Evolution of MF Advisory activity:
Advisory role in Mutual Funds has begun to evolve in India after introduction of Investment Advisor regulations and tightening the rules around commission payouts by AMCs to Mutual Fund distributors. Selection of right Mutual Fund for investment has always been a tough call to make. Although a few sites have come up attempting to introduce some standard screening processes to shortlist funds, emphasis is still very much on past performance in a limited way. These sites do come up with similar suggestions since they rely on same parameters making investor or advisor deem it as the best.
Returns to MF Investors are discouraging:
Several investors we spoke to have admitted to investing in multiple schemes, either in SIP route or lump sum routes. While we don’t consider it as a bad practice, we were told that they were asked to invest in different schemes at different times by their agents based on their study of funds at those times. Returns earned by investors on their entire Mutual Fund portfolio are often worse than the bench mark Nifty.
Premise on which MF advisory is built:
Data mining done by several sites analyse the data objectively and come up with schemes that offered the best returns for the given time frames (ending on the date of query, in most cases). In the absence of any other credible criteria to adopt, most agents advise their clients to go with Schemes that are the flavor of the day / month. The underlying presumption in such an approach is that “Winners will stay winners”. A few sites have rated / graded funds into different categories and suggest investors to stay away from poorly rated funds.
Fact finding Case Study:
In this story, we present some facts on how this approach had worked in past 10 years. At the end an effort is made to think out of box and conceive fresh ideas to address this issue, which could help advisers gain respect from investors and earn income. We tested by starting a portfolio of funds on each possible trading in the past 10 years. Then, we captured all the results.
What we found from hard data:
- There were 2544 trading days in the coverage period. At 25 top schemes per day, the total cases covered were 63,600. A total of 390 unique schemes made it to top 25 in all these days. Some made it more number of times. Some made it fewer times.
- Out of them outperformance was noticed only in 48% cases. This meant an average investor relying on this model would have had 52% of his investments underperforming and only 48% outperforming Nifty. The chances of his overall portfolio of funds beating Nifty are limited.
- Then we calculated the quantum of outperformance or under-performance of Fund Portfolio. Sadly, the Mutual Fund portfolio returned a negative Rs 2,435 in 375 days on every investment of Rs 1,00,000. This means a negative performance of 2.44%.
- We then tested the efficacy of this approach to top 10 schemes on each day. To our surprise, the success rate improved by only 1 percent. The quantum of under-performance with 10 schemes stood at Rs 2,140 on an investment of Rs 1,00,000 in 375 days. Under performance of negative 2.14% per year is clearly unacceptable for any investor who looks forward for better returns from us.
The above findings tell us why many investors report under performance of their overall portfolio of funds when compared to benchmark Nifty. No wonder, investors are reluctant to respect their advisers too much.
Should there be a different approach to selecting Mutual Fund schemes?
Can the success rate be improved to make investors earn better return than Nifty?
Unless the answers to above questions are affirmative, many clients will eventually lose faith in the system and may move back to fixed income instruments like bank deposits and bonds.
In order to improve the accuracy, we followed a slightly different approach to short list the top schemes on all days. In our approach, we gave emphasis to outperformance over benchmarks, AUMs, Ratings, Volatility of outperformance and share of illiquid stocks instead of simple point to point returns of respective schemes. Like SPOTS and SPOTS Current from Vivekam for equity, we began listing out the likely outperformers in next one year. We also checked how the findings performed in next 375 days to test the strength in argument.
If a selected mutual fund has done better than Nifty in next 375 days, we deemed it a success else a failure. All those funds who earned less than Nifty may have still earned positive returns but were still considered as our failure in spotting the winners. They are given Purple colour while the winners that have done better than Nifty are given Green colour. From the images here, one will find that the winners outnumbered in all cases.
Encouraged by the ability of our system to spot better funds, we started building portfolios of 10 top funds on each possible trading day and tracked their performance in 375 days. If the collective performance of all those funds was better than Nifty, our goal is accomplished. We captured the data of all portfolios and tabulated the data.
Voila! It worked wonders.
On an average 65% of the schemes selected on most days have beaten Nifty. This is in contrast to 48% noticed in the approach referred above. Quantum of outperformance enlarged while the quantum of underperformance shrank making the net returns far more attractive than in normal practice.
If one assumes a similar investment of Rs 1,00,000 per scheme in all the top 10 schemes on every possible day, this system produced an average positive outperformance of Rs 5,165 in 375 days. This implies, a suitably modified approach can help improve the returns to investors from negative 2.14% to positive 5.15% or a net gain of over 7.30% per year over benchmark Nifty.
We are so excited that we immediately started building a product platform to be of help to our clients in building portfolios of mutual funds with a clear goal to earn returns that are far superior to Index over time. We also began our exercise to give shape to new, smooth and peaceful approach of mutual fund investments. Clients availing this service, due to be launched in August 2016, will experience the following features in their interactions.
- All investments will be routed through registered brokers on NSE who have the mandate to buy / sell Mutual Funds through screen based trading (MFSS).
- Clients will have access to the latest funds holding statement from Broker as well as Vivekam platform.
- Clients will be advised and assisted to execute the suggestions from Vivekam like in equity products. They will get SMS alerts, eMail alerts like in equity products.
- Their performance of funds portfolio will continuously be compared with Nifty to see where they stand at any point of time.
- The custody of assets will remain with clients all the time.
- Unlike in equity, Clients will only pay 0.25% of their portfolio per year to Vivekam.
- To sweeten the deal further, Vivekam will not charge any performance charges from clients.
Clients desirous of using our services or testing our services are welcome to write to us as early as possible. We will soon be coming out with our plans to help existing clients on how to rebalance their portfolios periodically.
Comments, suggestions and views are welcome on firstname.lastname@example.org