All mutual funds constantly preach investing for the long term. Two questions that immediately pop up – how long is ‘long term’? Conventional wisdom says – equity investment for less than three years is not advisable. Therefore, contrary logic dictates that ‘long term’ for equity should be more than 3 years. This is not set in stone. Just generally accepted principles. Second – do MFs themselves walk on their own path. Let us dive a little into an interesting observation I made while reviewing a fund.
Among the many varieties of mutual funds, one is Fund of Fund (FoF). This is a type of fund where the fund manager does not buy the underlying investments directly (equity or debt) but buys and holds other Mutual Funds. Hence the term Fund of Funds. Everything else remaining same, the only difference is the investors pay little extra fund management charges – one for the FoF and other for the underlying fund. Now, back to the interesting observation. This chart is the percentage allocation of the underlying assets of the ICICI Prudential Advisor Series – Thematic Fund:
We can make 4 observations:
Let us see each one of these in detail:
1. ICICI Prudential Technology Fund – An equity fund which was held for a mere 3 month:
Entered in Oct’18 and exited fully in Jan’19. An equity investment for a mere 3 months. AMC and MF intermediaries will scoff at the idea if an investor were do it. But it is perfectly reasonable for an AMC to do the same. It was not a small position either. The allocation was almost one-fourth of the fund. So much for “long term” investing.
2. ICICI Prudential Exports and Services Fund: Exited at the bottom of market:
The AMC exited about 7.5% of the stake fully in Mar’20. At the very bottom of market. Precisely at the time when its own sales team was actively preaching investors to buy more. Ironic? You bet.
3. ICICI Prudential Pharma Healthcare and Diagnostics Fund: Reducing exposure in a well performing sector:
The best performing sector has seen its exposure reduced constantly. Beats all investing logic.
4. ICICI Pru India Opportunities Fund: Increasing exposure in an underperforming asset:
For reasons best known to the AMC, they are increasing allocation in an underperforming asset. Just to give you an idea, the NAV is still below par! And this has the highest exposure at 40%.
I have taken this from the Scheme Information Documentation (SID) of the fund:
The first point stands out in the scheme document. So, I highlighted it.
From the charts above, #1 is not long term by any standard. Just a cursory glance at #3 and #4 are enough to understand that the allocation should have been opposite. Increasing allocation in #3 and decreasing in #4. In an ideal world, that is. To maximize wealth.
AMC will preach something and practices something else. Is it illegal? Definitely no. Is it unethical? Depends on who is looking at it.
Talking and walking the talk are two very different things. Next time, the AMC preaches “long term”, show them the mirror. Let it begin at home first.
Don’t just rely on brand names or their fancy presentations. If not a deep dive, at least look under the hood. Look at the history. You will be surprised, how much one can learn from it. Try and understand the nuances. Talk to your trusted investment advisor. And then take an informed decision. Bottomline – invest wisely.