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Over 50% MFs are underperformers

Strange it may sound, but in spite of all the hulla gulla, jazzy marketing, more than half of the mutual funds perform far worse than how the BSE performs. And whats worse is that its almost impossible to find out which fund is good and which one is not. If you give me a stock, I can find out whether it is undervalued/overvalued etc. but these analysis does not seem to work for mutual funds… for almost all of them are traded at the NAV (net assets value). (except some wonderful closed ended funds like Morgan Stanley Growth fund which is now trading at a discount of 10% from the NAV)

I think its high time that these mutual funds should stop concentrating on collecting funds, creating new funds and jazzy advertisements and start concentrating on creating wealth… because end of the day this is what matters.

19 replies on “Over 50% MFs are underperformers”

@reader..
welcome to ENagar.
you can find a lot of data on this topic in http://enagar.com/category/investing/

basically
1) you look the company peers and compare the ratios of PE, revenue/share, EPS, growth% etc.
2) you look at the company and find out its potential.. if you think that the profits are going to double in a year or so, then you adjust the PE with the growth expectations to come up with the purchase price.

i hope it helped

Thanks for the explanation. Based on your parameters could you please tell me whether Karuturi Networks CMP is undervalued/ overvalued? Karuturi is the leading Cut Roses producers in the world; it is a B’lore based company. I visit ENagar very often. Job well done. Thanks again.

its an interesting company….
an ethopian agri company with bangalorian parentage… i would put a conservative price target to be around 300.. but because of the 50 million in convertible bonds (almost 5 years of revenue)… i doubt if the company stock can continue to deliver this fabulous returns….. but the company has a lot of potential… and if the promoter is honest… u stand to make good money.

i liked a few points…. 1) 50 out of 60 hectares it owns is in Addis Ababa, Ethopia… so it might be wrong to call it bangalore based. being ethopia based…. its revenues should not be hurt due to weak dollar…

also i have a gut feeling that in the next 6 months the company would finalize a major acquisition… which can potentially increase the stock price to the next level…

do you know where in bangalore does the company owes land? 10 hectares in Doddaballapur…. should be worth a fortune.

downside..
promoter holding < 1/3 and will fall by another 30% when the convertible bonds mature… and this is a red flag… esp for a <50cr revenue company….
i do not like companies which lack focus… even thought flower and Gherkins are its main business… the company changed its name from Karuturi Floritech to networks.. and its networking division is going to be a drag to its progress…. this raises some serious questions about the company’s management and its foresight….

in short… i have very little trust in the promoters… but if they are half as competent as they sound.. then this stock should deliver some fabulous returns.

@Reader, Actually whether a stock is undervalued or over valued is a very subjective calculation depending upon your assumptions. But you can use a couple of benchmarks provided by the models such as CAPM (Capital Asset Pricing Model) and APT (Aribitrage Pricing Theory).

You need to be very sure while comparing a firm with its peer in similar industries because the firm size and unsystematic risk varies. You need to make lots of adjustments before you can make their statements comparable and then try to assess whether the stock price is under or over valued.

@Ankur It’s not as easy as just looking at EPS, P/E etc. Such numbers can be very misleading.

http://enagar.com/2006/10/19/ulip-insurance/
http://enagar.com/2006/06/12/mutual-fund-fraud/
i have never ever written in favor of mutual funds… and my portfolio also does not have any mutual fund (except morgan stanley… which i still recommend to everybody and anybody… and one tax shield fund which Income tax department forced me to take.)
in fact i have always found that the mutual funds do not deliver the returns worth the charges they charge…. and all the investor money is pilfered away in jazzy advertisements.

now u will have to teach me CAPM (Capital Asset Pricing Model) and APT (Aribitrage Pricing Theory).

i have read a lot of beta… but i have found very little practical use of that…
what works the best for me is that i come up with a perceived value of the company (based on revenue, growth, profitability, and my trust in the management) and the money the market value nears this perceived value… i start selling the stock…. sounds crude … but works wonders

