MFDs: The Most Cost-Effective Financial Intermediaries in India

The role of Mutual Fund Distributors (MFDs) in India’s financial ecosystem has been undervalued and often misunderstood. While other financial intermediaries earn significantly higher commissions, (1/14) MFDs facilitate large-scale wealth creation at a fraction of the cost. This article presents data-backed insights into why MFDs are the most cost-effective financial intermediation channel in India.

The Numbers Tell the Story

Commission & Revenue Comparison (FY 2023-24) (2/14)

Har Har Mahadev!

Every Mahashivratri, we celebrate Lord Shiva—the supreme yogi, the fearless protector, and the one who consumed the Halahal (poison) to save the universe. But hidden within this legend of the Samudra Manthan lies a deep lesson for investors.

Just like the(1/10) great churning of the ocean (Samudra Manthan) produced invaluable treasures—Lakshmi ji, Kamdhenu, Kalpavriksha, Dhanvantari, and ultimately Amrit—it also produced something destructive: the Halahal, a deadly poison. No one wanted it. But Mahadev took it upon himself, (2/10)

STOP SIPs! SELL EQUITY! INVEST IN GOLD!

Dear Investors,

It’s time to act! Stop your SIPs immediately. Redeem all your equity holdings. Put everything in gold or FDs.

Why? Because FIIs are selling, and retail investors like you are being told you’ll be the “suckers” left (1/4) left holding the bag. And you know what? I want to be that sucker. I want to be the dump yard for FIIs. I want to give them their golden exit

Some experts say u should buy US stocks instead. I fully support that—just make sure you first dump Indian equities before doing so.(2/4)

In many cases, the presence of a designated fund manager on a scheme is driven as much by regulatory requirements as by active management needs.

Here’s a closer look:

1. Overnight/Call Money Funds:

These funds typically invest in highly liquid, short-term instruments (1/15) with a one-day maturity. The fund manager’s name on the scheme is often a regulatory formality rather than an indication of active, discretionary management. The underlying strategy doesn’t demand frequent, tactical decision-making.

2. Constant Maturity Funds:

When a (2/15)

Falling NAV is just one part of equation.

Buying more units is other.

Why is this lost on us and why we treat it differently and what should we be doing.

1. Mathematically:

- Total Value = Number of Units × NAV (Net Asset Value) (1/5) - For example: 2 units × 2 NAV = 4 total value

- If units increase to 4 and NAV stays at 2: 4 × 2 = 8

- If NAV increases to 4 and units stay at 2: 2 × 4 = 8

The end result is mathematically identical. 8 is 8, regardless of which factor increased.
(2/5)

NAV of HDFC Flexicap Fund

- Around 30 year back- Rs. 10

- ⁠Around 25 year back - Rs. 17

- ⁠Around 20 year back - Rs. 53

- ⁠Around 15 year back - Rs. 196

- ⁠Around 10 year back - Rs. 450

- ⁠Around 5 year back - Rs. 608

- ⁠Sept 2024 - Rs. 1883 (1/6). @hdfcmf But this funds’ NAV has dropped

- 10% plus almost every 6 month.

- ⁠20% plus almost every year.

- ⁠30% plus almost every 4 years.

- ⁠40% plus almost every 5 years.

- ⁠50% drop almost every 8 years.

The above illustrations shows inevitability of market volatility (2/6)

Why Market is not falling!

- Many experts are giving many reasons and there is merit in most of their rationale like GDP expansion/Infra/Rise in Corp Earnings etc.
- ⁠But important factor is domestic liquidity. India almost always has high saving rate but the savings were (1/5) mostly parked in RE/Gold/FD.
- ⁠That is the reason that India rarely witness big collapse or deep correction either in RE or Gold.
- ⁠Traditionally Indians used equity as a flippant lover. Investing when markets were rising and taking money out at the slightest of trouble(2/5)

Gamification of Indian Equities
(Euphemism for growing addiction of speculation )

-Derivates started as a hedge against risk and now become a tool to take risk (how ironic ). According to Sanatan dharma -what is bad. Everything in excess!

- Derivates accounts for 99.6% (1/8) of daily traded volume.

- Derivative trades are valued at $ 4.3 trillion per day. That is Rs. 34,80,00,00,00,00,000 /- per day. GDP of India is $ USD 3.5 trillion! Daily derivative trade volumes are higher than annual GDP of India.

- Derivative markets is now 400 times(2/8)

Yaar yeh market Samajh mein nahin aata hai!

Do you understand ur spouse? Do you judge your relationship on the basis of her / his mood of every day? Though you may feel like doing it , but it can be disastrous!

Equity market is just like your spouse. Do not judge with the(1/4) happenings of every day. Just love your spouse. That’s the best thing you can do. How do show your love. By staying and standing with her/ him through good and bad days but more important staying together for life. If you can do this then you will have kids, family, (2/4)

Total unique investors in MF us 3.6 crs.

Only 50 lacs have portfolio value above Rs 5 lacs. It’s portfolio value and not investment amount.

MF is a retail product. But retail investors in MFs are as prominent as Dilip Kumar in Sholay.

MF industry need retail revolution (1/4) but currently AMCs/ Distributors or regulators do not have either understanding/desire or will to do it. The next level of growth can only come from outsiders.

The MF industry is awaiting some magic moments. Unfortunately MF is not a ‘instant gratification’ product but (2/4)

This is one more reason why active started to outperform!

- One of the most important argument given is that passive outperformed in USA.

- But real reasons are not given. In USA , in most walk of life, few organisations dominate. Unlike India which is more diverse both(1/6) culturally as well economically!

- In india in last 20 years, out of BSE 500 , 156 companies (31% of total) delivered 20% CAGR.

