What's hot, what's not with Mutual Funds

Small funds find the going tough despite boom



MUMBAI: When the Association of Mutual Funds of India (Amfi) releases the monthly numbers for assets under management (AUM) of the mutual funds (MFs) in the country, much of the growth is usually restricted to the top four or five players. The industry continues to boom, but going is getting tougher for the smaller players.

These funds constantly face problems of shortage of quality manpower and lack of brand awareness among investors. However, they are not willing to give up so easily. Several smaller MFs are stepping on the gas to cash in on the equity boom in the country and devising novel strategies to attract the elusive investor.

“More than brand quality, it is the brand image that helps larger MFs to be more aggressive and persuasive in selling their products,” says Taurus MF managing director RK Gupta whose AUMs are currently at Rs 258 crore. “For distributors, it is almost a challenge selling products of smaller companies,” he adds. The fund house is waiting for a better time to launch an infrastructure fund, while it has the licence for portfolio management services and for launching fixed maturity plans.

Is big always better. Not necessarily, feels Mata Securities’ head of mutual fund distribution Sameer Kamdar. He says that lack of financial muscle for the marketing effort and subsequent investor indifference leads to a vicious cycle of difficulties for smaller funds. However, he adds, there are positives of being small too. “Smaller funds have the flexibility to change strategies and can bring innovative products faster to the market,” he feels.

Quantum MF, which was launched in February this year, subscribes to this view and believes in staying away from distributors and instead reaching out to the investor directly. “A distributor-led model of mobilising assets does not benefit the investor,” says Quantum AMC’s chief executive officer Arjun C Marphatia. Mr Marphatia feels that investing distribution commissions saved (by not opting for distributors) will enable his investors to obtain potentially larger returns over time – and this shall remain the USP of his fund house. Quantum currently has only Rs 55 crore under two schemes — Quantum Long Term Equity Fund and Quantum Liquid Fund. Whether this novel strategy will pay off in the days to come will be interesting to watch.

Besides organic growth, a joint venture with a foreign AMC is also another strategy which smaller MFs adopt. Recently, there were reports that Bank of Baroda MF was in talks with Pioneer Investments for a partnership that may bring back America’s third-oldest mutual fund in India for the second time. BoB MF officials were unavailable for comment.

DSP-ML Tax Saver Fund – Should you buy?

DSP ML Mutual Fund has come out with DSP-ML Tax Saver Fund, the first open-ended Equity Linked Saving Scheme (ELSS) from the fund house. (Note that every mutual fund can have one open-ended tax saving scheme (ELSS) and other ELSS NFOs have to be mandatorily close ended.)

DSP-ML Tax Saver Fund offers deduction under Sec. 80C and the minimum lock-in period would be three years as in any other ELSS. Investment expert Sandeep Shanbhag believes that this enforced lock-in offers the opportunity to the fund manager to take long-term calls without having to worry about creating liquidity for daily redemptions. “To that extent, the performance of ELSS funds in general have been better than their open ended counterparts”, he added. (Check out - Mutual Fund NFOs open now)

Advisor Hemant Rustagi feels, “ELSS is one of the best options among the instruments eligible for tax benefits under section 80C as they provide an opportunity to participate in the equity market and also help save taxes while doing so.”

However, on the flipside Rustagi says, “Though ELSS have the potential to give better return compared to other options under Section 80C, there is definitely some risk attached to it.” “This can, however, be tackled by investing thru SIP”, he added.

Experts also feel that DSP-ML Tax Saver does not have any unique feature that other ELSS funds do not possess, and as an investment strategy, investors would be better off investing with ELSS funds with a proven track record instead of taking part in New Fund Offers (NFOs) that have no special selling proposition.

In reply, the fund house states, “When investing in NFO’s it is also important for investors to look at the track record of the fund house in managing asset classes. DSPML Fund Managers has a consistent track record when it comes to equity fund management. DSP Merrill Lynch Fund Managers Ltd was declared the best equity fund group over 3 years at the Lipper India Fund Awards 2006. DSP Merrill Lynch Equity Fund was among four schemes that won the CNBC TV18 - CRISIL Mutual Fund of the Year Award – 2006.More recently, DSPML Opportunities Fund and DSPML India T.I.G.E.R. Fund, two of our top-performing equity funds, have been recognised for their outstanding performance. Both these schemes have been ranked CRISIL CPR 1.”

