Mutual Funds

Of Suckers, Mutual Funds and the Old Rs 10 Per Unit Trick

There is a sucker born every minute. I was reminded of this earlier in the day today, when late in the afternoon, that time of the day when I snooze after having had my lunch, I got a random call. For some reason, truecaller didn’t pick up the name of the incoming caller, and I took the call.

The call was from a financial planner’s office and a female was talking at the other end. She said a new fund offer (the technical term for a new mutual fund scheme) from a mutual fund was being currently sold, and that I should invest in it. (Why in the world would I invest in a new scheme and not in something tried and tested, is a question that I didn’t bother to ask).

She started with the usual bull about the long-term returns on the mutual fund expected to be very good (Again, I didn’t bother to ask, if she knew the future, why is she making a living making calls. That would have been very mean).

I replied like I usually do when I am not interested, with a polite hmmm, which doesn’t mean anything.

And then she let it slip, very casually: “Sir, units are available for just Rs 10 per unit.” That caught my attention. It had been years since I had heard that.

The oldest mutual fund misseling trick, something I had made my career writing on during the days I used to write on personal finance, ten to fifteen years back.

It took me back to 2004 to 2007, when stocks were rallying big time and new equity mutual fund schemes were launched dime a dozen. I was reminded of one scheme which had a theme of investing in stocks depending on where the head office or the registered office of the company was (some such thing). Those were the days my friend. Anything sold.

Hoardings on bus stands across Mumbai were plastered with the advertisements of new mutual fund schemes, with the Rs 10 price at which you could buy a single unit of the scheme, being prominently displayed. Even the mutual fund was trying to anchor the prospective investors to the price of Rs 10 per unit.  

As Jason Zweig writes in Your Money and Your Brain in the context of anchoring:

“That’s why real estate agents will usually show you the most expensive house on the market first, so the others will seem cheap by comparison and why mutual fund companies nearly always launch new funds at $10.00 per share, enticing new investors with a “cheap” price at the beginning. In the financial world, anchoring is everywhere, and you can’t be fully on guard against it.”

The stupid me had assumed that all these misseling tricks would have been replaced by newer ones by now. But I guess with every bull run a new set of suckers are produced and India is a big country.

Anyway, I told the caller, madam no money. She then made some polite noises about this being a good opportunity and I should invest in it, and that was that.

For people who don’t know about this misselling trick this is how it works.  When a new mutual fund scheme is launched, the price is set at Rs 10 per unit. Investors buy these units. If the mandate of the scheme is to invest in stocks, the mutual fund collects the money and invests it in stocks.

The price of a unit at the launch is set at Rs 10 per unit. This creates a perception of a cheap price in the mind of the investor. The older schemes, given that they have been around for a while, have higher prices.

Let’s say an older scheme which has been around for a while has a price of Rs 100. This higher value is because the scheme was launched many years back and the stocks that the scheme invested in over the years have gone up in value. In the process, the price of the scheme has also gone up.

Now let’s say you invest Rs 1 lakh in the scheme with a price of Rs 100. Assuming no expenses for the sake of simplicity, you will get 1,000 units (Rs 1 lakh divided by Rs 100) of the scheme. Now let’s say instead of investing in the old scheme, you end up investing in the new scheme at Rs 10 per unit.

You end up with 10,000 units (Rs 1 lakh divided by Rs 10) in the new scheme. 10,000 units is ten times 1,000 units. This creates the perception of a cheap price in the mind of the investor, thus misleading the investor into buying the new scheme and not the old scheme.

But does it really matter? Let’s say the new scheme invests in exactly the same set of stocks as the old one. The price of these stocks goes up 10%. Thus, the price of a single unit of the old scheme goes up to Rs 110 and that of a single unit of a new scheme to Rs 11. But the value of the overall investment in both the cases is Rs 1.1 lakh (Rs 1 lakh plus 10% return on Rs 1 lakh).

Let me explain this in even simpler way. Let’s say you have Rs 10,000 cash lying with you. You can have it in five notes of Rs 2,000, 20 notes of Rs 500, 50 notes of Rs 200, 100 notes of Rs 100, 200 notes of Rs 50, 500 notes and/or coins of Rs 20, 1,000 notes and/or coins of Rs 10, 2,000 coins of Rs 5, 5,000 coins of Rs 2, 10,000 coins of Re 1 or in different combinations of these notes and/or coins. 

