Mutual Fund Advertising: Deceptions galore
Jason Monteiro | 08 July 2013
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“Debt Mutual Funds help achieve your financial goals” is the tagline of a recent advertisement campaign of HDFC Mutual Fund. The advertisement which is a part of its “investor education and awareness initiaive” may fall short of its purpose. Debt mutual fund schemes may have done well over the past year, and fund houses would use this performance data to promote their schemes. But is this always the case? Even over the short term the returns of debt mutual fund schemes can be volatile. Experienced investors would know that debt schemes do well only in a falling interest rate enviroment. How would an average saver who is in reality saving for a financial goal know this? Over the long term, debt mutual fund schemes may fail to generate suffcient wealth. The ad of HDFC is misleading.
Debt schemes, also known as bond schemes or bond funds, are not advisable even for a conservative investor looking for steady returns. There are many factors that need to be looked at before investing in a debt scheme. Investing blindly could lead to inferior returns. Below shows the average returns of debt schemes over different periods.
How have bond schemes done over the short term?
Below are the one year rolling returns every quarter since March 2005. From the chart it is obvious that the for large portion of the period the average bond scheme returns have been below 8% over a year. Therefore, investors would have been better off investing in a bank fixed deposits. The returns have been better over the last year as the RBI has cut interst rates by 125 basis points since April 2012.
How have bond schemes performed over the long term?
Even over the long term, bond schemes have been a poor performer compared to inflation. The five year rolling returns every quarter since March 2005 show that there were periods when even over a five year period bond schemes on an average delivered a return below 7%. This is certainly not sufficient for financing you long term financial goals as well.
What have we said in the past?
Bond schemes rally during periods of reducing interest rates. However, it is usually hard to figure out such a period in advance. But, unlike products such as bank fixed deposits, bond prices fluctuate and, with it, the returns on your investment. Chosen at the wrong time (a period of rising interest rates), bond funds can mean loss of capital—a dreadful thought especially for fixed-income investors. Therefore, bond scheme investors would need to be cautious and keep a watchful eye on RBI policy. When interest rates have peaked, it would be the ideal time to invest. Peaks are now only with the benefit of hindsight. At the same time choosing the right bond scheme is crucial as well. This is impossible for a father whose concern is to get her daughter married.
Another mis-leading fund advertisement:
Axis Mutual Fund has recently launched a close-ended hybrid scheme—Axis Hybrid Fund (Series 5). The scheme would invest 0%-70% in debt and the rest in equity. The advertisement, as usual, talks about the positives, but who would talk about the negative surprise of equity investments and the interest rate risk of debt investments? Of course that is for the investor to find out for himself. Hybrid schemes such as this one and others like balanced schemes, Monthly Income Plans, and those having gold as an asset class have usually turned out to be a poor investment choice, as Moneylife had repeatedly warned .
Read:
Our analysis of such schemes has shown that on an average these schemes have been inconsistent performers. Axis Hybrid Fund Series 1, an earlier series of the same scheme launched in August 2011, delivered a return of 6.88% compared to a return of 9.05% delivered by its benchmark. Even over the past six months the scheme has underperformed its benchmark delivering a return of -0.07% compared to its benchmark return of 3.39%. The underperformance is no surprise to us but would be a little surprise for its investors.
