Why Mutual Funds are not performing? — Transcript

Full transcript

1. 0:00You know, every day I meet all these
2. 0:03people and they ask me one question.
3. 0:06What mutual fund should I buy?
4. 0:14Excuse me.
5. 0:15You know the EV sector? Actually small
6. 0:17cap. You know, uh
7. 0:22>> [music]
8. 0:27>> And I see so many mistakes of all of
9. 0:30these people when they actually [music]
10. 0:32pick their mutual fund.
11. 0:34So,
12. 0:35in this video we thought we'll do three
13. 0:37things. [music] One, we'll talk about
14. 0:39some main metrics you should look at the
15. 0:41fact sheet and we look at a bunch of
16. 0:42examples. Two, the qualitative factors
17. 0:45[music] of what you should look. And
18. 0:47three, the most important, what common
19. 0:49mistakes everyone is doing [music]
20. 0:51and you should avoid. So, let's get
21. 0:52started.
22. 0:54Now, I know what you're thinking. You're
23. 0:56thinking mutual fund may the most
24. 0:58important thing is this.
25. 1:00The returns. Absolutely wrong. [music]
26. 1:03So, what do you see apart from just
27. 1:06returns? Let's suppose you want to go to
28. 1:08Ladakh, finally, [music] and you're
29. 1:10going by bike.
30. 1:13Your starting point is over here and you
31. 1:15have two different ways to actually get
32. 1:18to Ladakh. There is option A
33. 1:22and option B.
34. 1:23>> [music]
35. 1:24>> This is what option B looks like. It is
36. 1:26via Manali
37. 1:28and it's actually
38. 1:31quite a tough way to get to actual
39. 1:33Ladakh. And if I have a red marker here,
40. 1:36I'll also add to you have been on the
41. 1:39road maybe broken a little bit. This is
42. 1:41an accident-prone area. The elevation
43. 1:43increases and decreases very quickly and
44. 1:46it's just not as enjoyable as option A,
45. 1:50which is way, way smoother, which goes
46. 1:54via Kashmir. And that place [music] is a
47. 1:57little easier. The You can see meadows
48. 1:59on either side, and it's probably
49. 2:00[music] a little beautiful. How does
50. 2:01this compare to a mutual fund?
51. 2:04Basically, you're looking at returns of
52. 2:06a mutual fund and how it got there.
53. 2:09[music] If it's very, very volatile, and
54. 2:11I'll show you a real example after this,
55. 2:13then that is less preferred [music]
56. 2:14because it's taking a lot more risk. I
57. 2:16got no idea what we are trying to then
58. 2:19you pick option A. And this is actually
59. 2:21called
60. 2:27Now, let me show you what this looks
61. 2:28like on an [music] actual mutual fund.
62. 2:30Let's look at the fact sheet. The fact
63. 2:33sheet is basically like a report card
64. 2:35with all the metrics of a fund. Go to
65. 2:39the search bar over here, and on this
66. 2:42platform search for, let's say, XYZ
67. 2:44mutual fund.
68. 2:45And you open that up. As soon as you
69. 2:47open it up, you'll get the basics of
70. 2:49that mutual fund. But, what we are
71. 2:51looking for is the fact sheet, okay? So,
72. 2:54what you need to do is scroll down here,
73. 2:57and on Coin, they put it over here under
74. 2:59scheme documents. [music] Click on this,
75. 3:01and the website will open up, and you'll
76. 3:03be able to actually
77. 3:05open the fact sheet over here.
78. 3:07>> [music]
79. 3:07>> By the way, if you've not started your
80. 3:09investing journey, a good place to start
81. 3:11is to actually open a free demat
82. 3:13account. So, go to the link in the
83. 3:15description, click on it, open the
84. 3:17account so at least you get started. So,
85. 3:19one way to think about this is the
86. 3:21trailing returns for this particular
87. 3:23fund for the last 3 years is 17.59%,
88. 3:27and the 3-year standard deviation is
89. 3:2914.78.
90. 3:31So, one expectation you can have is that
91. 3:33over a long period of time, this has
92. 3:35given 17.59, in this case, a 3-year
93. 3:38annualized return. [music]
94. 3:39It's going to be a plus minus 14.78%
95. 3:42going forward. Now, imagine if this
96. 3:44number was like
97. 3:4640%. You don't normally see such a big
98. 3:48number, but imagine, then you'd assume
99. 3:51that there'd be too much volatility. And
100. 3:53that's [music] just not a good thing.