[I] 1-year
3-year
Assets

Existing Equity Diversified Schemes Returns *
Rank *
Returns *
Rank *
(Rs in cr)

DSP-ML Equity Fund 49.4
30 / 132
49.4
9 / 66
652

DSP-ML India T.I.G.E.R. Fund (G) 59.0
9 / 132
59.0
N.A.
1,182

DSP-ML Opportunities Fund (G) 49.2
31 / 132
49.2
11 / 66
1,282

DSP-ML Top 100 Equity Fund (G) 51.1
29 / 132
51.1
28 / 66
292

* Figures as on November 30, 2006



Conclusion:

Experts believe that, “If an investor decides to invest in this fund, he will have to go by the track record of the existing funds of the fund house to assess its capabilities. On the other hand, some of the existing ELSS has an excellent track record. One can look at the quality of the portfolio and the extent of exposure to different market caps in these funds and then take a decision.”[/I]


Source : Moneycontrol.com

Private sector MFs grow high on AUM

The sustained bull run in the secondary market, better management of resources, leading to higher mobilisation, have helped the predominantly private sector mutual funds (MFs) to outperform their other peers like the bank-sponsored joint ventures of Indian or foreign companies sponsored Asset Management Companies (AMC) in the year 2006.

The total AUM of the Indian private sector-owned MFs grew 76% and they added Rs 33,508 crore, taking their total assets to Rs 77,106 crore between January to November this year. According to the Association of Mutual Funds in India (Amfi), the AUM of the MFs went up by 71.33% (Rs 1,42,130 crore) to Rs 3,41,378 crore between January to November this year.

The predominantly Indian bank-sponsored joint ventures registered the lowest growth. The AUM in this segment went up by 48% or Rs 5,164 crore to Rs 15,961 crore. However, the joints ventures of Indian banks with other categories of MFs have grown by 59.97% or Rs 16,524 crore to Rs 44,078 crore.

Commenting on this trend, N Sethuram Iyer, CIO, SBI Mutual Fund said, “Indian banks sponsored MFs could not grow at par with industry growth as they could not mobilise resources thorough the liquid funds. All other types of MFs could able to garner good resources through the liquid funds which has helped them to grow their AUMs faster”.

• The total AUM of the Indian private sector-owned MFs grew 76% and they added Rs 33,508 crore
• AUM of the MFs went up by 71.33% (Rs 1,42,130 crore) to Rs 3,41,378 crore between January and November this year
• Indian banks sponsored joint ventures registered the lowest growth
• AUM of the Indian MFs have gone up by 70.37% or Rs 42,706 crore to Rs 1,03,394 crore against 65.49% of foreign JVs

He said that Indian bank sponsored MFs could perform better in liquid funds in future by reducing expenses and improving performance. Except in the category of liquid funds, the performance of the Indian bank sponsored MFs have been better in all other types of schemes including equity linked funds.

The AUM of the predominantly Indian MFs have gone up by 70.37% or Rs 42,706 crore to Rs 1,03,394 crore as against 65.49% of the foreign JVs. The AUM of predominantly foreign MFs went up by Rs 33,384 crore to Rs 84,358 crore.

The LIC AMC, the only MF under institution run category, registered the highest growth of AUM that went up by 192% or Rs 10,844 crore to Rs 16,481 crore.

Private sector MFs grow high on AUM

The sustained bull run in the secondary market, better management of resources, leading to higher mobilisation, have helped the predominantly private sector mutual funds (MFs) to outperform their other peers like the bank-sponsored joint ventures of Indian or foreign companies sponsored Asset Management Companies (AMC) in the year 2006.

The total AUM of the Indian private sector-owned MFs grew 76% and they added Rs 33,508 crore, taking their total assets to Rs 77,106 crore between January to November this year. According to the Association of Mutual Funds in India (Amfi), the AUM of the MFs went up by 71.33% (Rs 1,42,130 crore) to Rs 3,41,378 crore between January to November this year.

The predominantly Indian bank-sponsored joint ventures registered the lowest growth. The AUM in this segment went up by 48% or Rs 5,164 crore to Rs 15,961 crore. However, the joints ventures of Indian banks with other categories of MFs have grown by 59.97% or Rs 16,524 crore to Rs 44,078 crore.