//i have read a lot of beta… but i have found very little practical use of that…

Hmm..shocking statement 🙂

My point is- you need to make lots of adjustments to the statements of the firm before making any sort of decision. We shouldn’t look at them on an ‘as is’ basis.

lawyers by definition are pessimistic .. who are paid to find loopholes and faults… while engineers are visionaries who believe in a story and work hard and patiently to make it into reality.

an attribute which i am seeing in our investment rationale too. i do take the company’s visions and forecasts with a pinch of salt, but i believe in them and that is why i invest in that company.

stock market is like fashion industry… if a stock is in the center of attention then people will pay any price to get a piece of it… if not that nobody will touch it even with a barge pole….. luckily there is always a transition in and out of limelight and my only mission in stock market is to spot this trend.

Thanks to Ruhi and Ankur. Keep a eye on Karuturi, they have already acquired Kenya’s Sheer Agencies. Now Karturi is largest cut-roses producers in the world (650m/year). FY07 profit is 100Cr not 50cr. They are very aggressive in floriculture business. Recently George Soros bought 4.6% of the company. After FY08Q3 results, it may touch 300+. I believe in value investing. In my opinion this company will give very good return in medium to long term.

///I think its high time that these mutual funds should stop concentrating on collecting funds, creating new funds and jazzy advertisements and start concentrating on creating wealth… because end of the day this is what matters.///

then how will they get their dal roti
i was a sub broker once in college and know how the business works
it isnt about giving great returns
it is about selling funds and selling more funds
and making the fund house famous
its is like the politicians promise easily accepted during a fresh elections
plus the agents have to be kept happy dont they?
and nfos give more commission
plus the job of the fund manager is to show max navs at diwali time so as to get max bonuses
then again who said that mfs are true mfs they are trust funds – invest and trust the fms judgement and integrity

next time try hdfc taxshield r sbi tax they r way better than kp/tempelton tax shield

@prax…
i did not know u were a sub-broker.. interesting.. so why did u discontinue? it must be fun and rewarding too.

yups the more the people apply for IPO, NFO, SIP etc… the more the commissions…. the last thing a broker wants is an investor who buys funds/stock, but does not trade….. but its the duty of the individual investor to look beyond the distractions and go for the value purchase…

hdfc taxshield… 🙁 i have already made the purchase for this year.. but i will do consult u before i invest for the next year… after all mf are very confusing to me 🙁

//lawyers by definition are pessimistic .. who are paid to find loopholes and faults… while engineers are visionaries who believe in a story and work hard and patiently to make it into reality.

FYI- No more into law. I don’t know what you’re trying to say but it doesn’t hold up to the rest of the discussion.

Thanks.

i was a sub broker at jm when in college
did it moreso for my family n extended family n friend and easily met targets.
stopped because that was not what i intended to do
plus the commission started to fall drastically and i found it better to goto a broker

on mfs ur welcome and value research india is a good site to chk out too they are relatively better at their job

@ruhi…
all i am saying is …
i have tried doing beta analysis a lot of times, it did help me in predicting the short term trends/trading calls but never beyond that. these theories somehow break down the moment i apply them to indian stocks..
since there is no reason why u should trust me.. why don’t u take this challenge….
lets take 3 biggest companies listed in india… RIL, ICICI and L&T… (or any other sensex stock of ur choice) use all ur analysis and predict the future prices …. u will see the results for urself….
if u want to spice things up… we can have a 100$ wager on the results u publish.

PS: I believe in dignity of labor… and have high regards for lawyers …

@prax…
//nicely described ruhi same with auditors//
thanks.

//stopped because that was not what i intended to do//
neways i guess u r right.. in the job of a broker/trader the learning must saturate after a year or 2.. and there r not many tricks of the trade.. just watching numbers and pressing keys…. (atleast i got bored of trading in 6 months)

//plus the commission started to fall drastically//
thats surprising.. because i pay close to 30-40k in brokerage p.a. (and that does not include the brokerage paid by my friends and relatives whose investments i also manage.. and the commissions from IPO/mfs/bonds)

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