Mutual Funds – Long term bet?

Mutual funds have earned a reputation that hovers between risky and conservative. It caters to the segment that is skeptical to stocks but still want to take a shot at it. Also it provides a platform, wherein the funds are professionally managed by exposing it to multiple stocks. So it becomes certain that they are not as risky as stocks but they are not as safe as pure debt either.

Another aspect that is generally associated with mutual funds is that, it is a long term investment. What is the definition of long term here, 5-7 years? The perception is that it is a more passive mode of investment; hence consistent check is not a mandate.

After analyzing a certain set of funds, that did not seem necessarily true. I took a sample of funds to justify this notion.

These are the Top 3 Funds of Top 5 AMC’s namely the HDFC, ICICI, Reliance, UTI and Franklin Templeton.

The same set of funds across the span of last 3 years.

This is the CAGR returns that you would get, if you parked in these funds for 5 years. The ICICI Prudential Discovery Fund (G) and UTI MNC Fund (G) have been the best funds with an average of 12 % Annualized returns in 5 years. The average of these funds would have been 8.5 % CAGR Returns.

The same set of funds across the span of last 3 years.

Undoubtedly there has been some consistency in the repetition of top funds in the AMC’s across tenures. However here, the Reliance Equity Opportunities Fund (G) and the HDFC Midcap Opportunities Fund (G) has have given the highest returns i.e 17.08 % and 16.95% respectively. On an average these top funds have given an average of 11.8 % CAGR returns. Certainly that is more than the 5 year tenure as seen above.

Now let’s look at 1 year tenure.

These figures evidently state the returns are higher than the 3 or 5 year tenure. The best performing among the above, the Reliance Equity Opportunities delivered 22.22 % return in the last year and the ICICI Prudential Discovery Fund gave a 21.36 % return. The average in the tenure came to 16.8 %, way higher than even 3 year return.

Further, let’s take a peek at the worst performing funds and their returns in 5 years.

The observation tells us that even in a 5 year span, there was a good possibility of the capital getting eroded with funds like HSBC Unique Opportunities Fund (G) and L & T Contra Fund (G) giving negative returns after five years.

 Moral of the story is:

ü  It is purely a notion that longer the tenure of the fund, the higher the returns. There is a good possibility that the returns dwindle, even with the best of funds. The reason being, the longer the tenure, more the market cycles. Any bearish phase may be detrimental to the equity fund in general, unless you are into the right/ defensive fund.

ü  Pick of fund becomes even more important. As we have seen, the wrong pick of funds puts you into lurch as the years go by.

ü  Mutual funds are not passive mode of investment. It requires consistent monitoring and replacements as and when market cycles change.

After stating whatever I did above, I do accept that there are funds which you should stay invested in for a long tenure. But that quotient will be a very small figure, and tracking that is difficult. Thus reviewing becomes imperative.

                        *** All opinions above are personal and any further debate is welcome ***