Mutual funds should be bought by people who do not have much time to track markets or who do not understand stocks and stock markets at all- that is what "conventional wisdom" tell us. Howeve mutual fund industry inspite of increasing transparency under regulatory measures and media scrutiny still suffers from certain disadvantages ( See the book-The Motley Fool Guide to Invesment by Gardner Brothers) cheif among them are
1. entry/exit costs which cna be higher than brokerage costs if you are atrue investor because most funds engage in frequent buying and selling and therefore act more lke traders and true investors in sense of Buffett their portfolio resulting in increased transaction costs at the very least . That many ofthem fail to match the index most ofthe time is a proof that their strategy is flawed.
2. Huge amount of money is spent on advertising,marketing etc reducing asset value
3. There may be adverse incentive mechanism at work in Mutual fund industry leading to managers churning portfolio in ways that affect the investors adversely
4. If argument that investors not having time or expertise should leave the work to MF mangers, the argument is at best partially correct. For understanding the jungle of Mutual funds whose performance varies with time, would require serious investment of time to pick and track their performance.
5. So let us construct two funds Kalfund and Ckal fund. First fund requires each investor nearly randomly picks on the best and well know companies after dropping the underperforming sector ( every year- it may be IT, automobile or pharma) and invests his funds in 10-15 companies without churing porfolio ( except once a year if a sector is under serious threat of underperformance e.g IT or export oriented company in coming year). Second fund we will construct by year end and track its performance withother mutual fund industry. The second fund will contain 10-15 stocks of all hue but still ignoring sector which is likely ti be serious uderperformer.
In the first case we will see if any investor having bought shares of 10-15 well known companies ( with equal investmnet in all) and without seriously churning his portfolio would have done better than index and most Mutaul funds overall and over last 3-5 year period. ( to be continued by Dec 31)
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