101. 3:54Now, a good question would be, what's a
102. 3:56good standard deviation metric? Well,
103. 3:59there is none. So, if I'm looking at a
104. 4:01flexi cap, then you see all of the
105. 4:03standard deviations in all of the flexi
106. 4:05caps and compare which one is the
107. 4:07lowest. If you take a different
108. 4:09category, compare the funds of the same
109. 4:11category. But that's just one metric.
110. 4:13Now, let's talk about the second metric
111. 4:16>> [music]
112. 4:16>> and let's bring
113. 4:19this example back.
114. 4:21Imagine there are two drivers. Both of
115. 4:23them have exactly the same bike. One of
116. 4:26them is our benchmark. It can be the
117. 4:27Nifty 50, the Sensex, Bank Nifty, any
118. 4:30index that your fund category considers,
119. 4:33and the other is our fund. Now, our fund
120. 4:36wants to beat this benchmark, which
121. 4:38basically means [music] it wants to give
122. 4:40better returns than the benchmark. So,
123. 4:42it decides to put it in a nitro booster.
124. 4:44By adding this nitro, our fund is also
125. 4:47taking extra risk. But how much extra
126. 4:50risk is the fund taking? And how do we
127. 4:53measure it?
128. 4:55This brings us to our new metric. The
129. 4:57second one is
130. 5:00Let me show you what this looks like on
131. 5:01the fact sheet.
132. 5:02>> [music]
133. 5:02>> So, here it says 1.05.
134. 5:06And the beta for this one is 0.95.
135. 5:09This means if the index goes up or down
136. 5:12by 10%, [music] this fund will go up or
137. 5:15down by 10.5% and this one will go up or
138. 5:18down by only 9.5%. [music]
139. 5:21Now, you might not see this happening
140. 5:22exactly, but statistically, this is how
141. 5:26they behave. So, imagine if I blow this
142. 5:28number out of proportion. Let's say the
143. 5:30beta is two.
144. 5:31>> [music]
145. 5:31>> So, that also means that this will fall
146. 5:33twice as hard as the index, but may
147. 5:36perform twice as better as the index.
148. 5:39[music] It's taking more risk.
149. 5:41And you need to understand how much more
150. 5:43risk is okay with you.
151. 5:45>> [music]
152. 5:45>> Now, is this good or bad? You decide.
153. 5:48Which of these riders was actually good
154. 5:50or bad? You like the more riskier one?
155. 5:52Then, good for you. [music] You like the
156. 5:54less riskier one? Good for you. The
157. 5:56point is that you pick. There is no
158. 5:57best. And now, we come to our third
159. 6:00metric. And I'm going to bring this back
160. 6:03yet again. And if you like this drawing,
161. 6:06all of this explanation, these props,
162. 6:08everything you see,
163. 6:09can you please subscribe? I really think
164. 6:11[music] we put in a lot of thinking on
165. 6:13how to make something really simple for
166. 6:15you and your zero to one money journey
167. 6:17becomes better. So, the more love you
168. 6:18show, the more motivated we get. [music]
169. 6:21Now, getting back to our two riders over
170. 6:23here, what's interesting is
171. 6:25same riding style, same bike. One of
172. 6:28them [music]
173. 6:29took extra risk, right? By adding their
174. 6:33nitro booster.
175. 6:34>> [music]
176. 6:35>> What is the second biker getting in
177. 6:37return for taking this extra risk? He's
178. 6:40earning time, right?
179. 6:41And this is precisely what our next
180. 6:43metric actually calculates,
181. 6:45>> [music]
182. 6:45>> which is, let me write it,
183. 6:51the Sharpe ratio.
184. 6:55The ratio measures the additional return
185. 6:57a fund has generated over a government
186. 7:00bond, which is basically considered the
187. 7:02risk-free [music] return. And it divides
188. 7:04that extra return with the risk that
189. 7:05fund took, which is simply the standard
190. 7:08deviation we just discussed. [music] And
191. 7:09it then helps you to compare different
192. 7:11funds on how they are managing their
193. 7:14risk. So, now let's look at the fact
194. 7:16sheet over here. If I look at 3 years
195. 7:18annualized, it's 17%. 3 years, this is
196. 7:2016.97. Let's assume they're exactly the
197. 7:23same because it'll be easier to
198. 7:25understand.
199. 7:26And let's say, um, the actual Sharpe
200. 7:29ratio here is
201. 7:310.62 and [music] the Sharpe ratio here
202. 7:34is 0.73.
