Avoid mistakes with mutual fund investments

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5 factors affecting a funds return

So far many have written articles on how to invest in mutual funds. No doubt that this trend will continue. With respect to the mutual fund investments that we have made in the past, the expected results are not forthcoming and at the end of the day there is great disappointment than joy on seeing the actual returns. There are several reasons for the same. It’s the result of our wrong beliefs or superficial decisions we have made without solid reasons for those choice of investments. Once we know the mistake, we approach a number of advisors for undoing that mistake and most of the time it is too late or too costly. A better approach is to avoid errors before making a mistake.

1. NAV vs Returns

The most unshakable belief most of us have is to invest when NAV is low or at the beginning of NFO. We often think that we can choose funds for investments based on NAV. We have told in the past several times that this is not a good approach. We are reiterating again that this will not help our investments in any way. For example: Invesco small cap fund was recently launched and is a one-year old fund. SBI small cap is a decade old fund. New investor now has two choices. One is to invest in these new products during NFO when the NAV is at 10 or the other options is to invest in SBI small cap fund. In these two approaches, you can see in the table how we have profited over the past years investing in SBI small cap for which the NAV is higher.

The Invesco small cap fund is about a year old now. The other is SBI Small cap fund which is 10 years old. If the new investor has invested in this SBI small cap, his NAV moves from 49.33 to 53.46 giving a return of 8.26%, whereas the other Invesco small cap moves from 10.07 to 10.53 giving a return of 4.58%.

It clearly shows lower base of NAV in Invesco is not helping the fund or our investment to grow – Mutual Fund returns purely depends on the composition of the folio and not based on NAV or NFO.

Scheme Name	Launch Date	Amount Invested	Value as on 11-11-2019	Profit	CAGR Returns (%)	NAV on 11/11/18	NAV on 11/11/19
Invesco India Small Cap Fund	30-Oct-18	100,000	104,568	4,568	4.58	10.07	10.53
SBI Small Cap Fund	9-May-09	100,000	108,237	8,237	8.26	49.33	53.46

2. Scheme AUM vs Returns

Most often we think that it would be better if we invest in the largest schemes. This does not always turn out to be better. For example: when the AUM is very high, it becomes difficult for the fund manager to invest bigger amount. It is not easily possible to select good & better companies to invest in. Managing higher amounts has its own problems. Therefore, as the AUM increases, administrative difficulties to manage them also increases. The table below gives 1 year and 3 year returns of small cap funds along with their AUM. It is loud and clear that when AUM is small, the returns are more and when the AUM is high, returns are less. Following table gives small cap fund returns from different fund house with varied AUM.

AMC / Fund house	AUM in Crores	1 Year Return	3 Year Return	Expense Ratio
Axis	1200	22.9	13.08	2.38
SBI	2915	8.3	12.44	2.03
DSP	4905	-2.47	0.77	1.87
L & T	6112	-7.64	8.08	1.79
Franklin	7031	-4.33	2.47	2.29
HDFC	9137	-7.94	9.32	2.01

3. Expense Ratio vs Returns

In recent times we have read more about mutual fund returns. The important point we learnt was that when the cost increases, the profit is reduced. No doubt that this is true. But these lessons are not helping us get good returns. Is there a new problem? No, there is a caveat. Look at the above table. The expense ratio of axis small cap which is slightly higher, is the most profitable in both 1 and 3 years. It is more profitable than loss-making schemes. So, do we have to choose a lower cost lower return fund or Is it ok to choose higher return funds with slightly higher costs? At the end of the day – total return received by us after all the cost is important. When this is higher, the cost does not matter. Hence do not see the expense ratio alone. Always see returns along with expense ratio and decide based on net return after all the cost.

4. Size of the fund house vs Returns

Will big fund houses give “bada” returns?

At present, public banks, private banks, corporates and foreign companies are managing the funds. We are often choosing schemes with names that are familiar to us or in companies that we think are the biggest corporations. Are their funds really profitable? Answer is yes and no. Small AMC schemes have also given good returns in the past. Check the table below, this table gives large cap funds managed by various fund houses and their returns. No Guarantee that big fund houses will give better returns.

Large cap funds 1, 3 and 5 year returns and their parent fund house’s total AUM amount in crores is given

Fund	Rating	1-Year Return	3-Year Return	5-Year Return	Scheme AUM in  Crores	AMC AUM in Crores
HDFC Top 100 Fund	* * *	8.53	11.09	7.6	18,507.00	376,597.57
ICICI Prudential Bluechip Fund	* * * *	9.25	11.64	8.93	24,132.00	348,068.36
SBI Bluechip Fund	* * * *	12.5	10.32	9.71	23,585.00	320,662.84
Aditya Birla Sun Life Focused Equity Fund	* * *	11.6	10.11	8.5	4,360.00	253,828.50
UTI Mastershare Fund - Regular Plan	* * *	10.21	10.93	7.8	6,174.00	154,229.01
Franklin India Bluechip Fund	*	4.45	6.93	6.41	6,669.00	124,025.02
Axis Bluechip Fund	* * * * *	22.58	17.86	10.79	8,749.00	105,526.17
IDFC Large Cap Fund - Regular Plan	* *	11.06	10.95	6.53	457.00	94,150.54
DSP Top 100 Equity Fund - Regular Plan	*	16.96	9.56	7.46	2,641.00	75,415.56
Mirae Asset Large Cap Fund - Regular Plan	* * * * *	13.22	13.94	11.7	15,897.00	33,282.15
Invesco India Large Cap Fund	* * *	12.31	10.71	8.34	202.00	23,542.83
Edelweiss Large Cap Fund - Regular Plan	* * * *	13.62	13.05	9.09	172.00	11,763.71

5. Dividend Received vs Returns?

We think and believe strongly that the schemes that often distribute large dividends give great returns. This is not the right approach and there is often no extensive relationship between the dividend and performance of the scheme. For example: A fund that gives regular dividends has an annual return of 8%. Another fund that rarely gives dividends has an annual return of 9%. Then the second one is a better plan. The first fund is not very suitable for investments with respect to returns parameter. Currently there is no tax for dividend received but it may change in the near future – more news is awaited in this regard.

Finally

The Return of a fund is largely due to the manner in which the fund is managed and its underlying assets i.e. the quality of the assets it holds.

Various parameters or variables like NAV, NFO, scheme AUM, fund house size, dividend distribution, etc. are influencing the returns in certain cases in a limited way. We should understand the reality and ignore the myths and choose funds for investment based on the fund’s underlying assets for better returns.

All the best!

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