Choosing mutual funds is getting complicated

In the past few years, both star fund managers and star fund houses have been challenged by the tough market conditions


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There was a time when you could pick a pedigreed fund with a 10-15-year track record and buy any scheme. Or pick a star fund manager and hitch your wagon to the star performer. You could fill it, shut it and forget it. But those times are over. In the past few years, both star fund managers and star fund houses have been challenged by the tough market conditions prevalent since the 2008 global market crisis, which started with the collapse of Lehman Brothers. And its after-effects still persist.

The S&P BSE Sensex has been quite volatile since 2008, caused in part by global events, and even the best fund managers are finding their old philosophies being challenged.

Obviously, 2016 was tough and every other fund had a bad phase. We had to take a re-look all the numbers, again and again, and ask whether the schemes deserved to stay in Mint50. Perhaps the job of a financial adviser is more defined. Typically, she maintains a list of schemes to recommend. And in exchange for a fee, she can suggest to you 5-7 schemes from this list.

But as a newspaper, which is read by lakhs of people whose individual risk profiles we don’t know, we can’t give personal advice. We have to broaden our view and enable all the readers with enough information— processed, not raw—to make their own baskets (read ‘How to use Mint50’).

We find solace in the basics. The more we go back to the basics, the more we can filter out the noise. But it is still a big task. The Rs16-trillion Indian mutual funds industry has about 700 debt funds and more than 500 equity funds. All have had their good and bad days. The issue is: how bad were the bad days and were they enough to throw water over the good days?

Bad phases: permanent or temporary

Your fund will not outperform every day. Prashant Jain, executive director and chief investment officer (CIO), HDFC Asset Management Co. Ltd, had a tough time between 2011 and 2016: outperforming the peers in some years and underperforming in others. Last year, BNP Paribas’ schemes were hit by demonetization, as it has consistently held consumer-facing companies. With little cash in the public’s hands, these companies suffered.

Looking at a scheme’s past returns is not enough. Rolling returns show a clearer picture. See if its strategy makes long-term sense. Check if its performance was affected by market-linked factors or mistakes by the fund manager. If your fund slipped because of market factors, then the slip is temporary.

Change of fund manager

Like everyone else, fund managers too change jobs but this seems to be happening more often now. Axis Asset Management Co. Ltd lost two of its senior-most fund managers. Anoop Bhaskar moved from UTI Asset Management Co. Ltd to IDFC Asset Management Co. Ltd in 2016, a year after Mint50 included UTI Mid Cap Fund. Kenneth Andrade, who Bhaskar replaced at IDFC, moved out of the mutual funds industry and Vetri Subramaniam, erstwhile CIO of Invesco Asset Management (India) Pvt. Ltd has now taken Bhaskar’s place at UTI. Sounds confusing?

We maintain that you shouldn’t exit a fund just because a fund manager leaves it. But sometimes the schemes do suffer during fund manager transitions. One way to cut through the noise here is to ask: do the reasons for investing in the scheme still prevail? A good fund manager is never the only reason to choose a fund. The fund house and its processes also matter. If a manager’s exit disturbs all that, then there may be reason for you to exit as well.

Change of fund strategy

When Andrade left IDFC, investors and advisers were concerned about IDFC Premier Equity Fund. And then, the scheme’s co-manager Punam Sharma, too, quit last year. In came Anoop Bhaskar, whose fund management style is different from Andrade’s. Although Bhaskar’s way forward has good intentions, the original reasons for investing in IDFC Premier Equity were no longer there.

For instance, Bhaskar’s penchant for diversification goes against Andrade’s style, though both boast good track records. Staying invested, despite this, may not be a bad move but exiting is acceptable if styles of the predecessor and successor are vastly different.

There are good and not-so-good schemes to choose from. But when markets are volatile, can mutual fund schemes that invest in such a market, remain unaffected?

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