Coffee Can Investing Vs Mutual Funds – Which is better option?

Coffee Can Investing Vs Mutual Funds - Which is better investment optionCoffee Can Investing Vs Mutual Funds – Which is better investment option?


There are several investors who invest in stocks or mutual funds. Some keep on churning their portfolios, i.e. frequent buying and selling of stocks while some keep the stocks for long periods. Some invest in a variety of mutual fund portfolio to try their luck. There is another set of investors who invest based on Coffee Can Investing Portfolio approach? What is Coffee Can Investing?  How Coffee Can Investing has become famous in USA? Among Coffee Can Investing Vs Mutual Funds, which is better investment option in India? How to get the most out of Coffee Can Investing approach?

Also Read: Best SIP Date for Mutual fund Investments

What is Coffee Can Investing?


Coffee Can Investing refers to long term investment or ‘buy and forget’ approach where funds are invested in companies that perform consistently  well and forget the for a long time. The investors build a portfolio of some well-performing stocks, invest in them and forget for long time duration, say 10 years or more. Some experts say that this type of investment fetches you more than keep rotating your portfolio. 

How Coffee Can Investing has become famous in USA?


The concept of Coffee Can Portfolio has its root vested in Old West America where people used to hide their valuables in the coffee cans and then the coffee can was put under mattress to be kept for years or even decades. In the year 1984, a portfolio manager, Robert Kirby suggested that investors should follow this approach. The investor should identify a diversified portfolio of consistently performing companies, invest in their stock and stay invested for at least 10 years.

In the context of United States, it has highly developed equity markets where around 50% of the individuals invest in mutual funds. And, not only that, they maintain 10 times balance in mutual funds than savings bank account. Due to huge sums of money being invested in equity markets, extensive research on stocks, a large number of big public companies, it has become difficult for portfolio managers to create any extra return (alpha) from active investments. Individuals shifted to passively managed funds, index funds and Coffee Can Investing to avoid the expenses of fund management. This way, Coffee Can Investing gained grounds in the U.S.

In the Indian context, it may be not that popular because actively managed equity funds have beaten their benchmarks by as high as 10-15%. Hence, investing in mutual funds is still a better option for India. 

Coffee Can Investing Vs Mutual Funds – Which is better investment option?


1) Investing in Quality companies


Only a few companies meet the criteria of Coffee Can Investing in India. Out of the 50 top-rated companies, only 10% can said to be apt for such investment. For Coffee Can Portfolio (CCP), one needs to select a company with at least 100 Crore of market cap. Amongst them, again short list those that have been around in the market for 10 years and at least 10% revenue growth and 15% return on capital employed for each past 10 years. It is very an intricate task to pin-point such companies in India. On the other hand, the fund manager would manage to churn the portfolio and keep investing in stocks that may outperform.

2) Probability of investors to sell their shares


A portfolio created by investing in the companies with the criteria of Coffee Can Investing might have outperformed Sensex by 5-10% in last 15 years, but during the phase of stagnation in  a specific stock or bear period, most investors tend to sell the non-performing stocks. This kills the entire purpose of Coffee Can Investing.  On the other hand, most of the mutual fund managers would invest for medium to long term which can help to get higher returns.

3) Performance of CCI and Mutual Funds


If we draw a comparison between returns from a Coffee Can Investing and returns from mutual funds, we find that CCP gives 5-7% annualized return, whereas actively managed mutual funds have constantly beat their benchmarks  by as high as 8-12%. 

4) Cost of investing in CCI and mutual funds


There are several stock brokers which are offering 0.1% to 0.75% fee when you buy or sell stocks. On the other hand, the biggest disadvantage of actively managed mutual funds is that they charge considerable fees. Some funds have a front-end load or back-end load/brokerage commission, which is basically a fee paid for investing or disinvesting in the fund. Some funds typically charge an expense ratio, which at times may be in excess of 2%. At the end, all the investors are collectively paying huge sums of money to the fund managers whose performance may be average sometimes.

Conclusion: Coffee Can Investing is a good investment concept, but very few investors succeed in it due to lack of financial expertise and investor bias. If someone is determined to invest in it, then he is must not invest more than 10-15% of his investment corpus in such concept.

