Over the years I have noticed a pattern in the portfolios that investors share with me.
Years of being sold products based on commission leads to portfolios being cluttered.
For those that have stocks, there are thirty, forty maybe fifty scripts all with varying quantities of money invested and no coherent strategy or ongoing tracking in place. There are certain situations where directly buying stocks makes a lot of sense, but investors need to have the right temperament, time horizon and be extremely strategic about how they make those investments at a portfolio level.
Similarly, there will be dozens of mutual funds in a portfolio, most of which are invested in the same securities.
Is there a benefit to chasing the next hot stock or the next great theme? Calculation of the actual investor returns doesn’t seem to suggest so.
In fact, S&P Dow Jones, a global index firm, created a report to evaluate how well the average mutual performed over time compared with their benchmark. What they found in 2020 was that eighty eight percent of Indian large cap equity funds could not beat the benchmark in a three-year period. For tax saving funds, this figure was ninety percent!
If equity managers cannot beat the index is it not better for investors to just buy the index?
Why should you as an investor go through the hassle of finding the best fund manager and monitoring his performance every year if eventually he is going to be no better than average?
For most investors, it is far better to simplify life, avoid the hassle of chasing the next hot theme or fund, and instead invest in low cost passive funds.