Sunday, June 29, 2008

Mutual Funds and art of wealth destruction

Equity mutual funds (EMF) raise funds from public when stock markets are upbeat. So why are they coming now?

I did a quick check on the cash position of a broad spectrum of funds. They have all liquidated recently and have suffered severe hemorrhage in the their NAVs. Most funds are quoting at a discount of over 35% from peaks. They all have pressed sales while markets sneezed. Reasons could be either redemption pressures or fund manager’s paranoia. Either way, it bodes ill for investors in these funds. These are the same funds now coming out with NFO, especially at a time when collections from NFOs have whittled down to 10% of their offer size.

Their intention is to average out their holdings or to buy new stocks that come cheap. Cheap as in fall from irrational peaks; not cheap as in price below intrinsic value - because in these times of global uncertainties, who can predict future earnings? All they do in those glitzy commercials about their investment skills is nothing but pulling a charade. What lies concealed is the brutal fact that these guys that man the funds are no pros. They are as gullible as you and me or worse. Yes, they sit in front of monitors all day and get paid fabulously for making more mistakes than you and I put together. If they make money, it's purely because a good tide in the market lifting all boats (read stocks). What they do is just play fast and loose with other people’s money. So a `hit’ just means lost commissions for them; no mortal fear of loss of capital or financial ruin that we investors may envision. It pulls the essential caution element out of their actions.

Saving money is hard. Investing it is harder. Trusting it with impulsive fakers is scary. Give them their place in hell.


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