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Suresh

Coffee Can Investing Vs Mutual Funds – Which is better investment option

18 comments

  • Rln

    Dear Suresh,

    I didn’t realise difference between direct and regular mf plans and invested in fundsindia regular which I realised will have 1% commission that goes to fundsindia..should I take out my money and invest them in direct funds in each AMC now or let it go?( I can’t afford to start anything mew)

    • Hi RLN, you don’t need to visit each and every AMC website to invest in direct plans. There are several good apps like Mycams, MF utilitiies etc., which are online and you can track them at one place. I prefer Mycams mutual funds platform for direct mutual funds. You can refer this article for more info. https://myinvestmentideas.com/2017/12/best-mutual-fund-mobile-apps-for-investing-online-in-india/

      • Rln

        Thanks Suresh… Should I stop my current 8 (sip) MF from funds India and move them to one of these websites? I planned to start a sip and then buy additionally to put all the invested once so far. Does that work? Do u have any better solution?

        • You have couple of ways to do that 1) Stop current SIPs in Fundsindia and invest in direct funds through these online portals and continue existing units at Fundsindia. 2) You can do point no.1 + redeem funds at Fundsindia and repurchase from online portals. However this would attract necessary tax on mutual funds 3) You can do only new / fresh SIPs through online portals.

          • Munish K. Singh

            Suresh JI,

            I have investment in ELSS regular plan which has completed its lock in period.
            Now my question is, if I switch it from my existing ELSS regular plans to direct plans. Will it be consider a fresh investment for this fiscal year 2018-2019 . So i get two benefits .

            1. My existing investment convert in to direct MF.
            2. I do not need to invest extra for this year tax saving.

            Please give your valuable input either I am thinking right or not.

          • There is no conversion from regular plans to direct plans. You need to sell your funds and purchase in direct plan. These are considered as 2 different transactions. If your ELSS funds has completed lock-in period, you can sell your regular funds and reinvest in direct plans. these direct plans are considered as fresh investment in ELSS and you would be eligible for tax exemption u/s 80C in current year

          • Rln

            Thank u again, will go with option 1 as it looks much better… Let the fundsindia amount stay until I redeem them.

  • sheetal

    Nice article Sureshji 🙂

    I would appreciate, if you could provide some recommendation for direct equities for 2-3 years duration.

    Thanks ,
    Sheetal

  • Irfankazi

    Dear Mr. Suresh,

    sir, can you me your opinion regarding 2 funds i like to SIP

    1. SBI Banking and Financial Services Fund – And How Much SIP Better for 5 yrs term

    2. Any Good Balanced Fund – And How Much SIP Better for 5 yrs term.

    I already have about 20k SIP’s. All active since 1 year

    Aditya Birla Sun Life Frontline Equity Fund (G)   –  SIP 1000

    HDFC Mid-Cap Opportunities Fund (G)              –  SIP 1000

    ICICI Prudential Value Discovery Fund (G)         –  SIP 2000

    L&T India Value Fund (G)                                   –  SIP 1000

    L&T Infrastructure Fund (G)                               –  SIP 3000

    Reliance Large Cap Fund – Retail Plan (G)       –  SIP 2000

    Reliance Multi Cap Fund – Retail Plan (G)        –  SIP 4000

    Reliance Small Cap Fund (G)                           –  SIP 4000

    SBI Blue Chip Fund (G)                                    –  SIP 2000

    if you can please suggest & give Guidance that all my holding are good for average 5 yr term or should i change accordingly for better managing portfolio, i am bit confused

    Regards

    • Hello Irfan, There are better funds in Banking / Financial Services like ICICI Pru banking and financial services fund, Reliance Banking Fund etc., You can invest in such funds which has consistently performing. You can invest in ICICI equity and debt fund in balance segment. The others you may invest for 5-10 years period. Some of the funds may not perform well for 5 years period, hence you should go for long term.

  • Subramanian

    I am having Sip of DSP micro cap fund for last. 2 years.now current value is less than the invested amount.pls suggest can I come out or hold/continue the sip

    • Hi Subramanian, Currently midcap and small cap funds are under performing due to downfall in midcap and smallcap stocks. You can continue to invest for medium to long term of 5-10 years to get good returns.

  • Kumaran

    Hello Sir,

    Request you to write about L&T Focused Equity Fund NFO.

    Thanks,
    Kumaran

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