But at the end of the day, the total amount of money would still be Rs 10,000. It wouldn’t matter what denominations of notes and coins you have that money in. In the same way, the number of units you own in a mutual fund doesn’t really matter. What matters is how well the money you have invested in the mutual fund scheme, is invested further, and at what rate it grows (or falls for that matter).

Which is why, it makes little sense in investing in new schemes. But it makes absolute sense in sticking to old schemes which have had a good track record. Of course, for the mutual funds it makes sense to rely on these subtle misseling tricks because more the money invested with them, more the money they make. 

Anyway, I didn’t think I would need to write this in 2021. But as the old French saying goes (and I don’t know how many times I have ended a piece with this), “plus ça change, plus c’est la même chose.” The more things change, the more they remain the same.

Of course, whether you want to be a sucker  or an informed investor, the choice is clearly yours. As the old Delhi Police ad went, marzi hai aapki aakhir sir hai aapka.

PS: An added bonus the legendary Baba Sehgal’s all time classic, mere paas hai mutual fund. 

The RISK of RISK of Investing in Stocks, which OPIUM Managers Don’t Talk About

Summary: Just because you have taken on a risk by investing in stocks, doesn’t mean high returns are going to materialise.


The only function of economic forecasting is to make astrology look respectable – John Kenneth Galbraith.

It was sometime in October-November 2010. I had just joined a weekly personal finance newspaper, which for reasons I did not understand and for reasons above my paygrade, was to be run out of Delhi.

During the course of one editorial meeting, we had to decide what sort of return would systematic investment plans (SIPs) into equity mutual funds generate over the next decade. This was necessary as a part of a regular feature to be published in the newspaper, which would help a featured family come up with an investment-savings plan.

It was assumed that SIPs into equity mutual funds would generate 15% per year return. I protested against the assumption saying that 15% per year return was way too high but was overruled by the Delhi bosses.

At that point of time it had almost become fashionable to say that the stock market generates 15% return per year in the long term (In fact, there are people who still believe in this myth, which I shall write about in detail in the time to come).

Getting back to the point. We are now in 2020. 10 years have gone by. As I pointed out in a piece yesterday, the SIP returns on index funds have been rather subdued over the last decade. The average per year return over the last decade in case of the three Nifty index funds I checked was slightly over 9% (around 9.17% to be very precise). Index funds are funds which have a mandate to invest money in stocks that make up a stock market index, in the same proportion that they do.

The per year return of a little over 9% was nowhere near the assumed 15% per year return. Let’s say an individual had invested Rs 10,000 per month religiously through the SIP route for ten years. On this if he had earned a return of 15% per year, the value of his portfolio at the end of 10 years would be Rs 27.5 lakh.

If the return was 9.2% instead as it actually turned out to be, the value would be around Rs 19.6 lakh or around 29% lower. If the individual was saving towards a certain goal, he would end up way short. But that’s the rather obvious point here.

The question is how did the market narrative of stocks giving 15% return in the long-term come about? The first time I heard this 15% argument being made with a lot of confidence by marketmen was sometime in late 2006 or perhaps early 2007.

This, after the Indian economy had grown by greater than 9% in real terms for three consecutive years, 2004 to 2006. The zeitgeist or the spirit of the times that prevailed was that come what may India will now grow by at least 8% in real terms. Add an inflation of 5-6% on top of that and we will grow at 13-14% in nominal terms, year on year.

Assuming that the earnings of companies which are a part of India’s premier stock market indices would grow a tad faster than the nominal growth, we arrived at 15-16% year on year growth in earnings.

This would be reflected in stock prices growing by 15-16% per year as well. From here came the assumption, the stock market growing at 15% in the long-term. There is a lot more to this assumption including Sensex returns from 1979 on, but I will leave that for another day. For the time being knowing this much is fine.

In fact, over the years, I have seen this logic being offered by people who make their money in the stock market by managing other people’s money or OPM or even better OPIUM, with great conviction. These tend to include fund managers, analysts, traders, salespeople etc. (Oh, if you still didn’t get it, OPM and OPIUM sound the same. Rather childish, but good fun nonetheless). Those in the business of managing OPIUM really believe that stocks give 15% per year return over the long-term (I even wrote a piece on this titled Why Economic Growth Cannot Be Created on an Excel Sheet. You can read it here).

The trouble is that this assumption has turned out to be all wrong. The earnings growth has been nowhere near what the OPIUM managers have been projecting. This is reflected in the 10-year return on stocks, which as of August 20, 2020, stood at 8.7% per year (based on the Nifty 50 Total Return Index, which takes dividends paid by companies into account as well, unlike the normal index).