Commenting on this trend, N Sethuram Iyer, CIO, SBI Mutual Fund said, “Indian banks sponsored MFs could not grow at par with industry growth as they could not mobilise resources thorough the liquid funds. All other types of MFs could able to garner good resources through the liquid funds which has helped them to grow their AUMs faster”.

• The total AUM of the Indian private sector-owned MFs grew 76% and they added Rs 33,508 crore
• AUM of the MFs went up by 71.33% (Rs 1,42,130 crore) to Rs 3,41,378 crore between January and November this year
• Indian banks sponsored joint ventures registered the lowest growth
• AUM of the Indian MFs have gone up by 70.37% or Rs 42,706 crore to Rs 1,03,394 crore against 65.49% of foreign JVs

He said that Indian bank sponsored MFs could perform better in liquid funds in future by reducing expenses and improving performance. Except in the category of liquid funds, the performance of the Indian bank sponsored MFs have been better in all other types of schemes including equity linked funds.

The AUM of the predominantly Indian MFs have gone up by 70.37% or Rs 42,706 crore to Rs 1,03,394 crore as against 65.49% of the foreign JVs. The AUM of predominantly foreign MFs went up by Rs 33,384 crore to Rs 84,358 crore.

The LIC AMC, the only MF under institution run category, registered the highest growth of AUM that went up by 192% or Rs 10,844 crore to Rs 16,481 crore.

Capital protection mutual fund scheme? Beware!


This is exactly what you wanted -- a mutual fund scheme that promises to protect your initial investment and gives better returns than a bank fixed deposit and other guaranteed products on offer. They target the need for safety of initial investment that has so far kept conservative investors out of the MF ambit and to provide returns attractive enough to lure them away from guaranteed return products.

The performance of existing monthly income plans and hybrid debt oriented schemes show that funds are capable of generating superior returns with a high degree of safety. However, investors need to read the fine print on the protection of capital, liquidity, expected returns and risks before committing to these schemes.

Sebi's guidelines

In August, market regulator Securities and Exchange Board of India issued guidelines permitting fund houses to launch "capital protection-oriented" schemes. Sebi says capital protection should arise from the way in which the portfolio is constructed and not from any guarantee by the asset management company or sponsor.

It also requires that the scheme be rated by a credit rating agency on the ability of the fund to protect the initial investment and to be periodically reviewed on its continued ability to do so. Also, these schemes have to be closed-end, so investors can invest only at the time of the new fund offer and can redeem only on the completion of its term.

The modality

How do these funds aim to provide capital protection? A portion of the fund is invested in debt instruments that would mature at the value of the initial investment at the time of redemption. For example, out of Rs 100, Rs 80 may be invested in an interest-paying debt instrument or zero-coupon bonds, whose maturity value is Rs 100.

The remaining Rs 20 is invested in securities that are expected to provide returns that make the investment proposition attractive. This is something that an investor can easily replicate by parking the funds in, let us say, a post office monthly income scheme and investing the monthly interest in the equity market. However, the advantage that fund houses would bring is the use of sophisticated tools such as constant proportion portfolio insurance and dynamic portfolio insurance to apportion and manage funds between less risky assets and risky assets.

Unlike the example above, where the investment in equity was restricted to the cushion of Rs 20, the exposure to equity is leveraged with a defined multiplier. In the same example, if the multiplier is three, then Rs 60 (20x3) will go into equity and Rs 40 into risk-less assets.

The protection is at risk only if the value of the portfolio falls below the floor, Rs 80, and this is monitored on a continuous basis with built-in triggers. This would ensure that investors are able to reap maximum benefits by participating in an asset class that gives better returns without compromising on the safety of the capital invested. The other advantage is that investing in a mutual fund is more tax efficient than investing directly.

Buyer beware

Capital protection funds are excellent tools for fund houses because they are able to tap into a source of funds that have so far been cornered by bank deposits or post office schemes. However, the investor needs to keep in mind certain issues before being carried away by the capital protection bit, which is what the fund houses and distributors will emphasise on. These are:

No Guarantees. Sebi's guidelines do not require the fund house to give any guarantees. In other words, the AMC isn't required to make up the difference in case of capital erosion. They only need to ensure that, as far as possible, the investor's initial investment is safe, by structuring the portfolio in a way that ensures protection.

