Mutual funds are supposed to be long-term investors. Why did IDFC Premier buy Tecpro Systems in August and sell it completely in September and sell Fag Bearings in August and buy it in September?

Most fund managers show you, by way of illustration, how a stock held over years can fetch you high returns, underlining the importance of ‘buy’ and ‘hold’. Do funds follow this approach in practice? Some even buy and sell the same stocks erratically for no apparent reason.

While looking at some fund data we came across some strange transactions in IDFC Premier Equity Fund. As per our data, the fund bought 9,67,545 shares of Tecpro Systems Ltd in August 2011 and then completely sold them in September 2011. Tecpro (listed in October 2010) has halved in value from the listing price. We also noticed that IDFC Premier had 200,000 shares of Fag Bearings at the end of July 2011, sold them completely in the immediate following month, that is, August 2011—and bought 247,602 shares in September 2011. What could be the reason for such frequent buying and selling? We asked the fund house but did not get a relevant answer. Indeed, a spokesperson replied that “we are long-term equity investors and don’t look at short-term opportunistic liquidity events.Given this, your query is factually incorrect” but was unwilling to show what was “factually incorrect” about the data. The data for this is sourced from the Mutual Funds of India (MFI) database; MFI insisted that this information of buying and selling is absolutely correct because it is culled from the data submitted by the fund house itself.

Mutual funds are supposed to be the best bets for those who have no idea about markets and individual stocks. Picking stocks is a job that needs long years of knowledge and expertise and mutual fund managers are supposed to be experts in that game. Unlike millions of uninformed and emotional individual investors who, reacting to greed, buy high and then, reacting to fear, sell low, fund managers are supposed to know what to buy and when.

However, as we have been pointing out time after time in many of our articles on mutual funds, including some unusual fund managers are, after all, human and they too act like individual investors from time to time. They buy the wrong stocks; they buy at the wrong time; and they sell at the wrong time. They cruise along in a bull market confusing luck with performance and are shocked to find the market collapsing around them. They talk of value investing but hold on to expensive stocks hoping for one more rally. They chase momentum. Not all fund managers sport these patterns of behaviour always, but almost all of them do at some time or the other. As we said, they are human.

We have nothing against IDFC Premier. It is a well-performing fund. We wished to understand the factors behind its performance. The bizarre buying and selling from month to month is not confined to IDFC Premier. We will bring more stories of buying and selling by fund houses in the near future.