The funny thing is that the stock market has delivered a return of just 8.7% per year over the last decade, despite the valuations being at all time high levels. The price to earnings ratio of stocks that comprise the Nifty 50 index is around 32 these days. This basically means that for every rupee of earnings for these stocks, the investors are ready to pay thirty-two rupees as price. As I pointed out yesterday, such high valuation has never been seen before.

And despite such a high valuation the decadal per year return on stocks on an average is less than 9% per year. This is the irony of it all. It also makes me wonder why investors think that the stock market is doing well. Yes, it has done well in comparison to where it was in late March 2020, but clearly not otherwise.

Of course, when the OPIUM managers talk about 15-16% return per year from stocks over the long-term, they also highlight the fact that for higher return a higher risk needs to be taken on by the investor. The higher risk is the risk of investing in stocks for the long-term.

But what they don’t talk about is the fact that just because you are taking the risk of investing in stocks for the long-term, doesn’t mean that higher returns are going to materialise. I would like to call this, the risk of risk of investing in stocks, something which most OPIUM managers don’t seem to talk about.

The question is why does this happen? The answer lies in the fact that OPIUM managers are in the business of driving up assets under management for the firms that they work for. More the money that gets invested in a fund, the higher the fee earned by the firm to manage that money. And in this business of soliciting money, you need to sound confident.

The moment you start getting into nuance about high risk not guaranteeing high returns, you start losing the average prospective investor. Hence, the projection of confidence that the prospective investor is looking out for, leads to simplistic one-line market narratives like stocks will definitely give a 15% per year return, over a decade. Such narratives are easier to sell.

In a world full of complex uncertainties, the prospective investors are looking for certainty and those in the business of managing OPIUM can’t consistently project confidence to tackle the complex uncertainties, unless they believe in stocks giving 15% per year return in the long-term, themselves. This is the con of confidence which fools people on both sides.

The trouble is such narratives hurt. As  economists John Kay and Mervyn King write in Radical Uncertainty – Decision Making For an Unknowable Future: “Markets narratives are occasionally ‘dishonest and manipulative’, but normal people make honest use of narratives to understand their environment and guide decisions under radical uncertainty.” (King and Kay’s book is a terrific read though not a breezy one. Highly recommended).

This is not to say that one should not invest in stocks and invest all our money in bank fixed deposits. Not at all.

All I am trying to say is that just because you have taken on the risk of investing in stocks, doesn’t mean higher returns are going to materialise and which is why it’s called risk in the first place. So, you might end up short on the corpus you were trying to build (assuming you are trying to do this in a systematic way).This is something that needs to be kept in mind while investing in stocks either directly or indirectly through mutual funds. This is the risk of risk of investing in stocks. While all mutual fund ads have a disclaimer at the end saying that mutual fund investments are subject to market risk, nobody really explains to the investor what exactly this market risk is.

The economist Allison Schrager makes this point in the context of saving for retirement in her brilliant book An Economist Walks into a Brothel—And Other Unexpected Places to Understand Risk. The conventional wisdom is that when it comes to saving for retirement it makes immense sense to build up as large a retirement corpus as possible and then spend it at the rate of, say 4%, per year, after retirement.

The problem with this strategy is that 4% per year isn’t really a fixed amount. It depends on the retirement corpus one has been able to build up in the first place. And that in turn depends on how the stock market has been doing. As Schrager writes: “That’s where the strategy goes wrong.”

One way of getting around this problem is that in the years approaching retirement you take your money out of stocks and invest it in fixed income investments, everything from bonds to fixed deposits. This mitigates the risk to some extent but not totally.

What if the stock market is not doing well in the years before retirement? What do you do then? Do you continue staying invested in the stock market in the hope that it recovers, and you build a better corpus? What if it doesn’t?

That’s the risk of it all. At the cost of repeating just because you have invested in stocks and taken on a higher risk doesn’t mean higher returns are automatically going to materialise.

To conclude, it is important that as a stock market investor you realise this, irrespective of whether the OPIUM managers communicate this or not.

Stay safe and enjoy the weekend.

Will see you now on Monday (or perhaps Tuesday, depending on what my brain throws up over the weekend).

Disclaimer: This article is meant for educational purposes only.  

Is It Time to STOP Drinking Stocks SIP by SIP?