- In USA only 35 (just 7%) companies delivered 20% CAGR in last 20 years.

- In China only 5 and in Japan only 2 companies delivered 20% CAGR(2/6)

Har Har Mahadev (Every one is Mahadev).

This phrase / slogan is used more as a metaphor. Can you be Mahadev of your life. Life is too big a subject to talk, so I will restrict myself to business of investing!

In the great churning (buy and sale) of ocean (markets ),(1/4) search for amrit (returns) was carried out both by sur and asur (buyers and sellers).

Bhagwan Vishnu (SEBI/ Govt) provided base in form of 🐢 to Mother Earth.

Mountain( Stock exchanges) was used as shaft for churning the ocean both by sur and asur. Both wanted Amrit / (2/4)

Choosing passive funds !
1. Nifty 50
2. Nifty next 50
3. Nifty 50 Equal Weight
4. Nifty 50 Value 20
5. Nifty 100
6. Nifty Low Volatility 30
7. Nifty 200 momentum 30
8. Nifty 200 quality
9. Nifty mid cap 50
10. Nifty mid cap 100
11. Nifty mid cap 150 (1/5) 12. Nifty mid cap 150 quality
13. Nifty Alpha 50
14. Nifty psu bank
15. Nifty MNC
16. Nifty infrastructure
17. Nifty fmcg
18. Nifty India consumption
19. Nifty auto
20. Nifty IT
21. Nifty healthcare
22. Nifty Pharma
23. Nifty bank (2/5)
24. Nifty Financial Services (3/5)

Where to invest in 2023!

Debt MF
- Credit Opportunity Fund
- Corporate Bond Fund

Equity
- PSU Equity Fund
- Infrastructure Equity Fund
- Banking & Financial Services Fund
- Healthcare Funds
- Auto
- Gold and Silver

Use Safety Valve Strategy

What is on watch list (1/4) - IT Funds
- Nasdaq Funds
Will communicate when either prize correction or time correction taken place.

Avoid
- Crypto
- Stocks which rose and now fallen. It can be a value trap.
- Direct stocks and IPOs
- Trading
- Any scheme for making quick money.
(2/4)

Circa 1962

The Warren Buffet owned and managed company Berkshire was at $ 8

Year 1972

The share moved up from $ 8 to $ 80 in 10 years.

You were not lucky enough to spot the opportunity in 1962 and missed out 10 bagger.

You invested in the share at $ 80 in 1972
(1/4) In 1975 the stock was trading at $ 38.

A massive 53% drop in 3 years against 14% drop in S&P.

By year 1976 it was at $ 94

By year 1982 it was at $ 774

Currently trading at $ 4,78,675!

A 20% plus CAGR over four decades. (2/2)

Is current bull market in India ending soon!!!

The below chart from Morgan Stanley implicitly believes it’s so!

Gap between forward PE of India and EM. It’s at the highest level and at 3 standard deviation!

What will happen to Indian markets ! Only time will tell but I (1/7) offer my two paise comments on this and similar other narratives/ data!

Our inability to differentiate between cause and effect!! Here we are just looking at effect but not the cause as well!

Just look at the fixed income commentary one year back. Most experts said that (2/7)

Prashant Jain, one of the most iconic fund manager in Indian mutual fund industry has his last day in HDFC MF today. If he was born in America , he would have been touted and compared with Warrent Buffett! His track records over last 29 years is far better than WB.(1/4) But in India , ghar ki murgi daal barabar!!!

His was the longest serving fund manager not only in India but in global markets as well! His HDFC Balanced Advantage Fund which he managed for 29 years has delivered 18% compounded returns ( thought it’s a hybrid fund)!
(2/4)

Certainty/profitability/guarantee!!

I got married in Dec 94. Close relative of my wife gifted her a FD of Rs. 5k. My wife n her relative kept renewing the FD for last 27 yrs. Finally we encashed the FD yesterday.

The FD of Rs.5k grew to be encashed for Rs.40k over 27 yrs(1/4). Luckily no TDS and taxes was paid by me in IT return!

Most debt funds would have outperformed this significantly but one of my favourite fund HDFC Flexicap got launched in Jan 95

The value in this fund would have been around Rs. 5 L against the value in FD of 40 k.(2/4)

Yaar yeh market Samajh mein nahin aata hai!

Do you understand ur spouse? Do you judge your relationship on the basis of her / his mood of every day?

Equity market is just like your spouse. Do not judge with the happenings of every day. Just love your spouse. That’s the (1/4) best thing you can do. How do show your love. By staying and standing with her/ him through good and bad days but more important staying together for life long. If you can do this than you will have kids,family, companionship with highs n lows of life. But most importantly (2/4)

Myth of index investing (episode 6)

- 80% of active funds underperformed benchmark.

Let’s see the data only for large cap (I will post about other categories in coming days)

As these two pictures shows

- 47% n 67% of LC fund outperformed index funds over last 1/3 years(1/4) Against TRI the numbers look different. But right comparison should be with index funds only.

- Large cap category returns has been superior over 10 year n plus period.

- huge gap exist between index funds themselves.

Now d question is why is that from 2015 onwards LC (2/4)

Myth of index investing (episode 4)

20 years data

20 year nifty 50 TRI. 15.85% CAGR

Average of index funds 14.94% CAGR

Avg underperformance 0.91% CAGR
(Compounded over 20 years)

Number of index fund underperformed 100% (1/4) Value of Rs 1 lac invested in TRI. 19 lacs

Value in index funds. 16 lacs

Underperformance on 1 lac. 3 lacs

Now active funds

No. of funds with 20 yr history. 40

Nifty 500 TRI. 17.32% CAGR

Nifty 50 TRi. 15.85% CAGR (2/4)