How to choose Mutual Funds or ETF? (Part 1)

If you search about Mutual Funds and About Tip or advice on internet, You will come to only one result.

Buy index Funds or ETF.

Warren Buffett, in his partnership letters even accept that index, though S&P 500 was not famous that time and DJIA was widely followed and Passive investing was not a word, is difficult to fight with. Today we witness revolution like situation that Vanguard is very large mutual fund company holding sufficient big stake in many companies and need to keep more than 100 people only to keep Vote as proxy’s.

On the other hand Many Fund manager’s Including Warren Buffett, Is easily Performing better then index. Stock pickers are still alive. Though it may sound like very old but There was Someone named Peter Lynch, handled Record size ACTIVE Mutual Fund in which he invested from all over the world. In one of his book, he proved that even 8th standard students can Beat Professional fund manager. So now the question is how to built Portfolio for long term or how to choose right mutual fund as mutual fund itself is also Portfolio, for one objective and not for one person.

So this post is mainly what I believed about Investment. Before starting to main topic, Just check some tweets from Very Intelligent People.

Rajat Sharma, Correctly Point out Situation in India. For successful Index investing, you need Keeping Balanced and Good index with Right amount of Churning. In fact there is nothing called Passive investing as The index is followed in Passive investing itself is proof of active choice. One more assumption in Passive Index investing is MARKET IS EFFICIENT AND EVERY INFORMATION ABOUT EVERY COMPANY IS KNOWN TO EVERYONE.

Efficient Market Hypothesis tells us that there are three type of market. Any market is belonging to one. First is weak form market efficiency, second is Semi Strong form of market efficiency, third is Strong form of market efficiency. I am going to mention all of them as detailed as possible for me.

  1. Weak form market efficiency will tell you that all current information is price in. Market price is in no connection with past performance. But that information is public and not private. Someone having private information may be successful in such market
  2. Semi strong form will tell you that Fundamentalist will NOT be successful as the market is reflect all the new information which is out. This assume that channels which give information to traders about new information are fast a Stock Price quickly adjusted itself. Ironically this also believed that no investor can benefit from such new information. Passive investing is right for such market.
  3. Strong form market efficiency believe that no matter what, no one will earn return above average rate of return. Directly indirectly it believe, that everyone knows everything, no need to go anywhere, choose any specific stock. Bit difficult to achieve this stage.

What is Reality?

Activist investing is also successful in many markets like India. Warren Buffett is not Index investor and still performing good  Even though we are living in internet era, Value investing is also going on. Though whole Theory Scrapped Concept of Technical analysis, it is still alive. Though we have INSTANT MESSAGING tools not many are helpful. It is difficult to show cooked books of accounting but not impossible. That’s why Satyam or Enron was happened.

I totally agree that Cost can make or break investment. I think it is a myth that SOME ETFs don’t have any cost. Even Vanguard on their official website accepts they COST 0.12%. They them self give you calculation that they have cost.  But it is also true that we need to choose Mutual fund or ETF which having RIGHT COST.

Turnover Ratio and Diversification is something I believe, Go Hand in Hand. In the era of Index funds like today, Turnover is becoming Taboo. What I think is what is wrong with Investing in company which is looking undervalued, keeping yourself invested for quite some time TILL it is achieving Its right value or till you found more interesting opportunity. Not bad. That is what is happening with Index. The minute JP associate, BHEL is not fitting the objective of Index, it is kicked off. For keeping Turnover low, You need to choose stocks which are performing Good and also having Good fundamental. Now what can you say, if there are 1000 such stocks? Will you call it extra Diversification or Diworsification?

Yes. Portfolio theory Mentioned that you need to keep your eggs in different Basket. But how many? 20? 30? Peter Lynch Outperformed Market keeping more than 100 stocks in his portfolio. Now?

SIP is something nowadays taken as very seriously nowadays in India. One report suggests that SIP is so favorite that not many people are investing in as lump sum. Everything is Good. But when something is excessive, not good. Even if it is water.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter