Mutual fund fraud

Today’s Sensex value: 9468

Let me continue my discussion over mutual funds

A few days ago there was advertisement of Mutual funds investing contrarily to the market, having hedging features so that you make money even during a downturn, and all sorts of promises. Last weeks crash gave me a golden opportunity to check the validity of these claims.

1) Market fell by 25% last couple of days and there were not even a single mutual fund that had shielded itself and fell by less than 15%. The only ones who survived seem to be the new funds who were sitting with stockpile of cash.
2) Even funds which advertised they had hedging features, or ones which boasted that they invest smartly and do not follow the herd mentality seems to have taken the hit. My question is that are all these promises just on paper or does the investment adviser actually practice what he preaches?
3) I agree that Mutual funds have restrictions on the amount of liquid cash they can carry, so even if they know that the market is overheated, they cannot exit. However, while mentioning that the Mutual fund forgets 3 things:
a) The mutual fund may not keep lot of money in the bank accounts, but nothing stops them from buying bonds/gold or maybe bullion from the cash. Common sense says that if the market is overheated, you invest in safe (low return instruments) and buy when the markets fall as it is been happening for past couple of days.
b) Most of Indian mutual funds do not significant holdings in privately listed companies or have too much stake in a company that they cannot reduce their exposure during boom time profitably.
4) When the market reached its peak, FII started profit booking. In other words doing the same thing which MF were expected to do. Divert the money from the volatile stock market to bonds till the market returns proper realizations. Indian mutual funds start blaming them for the fall rather than learning from them and protecting their subscribers from the downfall. (even tough the value of the stock the sold was trivial when compared to the money they had pumped in over past couple of months)

I might sound a lot abrasive towards stock market today, but I had sincerely hoped that at least a couple of funds would have done good and I would extend my exposure in them. But I was disappointed.

1 reply on “Mutual fund fraud”

Leave a Reply

Your email address will not be published. Required fields are marked *