203. 7:36The Sharpe ratio, which is higher,
204. 7:38>> [music]
205. 7:38>> means that for the additional units of
206. 7:40risk it took, it actually got additional
207. 7:42units of
208. 7:43>> [music]
209. 7:43>> uh reward. So, over here it seems like
210. 7:45the risk was managed slightly better and
211. 7:48the returns in this particular time
212. 7:50period [music]
213. 7:51paid off.
214. 7:53There's one thing that you should note.
215. 7:54All of these numbers and and analysis
216. 7:56[music] is based on what happened in the
217. 7:58past. It actually does not reflect what
218. 8:01is going to happen in the future,
219. 8:02[music] but it gives you an
220. 8:03approximation of how the fund manager
221. 8:05has managed his risk so far. And I think
222. 8:09that is worth [music] considering. You
223. 8:11don't want a fund to be too much of an
224. 8:13outlier in any of the metrics. It should
225. 8:15be decent in almost [music] all of them.
226. 8:17And always look at a range. One single
227. 8:20number does not [music] make sense. Now,
228. 8:22this fact sheet actually has a lot more
229. 8:24stuff that we can cover, but I don't
230. 8:26have enough time. So, we think we should
231. 8:28do a different video on it, but you have
232. 8:30not subscribed, right?
233. 8:33So, all I want you to do is hit that
234. 8:34subscribe button. So, when we make the
235. 8:36next part of this, you can actually
236. 8:38watch it. Now, we've come to the second
237. 8:40part of the analysis, which is
238. 8:41qualitative factors. The third part is
239. 8:43common mistakes and I love that part.
240. 8:46So, if you want to skip to that part,
241. 8:47[music] you can. But, I want to talk
242. 8:49about the qualitative bit. This box over
243. 8:51here is quite [music] interesting. It
244. 8:53actually maps two things. One on this
245. 8:56axis, which tells you how large or small
246. 8:59the fund is investing in, whether it's
247. 9:01large cap, mid cap, or small cap. And
248. 9:03then in this axis, it's showing you
249. 9:05value
250. 9:06or growth.
251. 9:08And then it plots what kind of market
252. 9:09cap companies with what style is being
253. 9:12plotted.
254. 9:12>> [music]
255. 9:13>> A value approach is when the fund
256. 9:15manager thinks that a certain company's
257. 9:17undervalued
258. 9:18>> [music]
259. 9:19>> and eventually the market forces will
260. 9:21determine a way to price this better and
261. 9:24[music] unlock value will happen in the
262. 9:26future. So, it may take some time for
263. 9:29this to give returns.
264. 9:30The second approach is the growth
265. 9:32approach, where you say, "Okay, I will
266. 9:34find companies which are outcompeting
267. 9:37their competitors, growing really really
268. 9:39fast, and the future looks bright.
269. 9:42And that is a growth approach. It's
270. 9:43slightly more aggressive. It's [music] a
271. 9:45different style. Now, ideally,
272. 9:48you should know what kind of person are
273. 9:50you.
274. 9:51>> [music]
275. 9:51>> Do you like a value approach? Do you
276. 9:53like a growth approach? In my opinion,
277. 9:55no one really knows. Everyone just wants
278. 9:58to invest and see a good return. But if
279. 10:00you're that kind of person who wants to
280. 10:02align himself to what the fund manager
281. 10:04is thinking, blah blah blah, then this
282. 10:07uh
283. 10:08this is one place where you can see
284. 10:09whether his style makes [music] sense to
285. 10:11you or not. But I think the best
286. 10:12qualitative factor to analyze
287. 10:15is actually you.
288. 10:16Did you know way more than 50% of people
289. 10:20who start an SIP [music]
290. 10:22never continue it? Which means as soon
291. 10:24as in the market dips, people just exit
292. 10:26the stock. If all of you are learning
293. 10:28this, watching this,
294. 10:29>> [music]
295. 10:29>> but you're exiting your damn SIP.
296. 10:32So, I want everyone to make a promise
297. 10:33right now. Pause the video. Go to
298. 10:35comments and say, "I will not stop my
299. 10:37SIP." I think that qualitative factor
300. 10:39[music] matters way more than any other
301. 10:42analysis that you can do. Now comes my
302. 10:44favorite part.
303. 10:46Common mistakes all of you guys are
304. 10:48doing and no one told you how to fix it.
305. 10:51Mistake number one, let's say you're
306. 10:53supposed to compare
307. 10:55this pen with this paper thing.
