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.
