Why you should not invest in mutual funds

You can find lot of people giving advice that if you don’t have time to find stocks then it is better to do it through mutual funds. This is correct to some extent but problem arises when you start the process of choosing mutual funds. You can always buy top performing funds but there is always a clause mentioned “past performances may or may not sustain in future”. So you cannot buy mutual funds based on past performances alone.

We believe that one should not invest in mutual funds due to below reasons:

Portfolio of stocks

If you have a careful look at the portfolio of any leading mutual fund you will find that they have plenty of stocks and in most of the cases total number of stocks would be between 50-100.So even if one stock turns out to be multibagger it will not show any meaningful gain in the overall returns.I will explain this with an example:

Suppose Mutual fund ABC has 100 stocks and another portfolio XYZ has 15 stocks. 

Parameter	ABC Portfolio	XYZ portfolio
Total Portfolio Value (Rs)	100	100
Total Number of Stocks	100	15
Each stock average value	1 Rs	~7 Rs
New value of 1 Stock that becomes multibagger	10 Rs	70 Rs
New Portfolio Value say after 4 years	1 stock rises from 1 to 10 while others rises from 1 to 1.5  Total value: = (99*1.5) + (1 * 10) = 158 Gain of 58 %	1 stock rises from 7 to 70 while other rises from 7 to 10.5 Total value: =  (7*10) + (14*10.5) = 217 Gain of 117 % ( more than double from ABC portfolio)

So you can see that ABC portfolio owned by mutual fund and has 100 stocks gives return of 58% when one of the stocks becomes multibagger while XYZ portfolio with 15 stocks gives fabulous return of 117%

When there are too many companies in the portfolio there would be more chances of failure as great companies are few and only these few will ultimately become champions.

Diversification

Mutual fund manager who owns fund believe that it is mandatory to diversify the portfolio in different sectors to de risk their portfolio. But in this process they choose non performing stocks as well. Due to this, mutual funds always give only average returns .Our aim should be to find stocks that can perform better over a period of time and hence become multi baggers.

Frequent buying and selling

You must have come across news that fund ABC has sold shares of Company A. After some time same mutual fund will buy the stock of same company. So this frequent buying and selling does no good to your portfolio returns.

Limitations of Fund Manager

Fund manager has several restrictions while deciding to buy any stock. Some mutual funds places condition that stock selected should have market cap above 1000 cr only.So even if fund manager finds a potential multibagger company but market cap is below 1000 cr then that stock is left out which means that a great opportunity is lost. Similarly there are other restrictions like volume, free float etc.

Also, Fund manager would like to put his money on the stock which is also in the buy list of his competitor mutual fund because if something goes wrong with the stock and every other mutual fund is in the same boat as he is then he can say to his boss that it happened with others as well. But if he dares to take different path and fails then he can lose his job since he is like any other salaried person who is appraised based on his fund performance and peer performance.

Maintenance charges

Moreover they will charge you maintenance fees ranging from 2-3 % which lowers net returns for an investor.An investor has to bear other charges like security transaction tax, transaction charges , Exit Load etc. as defined by SEBI.

A stock you don’t want to own

Suppose you come to know that stock x is not worthy enough to be in your portfolio and don’t want that stock in your portfolio and the same stock is there in your mutual fund then effectively you are also owning that stock until the mutual fund sells the same stock. To better control your portfolio it is advisable to own stocks which you have confidence and believe in the growth story of the company.

Redemption pressure

Mutual funds face redemption pressure time to time from investors and hence they are forced to sell even when they do not want, again effectively reducing your net returns.

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