27 Feb 2016

Opinionated Mutual Fund Houses

Mutual fund houses have too many funds, as many as 214 in case of HDFC [1]. This makes it hard and frustrating for investors to find the right fund for them. The paradox of choice says that this is driving many investors away from investing at all.

Fund houses should simplify this mess, by getting rid of many types of funds.

To begin with, eliminate sectoral and thematic funds.

Get rid of funds that invest in a particular capitalisation, like large-, mid- or small-cap funds. Funds should all be multicap funds, benchmarked to the BSE AllCap 700 index, which tracks the overall market.

Eliminate index funds, since they don’t perform well [2].

Eliminate dividend payout and dividend reinvestment plans, since they have suffer more tax than growth. Except for ELSS, where dividends are tax-free, so ELSS funds should have only dividend payout, not growth or dividend reinvestment.

Eliminate equity funds that invest solely in India. Equity funds should
all invest exactly 65% of their money in India, and the rest abroad.

Get rid of hybrid funds that invest less than 65% in equity.

Moving on to debt funds, get rid of PSU funds, gilt funds, and corporate funds. Just invest in the entire debt market. Similarly, get rid of floating rate debt funds — what type of bonds to invest in should be the fund manager’s decision, not the investor. Also get rid of fixed maturity plans.

Getting rid of all this junk will make it easier for investors to invest, wasting less of their time, and with less frustration. And simpler products will encourage many more people to invest.

[1] According to Morning Star.

[2] And weird combinations like funds that invest a certain amount of money passively and the rest actively.

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