Occam's razor ( "law of parsimony") is a problem-solving principle attributed to William of Ockham (c. 1287–1347), who was an English Franciscan friar, scholastic philosopher and theologian. The principle can be interpreted as stating Among competing hypotheses, the one with the fewest assumptions should be selected.
Picking mutual funds is perhaps even more difficult than picking stocks for me. You cant talk directly to fund managers to find out what they are like. So you have to evaluate the fund house, fund returns and a bunch of numbers. Basically you are picking the guy who is going make decisions for your money but you have very little knowledge about him. When picking stocks, there is a lot more information available about the promoter of the company, media interviews and the fact that they have been managing the company for a certain time frame. Here you dont know how much skin the fund manager has in the game. While recently there have been disclosures in India about fund manager investments and their salaries, it is still not enough.
Picking mutual funds is perhaps even more difficult than picking stocks for me. You cant talk directly to fund managers to find out what they are like. So you have to evaluate the fund house, fund returns and a bunch of numbers. Basically you are picking the guy who is going make decisions for your money but you have very little knowledge about him. When picking stocks, there is a lot more information available about the promoter of the company, media interviews and the fact that they have been managing the company for a certain time frame. Here you dont know how much skin the fund manager has in the game. While recently there have been disclosures in India about fund manager investments and their salaries, it is still not enough.
And then most of them dont even end up getting average returns.
In the US mutual funds, the S&P Index vs Active Report June 2016 reported that:
- Over the five-year period through June 30, 2016, 91.91% of large-cap managers, 87.87% of mid-cap managers, and 97.58% of small-cap managers lagged their respective benchmarks.
- Similarly, over the 10-year investment horizon, 85.36% of large-cap managers, 91.27% of mid-cap managers, and 90.75% of small-cap managers failed to outperform on a relative basis
The good news is that in India the numbers are better. But its still about 50:50 chance. A coin flip. And the edge will diminish as the market becomes more institutionalised.
So by Occam Razor's principle, I would pick an Index MF or ETF for the average retail investor. Now make no mistake an Index ETF is sold as a passive investment. It is not. It is a very basic trend following system where a committee lays down a set of rules and criteria of including and excluding stocks in the index. Stocks which fulfil the criteria stay and those which fail, go. Similar to trend following where winners stay and losers go. Remember our friend: Disposition effect - Holding on to losers and cutting winners. An index and trend following strategy do the opposite.
You can read more on this topic here:
Another decision to make is whether one should make lumpsum investments or do an SIP. I would say do an SIP for your regular savings and if you do get a lumpsum windfall like a bonus or from sale of another investment, then invest that amount over 6-12 months and not immediately.
There is no need to have so many mutual fund schemes. There are perhaps more schemes than there are investible stocks in India.
Regards
Anish
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