Mutual Funds - Mutually Beneficial?

Mutual Funds - Mutually Beneficial?

"Myths which are believed in, tend to become true." - George Orwell. What!? Mutual funds are not good enough? Even the most open-minded investors wouldn't dare to raise questions about this highly sought after investment product. But history bears witness that, in the beginning, every disruptive idea is feared by most people and welcomed only by those few who have the vision to perceive the change before it happens.

Before we begin, let’s make one thing clear – we are not trying to prove that mutual funds are a bad product. On the contrary, we believe that investors should categorically allocate some part of their portfolio to mutual funds. But before they do, they must consider all the alternatives and understand what to expect when they invest in mutual funds.

For a retail investor, the process of investing money, even in a "simple" product like mutual funds is not all that simple. There are almost 500 equity mutual fund schemes available in India. How would you choose which ones to invest in? On what basis can you pick between the hundreds of options available in the market? Do you know the average long-term returns provided by these funds and how they compare to direct equities (Nifty returns for instance)? More importantly, do you know the average annual fees charged by these funds and what that means for your investment returns over, let’s say, 20 years?

If you know the answer to these questions, then by all means, go ahead and invest in the fund you have chosen. But do not get blinded by short term returns and misleading marketing material that is designed to highlight all the good parts, but doesn’t really answer any of the important questions that you need to ask before making an investment.

Presenting The Case

Unreasonable Costs In a research paper titled "Luck versus Skill in the Cross-Section of Mutual Fund Returns", Nobel laureate in Economics, Eugene Fama concluded that after accounting for management fees, the performance of most active managers is no different from what would be achieved by picking stocks through a coin toss. In other words, there is no evidence of fund managers with skill sufficient enough to justify their high costs. When it comes to long term investing, even a small increase in fees can have a huge impact on total returns over long term. Low cost passive strategies like the ones used by Tauro Wealth provide much more consistent returns and are able to outperform active managers in the long run.

Misleading Metrics Most mutual funds companies use extremely misleading metrics to convince customers of their high performance. Survivorship bias in one of the biggest factors that skews the results. By only highlighting the performance of their recent best performing funds, they drastically increase the average performance of their funds. You should know what the expected returns would be if you also included the funds that didn’t do so well and were shut down? To make things worse, there is no evidence to prove that funds which have done well in the past will continue do so in the future. In fact, studies show that most outperforming funds tend to underperform in subsequent years. Another major factor that skews the performance numbers is the exclusion of fees from the calculations. After deducting fees, the net returns of most funds is much lower than what is claimed in their marketing material.

No Star Performers Mutual funds companies claim that their funds are being managed by "expert fund managers” who can pick the best stocks year after year to give high returns. But numerous independent studies conducted in various global markets have concluded that there is no evidence that "star fund managers” exist. Even the best active managers are only able to outperform for a few years at a stretch. And there is no way to predict which fund manager will be able to outperform in the next few years! Tauro Wealth solves this problem by using cutting edge technology and passive algorithms that are known to provide steady results in changing market conditions. By removing elements of human emotions and biases from the portfolio construction process, we are able to achieve consistent results at a fraction of the cost.

Lack of Transparency Once you invest in a particular fund, you do not have any control over how your money goes. All the decisions are taken by the fund manager, and the portfolio holdings are only revealed once every quarter. Tauro Wealth, on the other hand, gives you complete autonomy to choose which Primers you want to allocate your money to. You can even customize their composition based on your views. Our advanced recommendation algorithms will show you the Primers that are best suited for your needs, but you get to take the final decision.

Assets v/s Cash Reserves Regulatory requirements force mutual funds to maintain a large cash reserve in order to facilitate liquidity for investors. But this lowers the potential return as a part of the capital is not being utilized for investing. By providing investment solutions on an individual level, rather than at the consolidated fund level, Tauro Wealth is able to deploy a much larger proportion of your capital in return generating assets.

Closing Statements

"We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light." - Plato

In a nutshell, Tauro Wealth offers investors an opportunity to capitalize using a large set of tailored portfolios which take their personal income goals and unique situations into consideration. By removing negative aspects of human emotions and bias that plague even the most seasoned investment professionals and drastically reducing the operational costs using technology, we are able to generate a much more reliable and user-friendly investment experience for the investor.