The Intelligent Investor: Investment Funds

For most of us looking to build wealth, it isn’t about whether we should invest in funds — but how.  Should you build a portfolio by yourself? Or take the help of professional fund managers? Benjamin Graham answers some of these questions in his book The Intelligent Investor, first published in 1949. The world is vastly different today, with technology, globalisation and ever-evolving market dynamics changing the way people invest and making it more accessible. But his advice remains relevant even now, in a landscape of mutual funds, PMS strategies, and AIF (alternative investment funds). Here’s a look at his core teachings and guiding principles.

Understanding investment funds

In very simple terms, investment funds pool (combine) capital from multiple investors and allocate it across a diversified portfolio of securities. They are categorised along the lines of structure, asset allocation, investment objective and fee structure.

→ By structure

Open-ended funds (mutual funds): Investors can enter or exit at Net Asset Value (NAV)

Closed-ended funds: Trade on exchanges, often at a premium or discount to NAV

→ By asset allocation

Equity funds: Primarily invested in stocks

Debt funds: Focused on bonds and fixed-income instruments

Balanced funds: A mix of equity + debt

→ By investment objective

Growth: Capital appreciation

Income: Regular cash flows

Stability: Capital preservation

→ By fee structure

Load funds: Include distribution or entry charges

No-load funds: Lower cost structures without commissions and fees

The pros and cons of investment funds

One of the most common questions (and expectations from investors) is whether investment funds offer better returns than the market. Graham’s conclusion is a balanced one: he says that investment funds tend to deliver returns broadly in line with the market and not significantly above it. Which makes sense, because, given the scale at which institutional capital operates, fund performance often reflects overall market movement.

But here is where investment funds have an advantage: they come with a dedicated expert/fund manager. Good fund managers can help investors avoid concentrated bets and poor stock selection, maintain a diversified portfolio, remove speculation from the equation, and stay disciplined through market cycles. So when it’s put into practice, this means the average fund investor may fare better than the average self-directed investor, not because of superior returns, but because of better and more objective decision-making.

The illusion and risks of chasing “top performers”

A common approach among investors (especially first-time investors) is to select funds based on recent outperformance. Graham warned against this. He says short-term returns and outperformance can be attributed to favourable market cycles, concentrated sector exposure and a degree of smart risk-taking. He adds that past performance is not an indicator of guaranteed future results, especially when fund managers are driven by aggressive positioning.

Graham calls out these “high-performance” funds, which claim they are designed to significantly outperform the market. While funds may be able to deliver excellent returns and outperform, those funds often focus on high-growth, high-valuation stocks, benefit from market upswings, and also attract inflows after periods of strong returns. He points out that markets are cyclical in nature, and that periods of exceptional performance are often followed by sharp downturns. So what seems like a magic formula or exceptional skill is often just a fund manager willing to take on bigger risk.

Choosing the right fund structure

Based on structure, funds are classified as open-ended/mutual funds, closed-ended funds, and balanced funds.

→ Open-ended or mutual funds:

Offer liquidity and ease of access

Typically priced at NAV (Net Asset Value or the per-unit value of an investment fund, or what one unit/share of a mutual fund is worth at a given time)

May include distribution costs or expense ratios (fees for the fund being managed and sold)

→ Closed-ended funds:

Trade on exchanges like stocks, and prices change throughout the day based on demand and supply

Usually available at a price lower than its NAV

Give investors more value for money/valuation advantage

→ Balanced funds:

Combine equity and debt allocations (bonds, FDs etc) within a single structure

Graham notably favoured closed-ended funds available at a discount, as they allow investors to acquire underlying assets at a more effective lower price. He also believed that investors may achieve better outcomes by allocating their money separately into equity and fixed-income instruments based on their goals and risk profile.

To sum it all up…

Across structures and strategies, a few core principles stand out:

• Do not chase recent performance
• Be wary of strategies driven by momentum or hype
• Expect market-level returns, not consistent outperformance
• Focus on the costs, since fund management fees directly impact net returns
• Choose simplicity and transparency over complexity

According to Graham, these principles form the foundation of disciplined, long-term investing.