Some equity investors may think it is wise to follow investment patterns of expert fund managers. But there are many reasons why this may turn out to be a bad idea, says Nikhil Walavalkar
THOSE who invest in shares use different methods to pick stocks. These methods vary greatly. A large number of investors rely on tips from friends and insiders, some pore over balance sheets of companies, while others scrutinise share price charts for a ‘head and shoulder’ pattern.
But there is yet another category of investors who try to be clever and mirror the investment actions of mutual funds. After all, mutual funds have all the expertise, they have access to extensive research and they hold discussions with senior management of companies.
Hitching a free ride like this may provide the investor with a feeling that he is saving time, money and resources. But there are many reasons why this may turn out to be a bad idea. There is no guarantee that a scheme that has beaten all equity indices may show the same results in the future.
Stock picking involves subjectivity. Investors have to track the fund management team of the fund house at a time when fund managers change jobs with a regularity. Though, it is easy to track the moves of fund managers, it is difficult to track research professionals sitting at various fund houses that serve as the backbone of the stock picking process.
The monthly fund factsheet does not tell investors at what price a particular stock was bought and the price target for the stock. There are instances of stocks running up 25-30% in a matter of days as the news of a fund manager buying a counter enters the market. This is especially true in the case of mid- and small-cap stocks where there is a possibility of higher returns compared to broad markets. In such circumstances, there is a risk of buying at a higher price.
Though, fund houses are not involved in heavy trading and quick profit booking, there are cases where the price move makes it a case for profit booking. This is a normal phenomenon that holds good in the case of schemes that are actively managed for high returns.
Exit cannot be timed by an individual investor as the scheme’s sale details come out only by the end of the month. In the mean time, insiders would have exited bringing the stock under pressure. In the mid-cap and small-cap space, there are cases when investors have bought stocks at a higher price and sold at a lower price while tracking mutual funds. Mirroring the portfolio of a mutual fund scheme is something that leaves the investors with significantly h i g h e r costs compared to the costs incurred by the fund.
Given the comparatively small corpus that an average individual investor has and the average fund holding of more than 30 stocks, the costs do not justify the activity. Instead it makes sense to invest the money in a mutual fund. If you already are a mutual fund investor, there is no point investing in the stocks that are there in the scheme portfolio. It rather makes sense to pick up stocks that are not picked by a mutual fund scheme. Investors would be better off picking such stocks that are typically expected to get supernormal returns but are high-risk small-cap or where there is low floating stock and a fund house cannot find a suitable entry and exit.
Source: Economic Times
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Allen Taylor
Nice Blogs. Regarding aping the mutual fund team may not be good idea with regards to selling. As mutual fund may sell because of some other reason like redemption from investors. Although the fund management team may be bullish but may be forced to take a decision because of redemptions.