Thread by @theBuoyantMan

Few misconceptions about mutual fund industry. Don't make the mistake of believing in popular-speak.

1. Mutual Fund companies manage the wealth of small investors.

Wrong. Fund managers appointed by the mutual fund companies manage the wealth, not the companies themselves.

2. Small investors can beat the market with the help of mutual funds.

Wrong. More than 80% of all mutual funds have given less than benchmark returns in the last 5 years. So, no. Small investors can't beat the market with help of any random mutual fund.

3. Fund Managers are the smartest people in the stock market.

Most fund managers aren't smart. If you put all the fund managers in a class, only like top 2-3% do really well. Remaining everyone just do so-so or just plain suck.

This is also because all these fund managers are in a rat race to be better than their peers. In this trap of rat race, they try to take the safe route to avoid getting fired and does what other fund managers are doing in the street. You can't beat the market this way.

4. Mutual funds provide an opportunity for you to invest for the long term basis.

Wrong. Most mutual funds don't even hold stocks for that long. Average holding period of any stock in a mutual fund if you take all the AMCs in India, is about 16-18 months. Talk about long term!

Very few funds rarely ever hold their investments for truly long term. Most of the funds out there are just trading in stocks and other instruments rather than investing for long term. So no, your average mutual fund is not to be considered a long term investment vehicle.

5. Mutual funds pick the best stocks in the market. You can't lose by investing with them.

Wrong. Stock selection by most mutual funds has no basis or backing in their proclaimed philosophy.

Funds that claim to be "Value" oriented chasing "Growth" and those claiming to be "Growth" oriented chasing "Momentum" are prevalent. They just keep shifting opinions and goalposts. So don't go by their stock picks. Definitely don't coattail on their holdings entries and exits.

6. Fund managers can't go wrong. Wrong again. Fund managers are just people like you and me. They have their beliefs, biases, agendas, and most of the times, it's on protecting their job and being safe rather than getting you the best returns possible, as a primary goal.

They are usually chasing their own salaries, bonuses, etc., and in a way, their actions also align with the industry wide incentive system which doesn't really make it conflict free for them to put you, the customer first. So, don't just believe in managers at the face value.

7. Fund managers take risk for getting better returns.

Nope.

There's this popular quote in the fund manager circle - "Nobody gets fired for investing in IBM". Fund managers usually take the safer route and do what other people in their industry do.

So, if they go wrong, they can 't be blamed for taking unique decisions that led to being wrong by a huge margin. If they are wrong, so will others be, and they won't underperform by a huge margin from rest of the managers.

This makes sure they don't lose their job, salary, or their annual bonuses. That's why you don't put blind faith in a fund manager. This is also why you keep track of whether the fund manager's actions align with the fund's proclaimed philosophy for investing.

Did I miss anything? Please do comment what other prevalent beliefs are out there about mutual funds that are simply wrong.

@Crazynaval - Please do share the analysis you showed me on our DMs. It will be very helpful. If you have already posted it on twitter, please share your tweet thread here. It was an eye-opener.