Why There is a Difference in Rate of Return on Similar Funds!

Posted On Monday, Mar 20, 2017


Let's say that you and your friend invested money in a similar equity fund with two different fund houses 1 year ago. Today, both of you have different rates of return despite investing in the same type of fund, both of you invested in that have equities as the underlying asset, yet your fund has barely given you any returns, while your friend is smiling all the way to the bank! Thanks to this, you are now planning to switch your portfolio to the fund house that your friend is investing in.

While this is an extremely possible scenario, but as an investor you should ask yourself a few questions… What is the investment strategy of the fund in which I had invested? What is the market like today? Is the fund that I have meant to perform in the current market conditions? And the most basic question – Is a one year time frame good enough to judge an equity fund’s performance?

There are many strategies involved in the fund’s decision making. Broadly, there are two: aggressive and conservative both of which have a direct impact on the rate of returns of the fund and which makes a fund unique from its competitors.

Today, we would like to restrict this discussion within the limits of the Mutual Fund industry and in particular, equity and debts funds. Gold is indeed an important asset class, but due to its cross country economic and political linkages, we would like to keep it as a separate topic of discussion.

Structure of a financial product

As an investor, your decision of investment depends on your age, income, financial responsibilities, risk taking capacity etc. Likewise, there are many factors from a fund house perspective, which affect the rate of returns. Market conditions (domestic and global) and the geo-political scenario play a major role but the philosophy of a fund house remains a very important factor. An investor must know all of these in brief before making an investment decision. This is very important as you look at the way the fund has performed, have there been wild swings in performance, given slight market movement, or have there been slight shifts in performance given wild market movement? Which suits your style of investing? As a risk taking investor style 1 may suit you, but if you don’t like taking much risk then style 2 may help.

There are several independent financial websites out there that show you interactive charts of fund performance across market cycles, please go through the same before you invest.

Equity funds

Equity is a high risk – high reward product. We live in a globalised world that if a macro-economic or political event takes place in one corner of the world, it has a significant impact (positive, negative) around the world. However, intensity varies from country to country, but impact is unavoidable. Indian stock markets fall due to the negative global economic and political news despite India's positive scenario and vice versa. It shows complexity and cross country linkages of the stock market. There are many factors that affect the stock market which are belonging to different countries and which are outside the limit of a nation’s regulation.

These factors have a direct impact on markets and therefore on returns on investment made in those markets.

Philosophy a controlling factor

It may or may not be easy for investors to understand the philosophy of a fund. Quantum believes in a transparent philosophy. You can click here to know more about Quantum Philosophy.

In general, we can say that aggressive and conservative methods are two main methods behind an investment philosophy. If you have a long term investment horizon then you should not worry about short term volatility prevailing in the market (especially in equity market) and you should select a fund that believes in the same philosophy.

How to know the Philosophy of a fund

If your fund house is churning your portfolio regularly (3-4 times in a year) then you must understand that the fund is having an aggressive strategy. It may be good or bad from returns on investment perspective but regular churning of portfolio raises the cost of managing the fund and it goes from your pocket. It is advisable to remain invested in appropriate time and avoid frequent churning of your portfolio.

Read the past factsheets of the fund and see how consistently a manager is sticking to the stocks purchased.

Don’t compare returns on investment only. You need to consider the expense ratio, frequency of portfolio churning, track record and ultimately philosophy before investing in a fund. Philosophy is the major force behind the investment strategy of the fund which is closely linked with return on investment.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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