Sunday, March 4, 2018

Book Review: How Fund Managers are making you rich - by Pravin Palande

If you have been investing or even thinking of investing in mutual funds in India, you should be really curious of how the folks supposed to handle your hard earned money work. Their background, habits, methods, where and what have they studied or smoked ?
Finally, here is a book with a slightly presumptuous title clarifies most of those things.

Before moving to individual fund managers, Palande provides a good overview of the Indian capital markets. It starts with talking about the period that most of us don't remember fondly - the dot-com bust of 2000. He quotes prominent fund managers of those times who saved their fund value by not falling for the hype and madness surrounding the IT stocks then. Its all about the steadfast fund managers whorefuse to invest in the fluff companies whose business they don't yet understand while the markets were on steroids due to unreal valuations to software companies. They get the brickbats when the fund returns lag the benchmarks and how the smiles were back after the crash.

Palande also brings out the small and big innovations that have come out of Indian fund managers, such as the low cost Benchmark mutual fund ETFs and distributor-less Quantum equity fund.

In the second half of the book, each chapter is devoted to an individual fund manager. It goes from how the manager started his career, moved between fund houses, evolved their own thinking about the markets, their predilections and their methodologies. Each one is a fundamentalist - or someone doing a fundamental analysis of the stocks but each one still has some uniqueness. So much that the chapter can be tagged by their most noticeable idiosyncrasy. Each chapter gives us a view of the nature of the fund managers job and
their uniform assertion of holding humble respect towards the unpredictable beast that is the stock market.

I would have liked some more description about the software systems that the managers use and the kind of data they analyze in the book. Some details about how they decide how much cash ratio to maintain and stock allocation. Do the fund managers really have some secret weapon at their disposal that puts them at a distinct advantage of the ordinary retail investor (apart from their superior knowledge and sense of the stock market, of course) ? They do have a research team and can afford a full-time attention to detail. Still is there anything else ?

Palande ends the book with a chapter that is bound to raise the hackles of the mutual fund gurus in India. He makes a case for investing in low cost Index funds. A majority of the mutual fund managers have similar kind of data gathering and analysis mechanisms at their disposal. Palande reasons that due to a very secular availability of information and maturing of the Indian capital markets, there is a progressively low variance in the returns that mutual funds provide. Indeed, it is getting very difficult for mutual fund managers to make their funds return a premium over each other or even the index. Further, the trend is set to harden, so why put your money in an active fund that charges 2.5% + commissions versus an index fund that does with less than 1% ? The Indian mutual fund industry counters by saying that such a case for index funds is already ripe in American markets but the Indian mutual fund manager can still beat the index that justifies the higher expense ratio comfortably. This is probably the point where the CEO of Birla Sun Life AMC does not agree with Palande, that he mentions in the foreword.

So please go ahead with choosing quality funds and fund managers for now... Yes, but they only can make you rich if your are into the mutual funds or the stock markets !

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