a portfolio is built not just of equity funds but of debt funds too and maybe even hybrid funds.
- If you can’t pick from the universe, make it simple with a building block portfolio of low cost index tracking funds. You’re in luck because we now have index funds tracking the Nifty Next 50, Nifty 100, Nifty 500, Nifty Midcap150, Nifty Smallcap 250 and even the US Nasdaq.
- You’ve a new year to make amends. If you’ve been one of those people who keeps switching funds because they read lists – then get a decent advisor to help you. If you have an advisor (online or otherwise) who recommends this to you, get a new one or educate yourself and do it yourself. But, don’t go crying to Google for answers if you mess up somehow.
So, screw those lists, stop wasting your time on them and go have a latte instead. On that joyous note, happy new year and good luck for the next decade.
Nithin Sasikumar is the co-founder of Investography, a financial wellness company based in Bengaluru. He can be reached at firstname.lastname@example.org or on Twitter @NithinSasikumar