Summary: The idea at the heart of systematic investment plans (SIPs) is cost averaging and it works when the stock market goes both up and down. In the last seven years, the market has largely gone only one way and that’s up. Hence, SIPs have given fairly ordinary returns.  

In the last decade and a half, regular investing into equity mutual funds through the systematic investment plan (SIPs) route has become a regular habit for many middle-class Indian investors. And its been a good habit.

Given that money invested in equity mutual funds is used to buy stocks, SIP investors end up owning stocks indirectly.

Also, mutual funds need to invest in a certain minimum number of stocks to meet regulatory requirements, hence, the old investment adage of don’t put all your eggs into one basket, gets taken automatically care of.

Nothing Works Forever

As the old Hero Honda advertisement went, fill it, shut it, forget it. SIPs are a tad like that.

The trouble is nothing works forever. What made SIPs such an easy and a beautiful way to invest is the concept of cost averaging that comes into play.

What exactly is cost averaging? Let’s say you invest Rs 10,000 per month into a mutual fund through an SIP. On the day of investment, the net asset value (NAV) of a single unit of the mutual fund is Rs 40. You end up buying 250 units (Rs 10,000 divided by Rs 40). The NAV of a mutual fund is the price at which an investor can buy or sell a single unit of the fund.

Let’s say a year later, the stock market has fallen and the NAV of the mutual fund has fallen to Rs 20. This time when you invest you end up buying 500 units (Rs 10,000 divided by Rs 20).

Essentially, you end up buying more units when the stock market is doing badly, and you buy fewer units when the stock market is doing well. When the market recovers, it is the units that were bought when the NAV was low, which bring in the maximum return.

Also, since most retail investors don’ know exactly when the stock market is going to fall (this is not to say that the so-called experts and talking heads on TV, do), an SIP strategy needs the investor to keep investing for the long term. The question is how long is the long term? Of course, there is no definitive answer for this.

I still remember when mutual funds first started talking aggressively about SIPs a decade and a half back, they used to talk about an investment horizon of three years. A few years later this investment horizon became five years.

In my personal experience, having invested in mutual funds through the SIP route for nearly 15 years, I think the real fun starts only after ten years. This is when the stock market has gone through various cycles and the investor has ended up buying enough mutual fund units during periods when the stock market was doing badly.

And as mentioned earlier, these are the units help the investor earn a good return when the stock market starts to do well again.

Of course, this is not the best possible way to invest but a pretty optimum one, especially for individuals who are busy running the rat race of corporate life and trying to balance it with their very demanding family and social lives as well. All this doesn’t really leave much time for them to research and invest in stocks directly. Hence, investing in stocks through the SIP route turns out to be a reasonably good bet.

The corollary to all this is that for SIPs to work the stock market needs to come down time to time as well.  Only then does the SIP investor end up buying units at lower NAVs, which benefit him later (I know I can’t seem to hammer this point enough).

But over the last few years, the stock market has only gone in one direction and that is up. Take a look at Figure 1, which basically plots the price to earnings ratio of the Nifty index.  It might look a tad complicated to everyone who switches off when they look at any chart but believe me this is very simple.

Figure 1: Price to earnings ratio of the Nifty 50 Index.


Source: www.nseindia.com

Let’s divide the chart into two parts, pre 2013 and post 2013. Pre 2013, the price to earnings ratio has gone up and down and up and down and so on. Post 2013, it has largely gone only one way and that is up (except the one big fall earlier this year).

What does that mean? It basically means that the prices of stocks that make up for the Nifty 50 index have gone up much faster than the earnings of the companies these stocks represent.  And this has gone on for seven years now.

Stock prices ultimately should be a reflection of expected future earnings of any company. But when the price to earnings ratio keeps rising for seven years at a stretch what it means in simple English is that the price of the stocks has gone up much faster than their earnings and the expected future earnings of the companies have never really materialized.

As of August 18, the price to earnings ratio of the Nifty 50 index stood at 32.03, the all-time highest level (in the data that is available since 1999). The average price to earnings ratio since 1999 has been around 20. This tells us clearly how high the current stock price to earnings ratio is.

The question is how did we reach here? Take a look at Figure 2, which basically plots the inflows or the money being invested into SIPs every month, since April 2016.

Figure 2: SIP inflows (in Rs crore).


Source: AMFI India.

Before we interpret Figure 2, let’s take a look at Figure 3. Figure 3 plots the money invested by foreign institutional investors (FIIs) into Indian stocks over the years.

Figure 3: FII investment into Indian stocks (in Rs crore). 

Source: NSDL.

