Lies, damned lies and statistics of MF returns

I am sure many of you have heard this phrase or read about it. It was made popular by the great American author Mark Twain, who attributed it to the British PM Benjamin Disraeli. In simple terms it means that some people, when not having any real strength in their arguments, want to throw around a lot of numbers, mostly irrelevant, to confuse the issue.

Why am I using this particular quote? Well, over the last few weeks as the market is going into a tailspin, I have seen a number of people who have come out and made a series of logically flawed statements. These are now making the rounds in Facebook groups and self proclaimed expert writings. While I generally go by the “live and let live” principle in life, this is going to affect a lot of gullible investors who have blind faith in what they read, from certain sources. But let us first look at some of the statements:-

  • Even though the index is static for 2 years, MF SIP have given XIRR returns of 12 % in the same period.
  • Do not worry about market levels, just continue doing SIP.
  • Even if your SIP investments are in the red, they will be fine in the long term as long as you are holding them for 15 years or more.

Let us first understand one simple thing. The Sensex consists of 30 stocks and if you had a MF which invested only in these funds, then the MF returns will certainly mirror that of the Sensex. The fact that a particular MF is doing better than Sensex, just means that the fund invests in other stocks. Comparing the two is probably the silliest thing that you can do for obvious reasons. In fact, some of the mid cap and small cap funds have done quite well in 2015 too. The basic stuff one needs to understand is this – an index represents the general mood and valuation of the market BUT it does not mean that all stocks are doing badly. Even within the Sensex there will be stocks that will buck the trend and there are a whole lot of companies that are not part of the popular index. Of course, if there is a prolonged sell off in a bear market then all stocks will probably be affected to some extent or the other. This is what happened in 2008, 2011 and may yet happen in 2016.

So the simple point is this – if you have a portfolio of stocks which are doing well over a period of time, then that portfolio will have decent returns. It does not matter if the portfolio is an index, an MF portfolio through a fund manager, or a portfolio that you have created on your own. To give an exalted status to MF, virtually saying that MF will necessarily give positive returns irrespective of what happens to the Indices, is a clear example of using data in a devious manner. In my book it is definitely a lie.

Let us now look at what happens to your portfolio value when the market tanks. Well, if you are looking at a long term portfolio then any sharp drop in the market will affect it in an adverse manner. Now let us take an example where an investor had 50 lacs in December 2015 and is also investing 50,000 per month. If the market continues to go down over the year 2016, then his portfolio will definitely be affected adversely. Let us say that the benchmark indices drop by 20 % in this year. As all fund managers are great one’s the portfolio value only drops by 10 %. The investor will hopefully get to buy his new units at a lower NAV through SIP but there is no guarantee of it as the market will not be going down linearly. SIP on a specific day of the month will most likely NOT help to buy at best levels. I have discussed this a lot in some of my earlier posts. In the balance, the investor is going to be poorly off on both scores of his earlier portfolio as well as his new investments.

You need proof of this? Look at your own data between January 2014 and January 2015. What is the XIRR that you have got on large cap funds? What was your portfolio value in January 2014 and how much is it for THAT portfolio today? Remember do not be deceived by looking at your TOTAL portfolio value, which would of course be more due to the investments you made in 2015.

What really bugs me is some people like planners and MF industry people knowingly try to create a hype that MF investments are less risky as compared to direct stocks and they will kind of do well, despite the markets doing badly. It is like saying all our batsmen will fail against Australia in an innings but we will still score enough runs !! And in cricket at least you cannot score negative runs !!

What about equity investment for the long term? Will your portfolio recover and grow hugely in the long run? It may well do that, but it does not take away the fact that the depletion of value in your portfolio is real. A 50 lac portfolio going down to 40 lacs does mean that your assets and net worth have reduced by 10 lacs. That fact cannot be wished away and will impact you badly. Of course, if you panic and sell off then you have just converted a notional loss into a real loss for your portfolio. Further, there is really no saying how the market will react in the future. What you need to remember is that for all projection of past data, no one has enough ability to project what will happen 15 years into the future.

These then are the lies, damned lies and statistics propagated by people who somehow want people to just keep investing in MF through SIP which really may not be a best idea in a fluctuating market we are likely to have in 2016. Does this mean I am saying that you should not invest in direct stocks or MF? Not at all – equity is a great asset class to be in, but do it with open eyes and understanding. MF is a simple instrument that is buying stocks with your money, it has no magical quality apart from the scale in which it is doing the transaction.

Equity investments are in a nascent stage in India and we all need to support it’s growth for retail investors. But we need to do it through objective advise that will really educate new investors, not though the current methods adopted solely for vested commercial interests or lack of knowledge.


8 thoughts on “Lies, damned lies and statistics of MF returns

  1. Though I am no fan of MFs, with a billion dollar monthly infow, they stand a better chance (theoretically) of averaging down their cost of acquisitions in scripts like L&T, MRF, Nestle, Eicher, oil explorers, commodities, PSUs, PSBs, take advantage of enhanced dividend payouts from PSUs and realize higher returns as scripts reach 52 week highs. That is how some funds perform better than others and indices. Financial muzzle of MFs and LIC cannot be matched by individual investors and hence not comparable.


  2. Dear Rajshekhar Roy,
    I fully agree with you. though, no doubt, Equity MF is a good product, people having self interests are exaggerating it.They always highlight the figure of the best scheme which is one among hundreds(but what about the worst performing scheme? you mention it also !). They should check weighted average return of all schemes and then comment. Recently I read somewhere that Even though from June, 14 to Jan, 16 sensex return was zero, average return of equity MF was 12%. This needs to be checked for its correctness. For exemple a fund having an aum of 10,000 cr and another one having an aum of 1000 cr might have given 0 and 24 % return respectively, resulting in average return of 12 % which would be misleading as weighted average return would be only 2 %.Similarly return given by a fund should be compared with related index and not always with sensex, as already pointed out by you.
    I also agree with you that there is a scope on improving upon SIP. It may be more beneficial to invest on dips periodically over a long period of time.

    Liked by 1 person

  3. The million dollar question is – Does anyone have the time to keep track of this volatility on a daily / weekly or monthly basis. Worse still, even if one does manage to keep track, what should one do, after keeping track? If one couldn’t answer either of these questions, then a SIP is the next best alternative. Split your SIP over as many days of the month as you can, just for mental solace that you didn’t miss a buying opportunity when the market tanked. In the long run, this strategy actually makes little difference.


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