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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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The future roadmap

Posted by Muthu on February 24, 2019

There have been lot of good developments over the last few years for the investors of mutual funds. The costs have been coming down, funds have been meaningfully classified and appropriate benchmarking has been done.

The costs would further come down from April of this year. Henceforth we see costs going only one way, down. Due to increased allocation to financial instruments by households, the size of the funds has been going only one way, up.

Globally, majority of the funds struggle to beat the benchmark. I would give you an example. If Nifty returns 12% in a year, your large cap fund should provide you more than 12% to justify the cost. The excess return over benchmark is called alpha. If the fund provides you lesser than benchmark, the cost you’ve incurred is simply waste of money.

To the credit of Indian fund industry, over last two decades, funds have created significant alpha over the benchmarks to justify the cost incurred. This is likely to change. World over, index funds have been gaining strength as fund managers find it extremely difficult to beat the index. In my view, this may be the case in future for India as well. Though Indian fund managers are confident of beating the index in future, I doubt whether that would be the case.

Based on the industry’s past track record, I want to wait for next three years to see how things take shape. We need to then decide whether we would move fully to index funds or combination of index funds as core portfolio and some active funds as satellite portfolio. We also need to choose whether the investments would be through funds or ETFs.

The advantage of index funds is the costs would be very low. At the same time, investors have to settle down for index returns and not something over and above. As much as the costs would come down, the returns also would go down.

I want to touch upon here real and nominal returns. Equities in India have been providing around 8% over and above inflation. When inflation was 8%, the returns were as high as 18%. Here the nominal rate of returns is 18% and the real rate of returns is 10% (over and above inflation). You can see that the inflation has been coming down over years. If inflation settles around 5% in the long run, then equities would provide nominal returns of only 12% or 13%.

Though the real returns remain the same, the nominal returns would come down. To give you an example, during times of high inflation, you may get 12% as salary increment. When the inflation comes down, the increment may be only say 6%. Though ‘really’ you’re not getting less, ‘nominally’ you’re getting less.

If indexing, alpha, real or nominal returns sounds very confusing, I would clarify all these in our personal meetings. In your own interest, it would be better to start learning.

As you’re aware, we’ve never recommended you any NFOs (New fund offers), sectoral or thematic funds, closed ended funds, PMS (Portfolio management services) and AIF (Alternative investment funds). We’ve consciously avoided all exotic and expensive stuff. Recommending these would have made you poorer and us richer.

Our biggest contribution is to avoid all nonsense and choose few sensible stuff. Also we’ve been continuously focusing on your behaviour to ensure you stay the course and earn the returns the funds are able to offer in the long run.

For now, you need to do nothing. But in next three years, we may have to relook the way you invest.

As I’ve said earlier, your costs are going down. This means the income of fund houses and advisors have also been going down. Ultimately what is good for you only should prevail.

Once indexing becomes the main stream, the cost would be bare-bones and so is our income. We also expect the regulator to nudge advisors to fee based model rather than commission based one. The intermediaries like us would then have to become RIAs (Registered investment advisor), who would only charge fee. Also there may be migration towards flat fee rather than asset based fee.

I’m writing this to keep you informed of likely changes in next three years. We need to see how things evolve before firmly recommending you a course. Stay with us. We’ve guided you so far with utmost integrity which would continue in future as well.

4 Responses to “The future roadmap”

  1. Bijay Mishra said

    Muthu – I have been following your blogs. As usual fantastic point of view keeping investors interest in mind.

  2. Venkateswaran said

    Dear Muthu Sir, I have been learning day by day from your blogs and inputs. These are all quite informative without any hidden agenda. Really appreciate your service. Thanks a lot!

  3. RS said

    Dear Mr.Muthukrishnan, I am a regular reader of your blog and your tweets.. Your views are very balanced, honest, and old school. I myself being a dreamer / experimenter in my career, it is good to be reminded to be very sober when it comes to investments. Your words keep giving me a reality check, and keep reminding me to be sober when it comes to the very basics of life and investing. Best Regards.

  4. Sivakumar R said

    Sir, thanks for the blog. This will help general public like me to take informed investment decisions. Can you please a sugest couple of ETFs or Index funds that we can stay invested through SIP for next 3 years. Thanks much in advance.

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