Dear investors, wake up and smell the bullshit. Mutual funds sahi nahi he!

I’ve been meaning to write this post for a while now but never got around to it. There has a small but growing chorus over costs and performance in mutual funds in India over the past couple of years. This is very heartening, but this is a very small or tiny group of sufficiently informed investors who have been speaking out on social media, blogs, etc about the virtues of passive investing.

This is a Google Trends graph that shows the cumulative search volume for passive investing related terms in India. Notice the green and the yellow lines, sloping upward. I think the growing shift towards passive in the US and the ensuing buzz which we Indians eventually pick up, has played a large part in the increased awareness of passive investing in India.

The tragedy of Indian investors is that they don’t seem to give a shit about costs. In the US, the fee wars have gotten oh so crazy. Every single basis point reduction in fee is driving billions of flows. Advisors have played a major role in moving clients towards low-cost passive funds.

Active mutual funds saw an estimated $513b in outflows last year, the most ever w/ over half of it coming out in Nov and Dec alone. Here's a chart for historical context via @mbarna6 pic.twitter.com/BQNWg78w4X

— Eric Balchunas (@EricBalchunas) January 14, 2019

Here's some numbers behind the Core Wars. These 8 ETFs from Blk and Vgrd took in over 25% of the net $1T in ETF flows over past 3yrs despite making up 15% of assets. Dirt cheap + liquid = pretty unstoppable. #Terrordome pic.twitter.com/gzEbtBaK9H

— Eric Balchunas (@EricBalchunas) March 7, 2019

Of the top 10 biggest funds only one is actively managed now.. pic.twitter.com/hcV5zwC6i8

— Eric Balchunas (@EricBalchunas) February 4, 2019

Here’s the brutal fee war in the past month alone:

Nice timeline of this most recent (and arguably the most violent) outbreak of the ETF Fee War via @mbarna6 h/t to @nategeraci for inspiration.. pic.twitter.com/KgWLasKdzG

— Eric Balchunas (@EricBalchunas) March 13, 2019

Bogle, in one chart: pic.twitter.com/AhvgdQejyg

— Eric Balchunas (@EricBalchunas) January 17, 2019

In India, LIC uncles and mutual fund distributors masquerading as advisors continue to sell junk to investors. This is the end result of all this shoving down the throat style selling:

“Many people have numerous funds in the portfolio. A few have as many at 40, but 20-30 is not uncommon. This is partly due to the historical method of selling mutual funds, as the distribution agent was incentivised to push new funds,” said Sanjiv Singhal, founder and COO, Scripbox

Livemint

So anyway, this thought-provoking article on ET Prime by Pravin Palande is what inspired me to write this post. What made the article special was the sobering research by Anish Teli of QED Capital.

Here’s the TLDR:

1. In FY18, investors paid Rs 17,000 crores as fees and got jack shit for performance in returns.
2. As the industry has gathered assets, the performance has been absolutely dismal.
3. Expenses charged by funds have been growing at 19% over the last 10 years.
4. You’ve been paying ~2% to get returns lower than Nifty 500. Your fund house thanks you for your generosity.
5. Picking a mutual fund that can outperform benchmarks is akin to a coin toss. Good luck with that!
6. Expenses have grown 19% in the last 10 years while performance has gone to the dogs.

If you ever needed a case to invest passively in India, you ain’t gonna find a better one. There are hundreds of mutual funds in India that are closet indexers and they charge ~1%. To add to that there is an endless parade of thematic fund launches with high expenses designed to gather assets and they are sold hard because they charge higher expenses.

And the tragedy of investors world over is we buy what we are sold. Until and unless investors realize that costs matter, the mutual fund industry will continue to appreciate their charity!