What Figure 3 tells us is that between 2015-16 and 2019-20, foreign investors did not invest much in Indian stocks, except in 2016-17, when they invested Rs 55,703 crore. Hence, during that period it was money coming through the SIP route which was invested into equity mutual funds and then into stocks, that kept the stock prices buoyant despite the company earnings not seeing the expected growth.

As ironic as it might sound, it was money coming in through the SIP route which essentially ensured that stock prices did not fall, and in the process ensured that cost averaging went out of play.

Before SIPs became a popular of investing, between 2012 and 2014, the foreign investors invested a lot of money into Indian stocks. Money invested by the foreign investors and SIP investors over the last seven years has ensured that the Indian stocks have been at levels their earnings do not justify. Nonetheless, the hope still persists that these stocks will someday give earnings they are expected to. But hope cannot be an investment strategy.

Hence, the part of cost averaging where stock prices fall and which leads to SIP investors ending up buying more mutual fund units, hasn’t really played out in the last seven years.

Take a look at Table 1 which basically lists the SIP returns of three index funds, as of August 18, 2020. Index funds are mutual funds which invest in stocks that make up for a particular index.

Table 1: SIP returns of index funds.

Source: Value Research and National Stock Exchange.

What does this table tell us?

1) Over the last few years, the stock market has just gone one way and that is up. This has led to fairly limited SIP returns. Even the 10-year SIP returns of index funds are not in double digits. And if 10-years is not long enough, I don’t know what is.

2) What we also come to realise is that the SIP returns are on the lower side, despite the stock market valuation being at an all-time high level. Hence, all the money brought in by the SIP investors and the foreign investors has led to just about mediocre returns even over a 10-year period.

Lest we get accused of looking at the returns only on a certain date, let’s take a look at 10-year returns of these index funds in previous years.

Table 2: 10-year SIP returns of index funds.

Source: Value Research.

Table 2 makes for a very interesting reading. The 10-year SIP returns in years before 2020, are higher. In fact, if we leave out 2019, largely they are in double digits or very close to double digits. The reason for this lies in the fact that the 10 year-SIPs before 2019, ran through a longer-periods of the stock market going down (go back and look at Figure 1 again). This allowed cost averaging to come into play properly, something which hasn’t happened in the past few years.

Using this logic, a few months back I completely stopped all my SIPs. Honestly, there hasn’t been a more SIP man than me, having relentlessly been at it for close to 15 years. Whatever little I have saved in life is thanks to SIPs.

Of course, this is the past.

What about the future?

As long as the direction of the market stays one way and it doesn’t fall for an extended period of time, SIPs as a way of investing will have a fundamental flaw, as explained earlier. Hence, the 10-year returns one saw around between 2014 and 2018, are unlikely to be repeated in the years to come.

For a period of 18 months between November 2018 and May 2020, more than Rs 8,000 crore was invested into mutual funds every month through the SIP route. In the last two months, the investment has fallen below Rs 8,000 crore, nevertheless, it still remains strong. A bulk of this money has gone into equity mutual funds.

The foreign investors ignored Indian stocks for the last few years. But in 2020-21, the current financial year, they have come back with a bang. The reason for this lies in the fact that there a lot of money printing happening across the Western world.

Between February 26 and August 12, the Federal Reserve of the United States has printed close to $2.8 trillion in a bid to drive down interest rates in the United States and help the post-covid economy.

As has been the case in the past, some of this money has been invested in stock markets all across the world including India. The easy money policy of the Western central banks is likely to continue in the months to come, at least for the next one year, until the world starts coming out of the economic contraction that is happening thanks to covid.

In this scenario, the chances of the stock market and the price to earnings ratios falling, are rather low. Another reason which will ensure that stock prices may not fall is the fact that post tax bank fixed deposit return is now lower than 5% in most cases and the inflation is close to 7%. Hence, a segment of savers will try to drive up the investment return by buying stocks.

Whether the stock market will go up from here, the situation is too convoluted to say anything definitively. For that to happen, much more money needs to be invested into the stocks.

If as an investor you feel that stock prices will only go up from here despite the lack of company earnings, then you are better buying stocks directly and making irregular one-time investments into equity mutual funds than going through the SIP route. By going through the SIP route, you will keep escalating the cost of purchase of mutual fund units and in the process drive down returns.

That’s the way I see it at least. And I say it, the way I see it. The time to fill it, shut it, forget it, when it comes to SIPs, is over.

Disclaimer: The article is meant for educational purposes only.