Let’s face it, most of us start our investing journey with mutual funds. There always is that convincing salesman or our father’s LIC agent who also happens to be a mutual fund distributor and who knows about this wonderful mutual fund giving stupendous returns.
So there is always this debate, this contest between direct investing versus doing it through a mutual fund that always ends with the wrong conclusion.
I wanted to settle this for myself. So I decided to look at data. Past 10 years of returns of over 800 Equity mutual funds (because of the high returns).
Here are the simple evaluation criteria:
- If an investor is choosing to take risks with investing in equities, expected returns shall be between 15-20% year on year.
- We will not look at 1-year returns because with the markets rising high in the last few years, shorter time frames will give us wrong conclusions (Yes, always ask the distributor for longer time frame returns to get an accurate picture)
Here is what I found:
Of all the mutual funds that have been around for 5 or more years (reference data available here):
Their average 3-year returns were in the range of 10–11% (year on year).
Their average 5-year returns were in the range of 15–16% (year on year).
Their average 10-year returns were in the range of 10–11% (year on year).
Clearly, they don’t seem to be giving expected returns for the extra amount of risk. At least in the last 10 years, they haven’t done so.
But here was the surprise — we compared the stock market index performance during these periods we found:
NSE’s 3-year return was in the range of 12–13% (year on year).
NSE’s 5-year return was in the range of 14–15% (year on year).
NSE’s 10-year return was in the range of 11–12% (year on year).
Got the point? Let me explain. The average mutual fund doesn’t seem to be doing better than the broader stock index.
So why are you paying ~1.5% of your investment amount as fund management expense (didn’t know that? Well, it’s called a TER — Total Expense Ratio that you pay to a Mutual Fund for your investments)?
But don’t let that discourage you if you prefer mutual funds. You can invest in Index Funds which invest your money in indexes and also carry a much smaller expense ratio (~0.5%) and earn the same returns.
Now that brings us back to the original question? Are mutual funds better than direct investing? Well, we do not have all the data yet (www.prospareto.com is precisely doing this — helping people find the real performance of the best SEBI certified investing experts who can help people with direct equity investing and earn better returns on their investments), but we believe that direct equity investment if done right, if backed with the right research, can generate more returns than mutual funds.
Disclaimers: The analysis is based on past performance that can always change in the future and that all kinds of investing carries market risk.