More importantly, these schemes aim to protect your rupee investment and inflation is ignored. This means that even if you get the Rs 100 that you had invested, effectively you have lost money because of the value erosion in the Rs 100 over the period.

Does this mean that investors will lose money? Not likely. The closed-end nature of these schemes gives the fund manager the defined period benefit for making investments in debt instruments which ensure protection. The credit rating that Sebi insists on will also provide an added level of security for the investor.

Low liquidity. Capital protection funds are essentially closed-end funds, wherein an investor can't exit during the life of the scheme for any reason, be it need for liquidity, or poor performance by the scheme. The first capital protection fund in India, Franklin Templeton Capital Safety Fund, is mulling listing on the stockmarket to give investors an exit option.

The experience of closed-end funds listing on stock exchanges has not been happy with the units quoting on the exchanges at heavy discounts to NAV. This makes it essential for the investor to be able to spare the funds for three or five years, as the case may be, for which funds would be locked up.

Moderate returns. If you invest in the belief that returns from funds will match that of diversified equity funds when markets go up and reflect a fixed deposit in a bear market, you would be disappointed. A capital protection fund's focus is protecting the capital. Only a portion of the funds will be invested in equity and related instruments and returns to investors are going to be muted to that extent.

A look at the returns from MIPs and hybrid debt funds, which have a blend of debt and equity that is similar to the mix that capital protection funds will have, may give an idea of the returns that investors can expect (see Count Your Bucks).

The closed-end nature of these funds permit active portfolio allocation strategies by the fund managers, increasing equity exposure when markets are going up and the reverse when markets dip. This will give the capital protection funds an advantage in generating returns.

Return risk. The risk for an investor in a capital protected fund will not be of losing capital invested. The risk for the investor would be of not getting expected returns. The challenge for fund managers would be to be able to allocate sufficient resources to risky assets to generate returns.

For example, in a phase when interest rates are going down, greater allocation will have to be made to the debt component in order to offset the reinvestment risk and to ensure that the redemption value of the bonds at the time of maturity equals or is greater than the amount invested.

This would mean less exposure to equity products and that would greatly reduce the potential gains that a fund can achieve from subsequent gains in the stockmarkets. To put things in perspective, a look at the returns from MIPs show that funds that have at least 15 per cent in equity have fared better in all periods.

Tax implications. Dividends from the scheme will be tax free in the hands of the investor. However, since these schemes will invest predominantly in debt, the fund will have to pay a dividend distribution tax amounting to 14.02 per cent.

The long-term capital gains tax on redemption will be 10 per cent without inflation indexation and 20 per cent (excluding surcharge and education cess) with this benefit. Income from fixed return products like bank deposits, on the other hand, will have a higher tax incidence at the marginal rate of tax applicable to the investor and the capital protection funds are a more tax effective way for the investor to invest, especially for investors in higher tax brackets.

Buying the scheme. Caveat Emptor or buyer beware is a policy that will always hold the investor in good stead. Investors must guard against wrong claims made by distributors either out of ignorance or otherwise. Investors are going to be sold this product as a guaranteed product by distributors, who will find this the easiest way to convince an investor. The other issue on which the investors could be misled is expected returns.

These are predominantly debt funds that will have a limited exposure to equity and, therefore, the returns can't be compared to that of an equity fund.

After Sebi came out with the guidelines, the MF industry has lined up a host of capital protection funds. Franklin Templeton was first off the mark with its Capital Safety Fund. Reliance, UTI, Tata, and SBI have filed draft prospectuses with Sebi for similar products.

These funds are ideal vehicles for the conservative investor waiting to participate in equity marktes without risking their capital. But if you are an investor with a long-term perspective and not hung up on capital protection, you are better off investing in a well-managed diversified equity fund.

The Flip Side

Three reasons why capital protection schemes may not work for you
Guarantee. No AMC or sponsor guarantee against capital erosion. A high debt component means typical debt investment risks related to interest rate, default and reinvestment
Liquidity. It's less liquid being closed-end. Investors can invest during NFOs and redeem it either after the end of the term or if it gets listed
Returns. Likely to be much less than diversified equity funds and more in line with monthly income plans

SBI One India Fund – Should you buy?