308. 10:59Obviously, not comparable, but people do
309. 11:01this all the time. You can't compare
310. 11:03defense [music] sector car fund versus a
311. 11:06large cap. You can't compare small cap
312. 11:08versus large cap. These are two
313. 11:09different kinds of funds with different
314. 11:12kinds of stocks with different risk
315. 11:14profiles, different everything. So, what
316. 11:16you should do is you should compare the
317. 11:17right things. You should compare one
318. 11:19flexi cap with another, or one large cap
319. 11:21with another. And because that is the
320. 11:24same, the comparable actually makes
321. 11:26sense. And of course, with all these
322. 11:28numbers, you should make sure that your
323. 11:29comparable is right, and your benchmark
324. 11:32is also right.
325. 11:33>> [music]
326. 11:33>> The next mistake is this. A lot of your
327. 11:35friends would have invested in a bunch
328. 11:38of funds, okay? A bunch of funds. So,
329. 11:39let's imagine fund number one, fund
330. 11:42number 1 minute.
331. 11:44Fund number two, fund number three, fund
332. 11:46number four.
333. 11:48And uh let me add one more, fund [music]
334. 11:50number five. The colors please ignore
335. 11:52the colors. The colors don't matter.
336. 11:53These are different funds.
337. 11:54>> [music]
338. 11:54>> And you're like, "Dude, I've invested in
339. 11:56four, 1 2 3 4 5 different funds, and all
340. 11:59of them will give me a return."
341. 12:02Problem. The first problem is imagine if
342. 12:04all of these funds
343. 12:06invested in one stock.
344. 12:08>> [music]
345. 12:08>> I know a fund does not invest in one
346. 12:09stock, but please bear with me.
347. 12:11They all invest in
348. 12:12>> [music]
349. 12:13>> This one invested in HDFC Bank.
350. 12:15This particular fund invested in HDFC
351. 12:17Bank. This particular fund invested in
352. 12:20HDFC Bank. The fourth fund did something
353. 12:22innovative and invested in HDFC Bank.
354. 12:24>> [music]
355. 12:25>> And the fifth fund did something
356. 12:26innovative and invest in some other
357. 12:28company.
358. 12:29Now, you Do you really have five
359. 12:31different funds? [music]
360. 12:34No.
361. 12:36The same is true for an entire [music]
362. 12:40portfolio as well. Imagine if you've
363. 12:42invested in four different flexi caps,
364. 12:44and all of them have the same major
365. 12:46funds over there.
366. 12:48This is called overlap.
367. 12:50>> [music]
368. 12:50>> You don't want all these funds to have
369. 12:52an overlap of similar stocks, and
370. 12:55basically you've done no diversification
371. 12:57within equity.
372. 12:58>> [music]
373. 12:58>> You want to diversify in two ways.
374. 13:00In different kinds of assets, not just
375. 13:03equity, but all the other assets. And
376. 13:05within equity, hopefully, you do
377. 13:07different market caps as well. [music]
378. 13:10The next mistake is actually very
379. 13:12interesting. All of us jump into mutual
380. 13:14funds, but we don't think uh
381. 13:18If you've picked [music] a mutual fund,
382. 13:20does it really beat the index over a
383. 13:23long period of time? [music] I mean,
384. 13:25over here, you can see that we can
385. 13:27compare your portfolio with the index.
386. 13:30>> [music]
387. 13:30>> Did you actually beat Nifty or not? It's
388. 13:32actually a pretty cool feature to
389. 13:33understand. So, one thing you should
390. 13:35definitely ask yourself, and there's no
391. 13:37right or wrong over here, [music] is do
392. 13:38you really want to go passive and take
393. 13:40an index fund? Or do you want to have
394. 13:42some active [music] funds as well? And I
395. 13:44think the best thing you can do for
396. 13:46yourself is have like a very small
397. 13:48number of funds. I would say two,
398. 13:49[music]
399. 13:50three max.
400. 13:52And
401. 13:53just be so busy in life
402. 13:56that you forget looking at those
403. 13:58returns.
404. 13:59>> [music]
405. 13:59>> And one day, when you're old and gray,
406. 14:01the compounding has happened, and you
407. 14:03had forgotten about these because you
408. 14:05were busy living life.
409. 14:07Because the more you're going to
410. 14:09overthink this the more you're
411. 14:11going to not make money.
412. 14:15Bye-bye. See [music] you in the next
413. 14:16episode.