Some good mutual funds to invest in India
As optimism in the Indian stock market is at its peak, I decided not to invest in any stock. That’s why, I am sharing quality mutual funds where my family members have invested. Note that, this will be the first and last post on mutual funds investment. I will continue with equity discussions in subsequent blogs.
Few important things —
Investment instruments — Mutual funds invest in equity and capital markets. They can also invest internationally with majority portions invested in India. Net Asset Value (NAV) of any mutual funds is calculated based on stock prices in their individual holding and number of units allocated in the fund.
Regular v/s direct plans — I will always go for direct plans as expense ratio of direct plans is lower than regular mutual fund. In regular plan, intermediaries eat your returns. Please beware of so called “Investment advisors” who convince their customers to invest in funds where intermediaries get chunk of returns while investors in the scheme suffer a lot. Never ask barber whether you need haircut !
Thematic schemes — In stock markets, people usually go crazy about some theme or a sector. In 1990s, technology stocks were in boom. In 2004–2007, infrastructure and real estate stocks were sky-rocketed. I hope that I would be wrong. But, currently, India is seen as a “Consumption story” and “Infrastructure theme”. Often, people take stocks of such stories to unsustainable valuations. And, last fellow entering into the party takes all the brunt. Such stories are going to blow up on faces of madmen. Many fund houses launch mutual funds in theme or story. My basic argument — If investors in mutual funds understand the business economics of such storied stocks, then they could have picked stocks directly. My suggestion is not to fall in love with such stories. Better, go for a well diversified (not over-diversified) mutual fund with less expense ratio and good track record.
End investors are partners, not customers — I strongly believe that invest in fund managers who treat you as partners in the journey of wealth creation. If you are being treated as customers, then there are high chances that investment decision making is going to be unsound. Because of incentives involved, fund managers will not be able to manage money as if it is hers. This is because investment professionals always suffer from peer pressure. They are being evaluated on monthly basis. In light of competition from other fund houses, fund managers may yield to unsound practices of running behind the AUM growth. Such practice widely present in mutual fund industry is harmful for investors in the scheme.
Debt funds and full maturity plans — When macro factors are right, companies issuing debt-instruments (Commercial papers, NCDs, corporate bonds etc.) can easily roll-over the debt. However, when things get rough (in times of liquidity crunch), they won’t be able to pay interest and principal amount easily. This “borrow short, lend long phenomenon” widely present in Indian market is responsible for IL&FS crisis. Defaults by irresponsible housing finance companies and NBFCs brought financial system on its knees. Please understand that debt-funds and full maturity plans are not risk free instruments. You get 9–9.5% in debt funds or FMPs while returns from fixed deposits are 6.5 — 7%. Just for 2–3% higher returns, don’t take risk of defaults and heart-attacks. Nowadays, debt funds and FMPs have become pseudo lending machines in India. Recently, many fund houses were in news for exposures to not-so-good quality names. Such wide corruption in our banking and financial system would bring heartburns to greedy (or naive) investors. In computer science parlance, default is a feature, not a bug.
Liquid funds — Liquid funds invest in Government Debt securities (like treasury bills etc.). It is one of the best alternative to short term fixed income instruments like Recurring Deposits/Fixed Deposits.
How many mutual funds can one hold ? I believe 2–3 mutual funds for a lifetime should suffice for an investor. This is because opportunity set for different mutual fund managers is restricted to 5000+ companies in India. What matters is capital allocation in good quality companies at attractive price for long-long period of time.
Durability of returns matters a lot — Some people are pretty excited about last couple of years of performance. They think high returns in past continues in future. I don’t think so. If a fund consistently returns 15–20% over very long period of time, you are seating on multi-bagger returns. Always ask — is this high performance sustainable?
In short, equity mutual funds are the best option for investor who doesn’t want to invest directly in stocks. This comes with rider that you need to select mutual funds with low expense ratio, high quality fund manager and long holding period. For short term horizon, investors can go with liquid fund with most of the exposure to treasury bills.
Now, let’s discuss three mutual funds.
Parag Parikh Long Term Equity Fund
As I learnt a lot from Parag Parikh, I looked at his investment offerings. I liked this mutual fund because Rajiv Thakkar doesn’t restrict himself to market cap, country or any sector. He is not averse to holding cash if nothing exciting comes up. This is a well diversified mutual fund with 35% exposure to international stocks and 65% invested in India. Rajiv invests in good quality names with strong fundamentals at reasonable price for long term. His direct portfolio returned 17%+ CAGR since inception of the fund. Importantly, insiders are also fully invested in this fund.
I have invested for my son’s education in this fund and will likely hold for 15–20 years.
As I write this, I received a notification that an ELSS fund from Parag Parikh would be launched in July-2019. I am watching for the ELSS scheme.
This is another from Parag Parikh AMC. If I don’t find reasonable valuations for companies, then I put my money in this fund. This is an alternative to RD/FD. This comes with very low risk with returns so far 6–6.25%. One nice thing about this liquid fund is that they don’t charge penalty even if you withdraw within 3 months. RD/FD have penalty for premature withdrawal. On the other hand, expense ratio for this fund is only 0.15%. That’s why, it is better than RD/FD in terms of returns and comes with negligible risk.
Mirae Assets Emerging Bluechip Fund
This fund is from Mirae AMC which invests in small and mid sized company. I observed very good track record of investment decisions by fund manager Neelesh Surana. His strategies are same as we discuss in the blog post. That’s why, I invested my family’s money into this fund. They are very long on this fund. This fund returned around 20% over last few years.
Conclusion
I don’t think that any investor would need further investment decision besides these three funds. These are are good quality fund managers who will make right decisions for you at reasonable expense ratio. Your job is to invest on regular basis and to stick with them for long term ignoring day-to-day noise of Mr. Market.
Disclaimer
Investments in mutual funds is subject to market risk. Please read scheme related documents carefully. As I have invested in these funds, I have positive biases for these funds. I can be wrong! You are requested to do your home work before investing in any of these funds. Also, I wrote about these funds because I genuinely find them as good people. As I have discussed that direct mutual fund should be selected, nobody gets commission. All I want you to understand that I won’t receive any incentives to write about these funds! Next blog post will be shared by Oct-2019.
