Thursday, July 05, 2012

Investing in Indian mutual funds does not inspire confidence

Investment pundits, gurus, speculators, and charlatans long touted the BRIC sector. These days, the Indian hot-market story seems dated and out of vogue: probably because the Indian market's recent decline has besmirched some of its luster.

However, there still remains a case for prudent investment. In any market. Especially a down one.

And one of the easiest ways to start investing in any market is perhaps through mutual funds.

To buttress the motivation behind this blog, a minor sojourn follows.

The basic idea of a mutual fund is captured fairly in its name: it is a fund mutually owned by all the fund investors. Consider the case where 3 individuals with limited financial resources want to invest in the equity market. Sane equity investment requires that investment risk be mitigated through diversification. In simpler terms, the individuals should NOT plunk down all their money into just one company because then they'd have all their eggs in one basket. Instead, they should consider spreading out their risk by investing in a diverse set of companies. However, that can take a lot of capital (e.g. brokers might sell only in slabs of 100 shares), and this restriction can (rightly) keep out a lot of low net-worth individual investors.

Instead of individually trying to diversify their company specific risk, what if the investors got together, pooled their money and bought shares of 3 companies with their combined resources? that would spread the risk over 3 egg baskets, instead of 1 risky basket for each individual. What if they decided to take this good idea further and involved their in-laws, neighbors, friends and other communities? With a 1000 individuals, they could buy shares of every strong company on the market, almost totally diversifying away company risk!

In its simplest terms, this is what a mutual fund is: an investment company capitalized by several individuals for the express purpose of investing in an underlying asset class. The management of this special company (henceforth referred to as the "mutual fund") has one clear role: investing peoples' money for them. To ensure that the company can attract investors, the management has to show that it has scruples and that it is competent. Attention to detail, openness and presentation then become benchmarks by which managements try to demonstrate, and potential investors evaluate, managements' worthiness. Of course, these are in addition to the actual fund performance. But, as managements are obligated (morally AND legally) to often remind us: "past performance does not guarantee future results". Which essentially places a lot of emphasis on the foregoing exhibition and evaluation.

In light of above, I find the lack of attention to detail in the Indian mutual fund industry utterly dismaying. In reading through prospectus' and official website descriptions of several mutual funds (and of governing bodies!) I routinely find spelling errors and grammatical blunders. This horrifies me: the management that does not care to look at automated spell checkers (or rather know enough to employ people who would care about such simple, low hanging fruit) are being entrusted with hundreds of millions of peoples' hard-earned money!

Exhibit A: Page 2 on Goldman Sachs' BeeS Benchmark S&P CNX 500 fund


There can be no assurance or guarantee that the investment objective of the respective Schemes will be achieved. However, the performance of Benchmark S&P CNX 500 Fund may differ from that of the respective underling index due to Tracking Error.


Exhibit B: HDFC Mutual fund

Entry Load
(For Lumpsum Purchases and investments through SIP/STP) NIL 

Unfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on the investors' assessment of various factors including the service rendered by the ARN Holder.


I actually googled "unfront" to see if this was some new jargon in the Indian markets. I concluded it is a typo for "Upfront". Also, I actually had to fight my auto-correct to type "Unfront".

Exhibit C: AMFI

Disclaimer
The Information provided on the AMFI website is based on the information provided by the members. As such AMFI does not take any responsibility for its accuracy, completeness and timeliness.


The AMFI Disclaimer above is by far my favorite. It is tantamount to blanket recanting of everything posted on the website of an association formed, by the mutual fund companies themselves, with the explicit mission of spreading trust and awareness of mutual funds in India. I wonder what information  AMFI actually is responsible for on its own website.

I'd be happy if these were the only instances of head-slapping reading I have as yet encountered. Sadly, that isn't the case. I don't list them here since I have long since lost context on where and how I encountered these errors. I'll add to these as and when I run across more.

Till then, share my agony and ecstasy.








2 comments:

kage said...

here's more!

http://www.moneycontrol.com/mutual-funds/nav/GS-Nifty-BeES/MBM001

Goldman Sachs AMC has acquire Benchmark AMC. Pursuant to this all the schemes of Benchmark Mutual Fund has been renamed to Goldman Sachs w.e.f. August 22, 2011.

kage said...

Now from Goldman Sachs Benchmark mutual funds' website.

http://www.benchmarkfunds.com/Products/GoldBeES/Overview.aspx

"With effect from 14th July 2011, both Benchmark Asset Management Company Private Limited (BAMC) and Benchmark Trustee Company Private Limited (BTC) are a part of the Goldman Sachs group. Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, Goldman Sachs is one of the oldest and largest investment banking firms. The entire share capital of BAMC is held by Goldman Sachs Asset Management (India) Private Limited (the asset management company of Goldman Sachs Mutual Fund) and another Goldman Sachs group company, whereas the entire share capital of BTC is held by Goldman Sachs Trustee Company (India) Private Limited (the trustee company of Goldman Sachs Mutual Fund) and another Goldman Sachs group company."

Which other Goldman Sachs company is being talked about here? Is there a reason it hasn't been disclosed?