Tuesday, May 02, 2006

Mutual Funds in Bull market

by Kuppusamy Clellamuthu

Mutual funds have done a commendable job hitherto in India & elsewhere in the world. They have brought in millions of investors into equity investing, thought indirectly. That is some efforts laudable.

However many of us have a belief that mutual funds would grow at the rate of 40-45% every year (some people say 20-25 % YOY growth is not a concern with mutual funds). It does not make any sense to expect every year to be the same way how the last 2-3 years have been. Mutual funds have generated returns in the range of -30% (or even lesser) during the bear market of 2001-02.

Hell lot of money has been collected since the beginning of this calendar year where the market never looked attractive. In an extended bull markets like this one, people see the enormous returns generated by the mutual funds in the recent past and pump in money (purchase/invest in MF). Heavy inflow obtained this way leaves fund managers with few choices (all of them being bad) at these high levels. They have no choice but to put them in the same stocks they already own even at higher levels. Some funds need to keep some (more) money away for rainy days at these levels. This reduces the return for people invested later. Inevitably markets tend to correct/crash at some stage later. Seeing a fall in market & their NAVs people tend to withdraw their money from the funds. Fund managers are forced to sell more stocks at these low levels to meet these needs, thus driving the prices even lower. No one is ready to keep their money or put in new level where there are attractive buy opportunities for the fund.

In the last 1990’s and in 2000 lot (some one should find a better & bigger word at this place) of investor put in to .com/technology funds in US. They did not bother even with companies trading at 500-1000 times of their earnings. After historic correction (companies lost from 50-80 % of their value from late 2000 till 2002) in 2002, nearly half the investors were ready to invest in shares and MF. More and more attractive picks were present at that time. After all rational behavior and human nature never go together.

4 comments:

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Chandrasekaran Krishnan said...

I am first introduced to you tamil blog. It seemed very useful. Why dont you write a full fledged primer on Mutual funds, for novices like me ? Atleast a brief explanation about terms such as redemption, dividend option, growth option, how each works...

Chandrasekaran krishnan
krishchandru@gmail.com

Kuppusamy Chellamuthu said...

Thanks a lot for your nice words Mr.Chandrasekaran Krishnan. That really helps to keep the motivation right..

would take your suggestion seriously.

Kuppusamy Chellamuthu said...

Dear Chandrasekaran,

Your suggestion is valued. Going forward, would like to incorporate what you said.

- Kuppusamy Chellamuthu