Guided Investing





Walking the Talk?

Category : Mutual Fund, Passive Investing · by Oct 27th, 2020

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:

  1. ICICI Pru Technology Fund was invested only for 3 months
  2. ICICI Pru Export and Services Fund was exited in Mar’20 – at the market bottom
  3. ICICI Pru Pharma Healthcare Fund – the best performing sector has seen reduced allocation
  4. ICICI Pru India Opportunities Fund, the underperforming fund has seen increase in allocation

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.

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(7) comments

Harish Mudimela
8 months ago · Reply

As always, Anand is on point. In this day and age when Mutual funds are heavily promoted as good investments with decent returns and minimal effort from the investor’s side, this is a wonderful insight into an otherwise overlooked aspect of MF investing. Specially for retail investors who don’t have the domain knowledge.

While the insights in the blog post give us an interesting problem statement to start with, I would love to see a series of posts analysing other mutual funds options in the market as well as the arguments the fund managers put out in their monthly disclosures on why they are increasing/downsizing their investments in a particular asset corresponding to the graphs posted in the blog.

Sreenivasa Rao
8 months ago · Reply

Caveat emptor, you are investing your long term money for the AMC to play short term and paying a fee also

Kailash Nanji Thakkar
8 months ago · Reply

Nice Observation and articles

Pradeep
8 months ago · Reply

A doubt, do they charge 1% exit load for exit before 365 days even for FoF?
If they do, that’s very bad for observation 1. 25% of the AUM paying 1% is net gain for the AMC without doubt.

    Anand Gupta
    8 months ago · Reply

    Yes, 1% exit load before 1 year. Even for FoF.

      Pradeep
      8 months ago · Reply

      Sorry Anand, I was referring to the exit load FoF internally had to pay ICICI Tech fund for exiting before 1 year.

        Anand Gupta
        8 months ago · Reply

        Good point Pradeep.

        Look at it this way – consider a 100% Govt owned PSU. Will it still pay GST and Income Tax and other statutory levies? After all, money is going from one pocket of Govt to another pocket of Govt? Answer is yes, it would still pay. Otherwise there is no semblance of true accounting.

        Second, because the back-office processing is outsourced to a third party, there should NOT be a difference where the transaction is originating from. It could be own AMC, another AMC or an investor. Net of charges should credit to investor, irrespective of anything.

        Third – if internal transactions do get special treatment, then it will amount to subsidizing against other investors. Other “longer” term investors will be short-charged.

        So, Yes, FOF should ideally pay exit load wherever applicable.

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