SBI Mutual Fund latest offering - SBI One India Fund, is a 36-month close-ended equity scheme that converts into an open-ended scheme at the end of the 36-month period. The scheme seeks to invest funds based on the geographic location of a company. The minimum allocation as a percentage of equity assets to each region (North, South, East, West) would be 15%, while the maximum allocation to each region would be 55%.

The allocation of equity assets to a region would depend upon a number of factors including economic development, market opportunities, changing regulation, flow of investment/ capital to a region, demographic profile, and political and economic factors specific to a region. (Check out - Mutual Fund NFOs open now)

Though SBI Mutual Fund believes that SBI One India Fund has a unique investment strategy that makes it stand apart from any other fund, but not everyone is so positive. Experts see it as a gimmick as they feel that any other existing diversified scheme too can have a similar portfolio.

Just another Gimmick

Investment expert Sandeep Shanbhag says, “SBI MF as a fund house has a fairly decent track record and it needn't have resorted to such attention grabbing devices to generate assets under management.” “Investors would be better off sticking to existing performing well diversified plain vanilla products rather than getting talked into such strange mutual fund schemes”, he added.

Shanbhag also feels that the idea seems to go against the basic tenets of wise fund management in that, investments should go into that stock or company that offers the largest potential of capital appreciation and wealth building, regardless of the region such a company is situated in.

However, Sanjay Sinha, Head – Equities, SBI Mutual Fund explains the USP (Unique Selling Point) of the new fund: "The unique characteristic of this fund lies in the fact that it will seek a regional diversity in its investment strategy. The performance of model regional portfolios over the last 5 years have brought out the following points:

a) Every year one-region portfolio outperformed the other 3 regions. The difference of out performance between regions in each of the year was significant.

b) There was more than one region that outperformed the BSE 200 index every year and BSE 200 is a relatively tough index to outperform.

Based on these findings the fund will follow a strategy that will seek to allocate higher assets to those regions that will have a higher investment potential and therefore seek to outperform the BSE 200 Index. Dedicated investment teams have been put into place for every region. The performance of the regional asset allocation and of the regional portfolios will be reviewed periodically to ensure that we do not carry underperformance too long."

Liquidity – A Concern?

Advisor Hemant Rustagi feels that, “Being a closed-ended scheme, the liquidity comes at a price in the form of recovery of unamortized issue expenses.” “However, it should not be a dampener for a long-term investor”, he added.

SBI One India Fund vs Existing Diversified Schemes

Rustagi feels that, “Regional allocation, after all, may not be a great differentiator as any other existing diversified fund can have a similar portfolio, though without the minimum and maximum caps on regional allocation.”

But Sinha counters as he says, “While existing funds could have a regional allocation strategy, we believe that by following a dedicated strategy like this we will have a sharper focus and a more disciplined investment strategy. Portfolio in each region will be constructed on bottom up stock selection approach by a dedicated investment team.”

Avoid same eggs in different baskets

The concepts of diversification and asset allocation are well known. They are integral to any financial plan made for an individual. However, actual implementation can get a little complicated considering the nature of some investments such as mutual funds and unit-linked insurance products. Investors must therefore consider their indirect exposure to stocks and sectors held by these saving instruments.

Indirect exposure

One way for an individual to invest his savings is to buy stocks directly from the market. In this case, it is relatively easy to evaluate the level to which one has managed to diversify across sectors and stocks. One is also clearly able to demarcate the amount of exposure to equity and to other debt and related instruments. However, the risks of venturing out directly in the market are well documented. This is the reason why many investors are advised to use the mutual fund route or the unit linked insurance product route to taking exposure to equity.

This is where evaluation of stock and sector diversification becomes more complex. This also complicates one’s asset allocation calculation. Consider for instance this scenario — an individual has 10% of his stock portfolio composed of stocks from the pharmaceutical sector, half of this exposure is accounted for by one stock. This individual then proceeds to invest a substantial portion of his money in a diversified mutual fund. The fund too takes a high exposure to pharma sector and places particular emphasis on the stock that the individual already possesses in substantial quantities.

The key point that emerges out of such a scenario is the indirect increase in the exposure of this investor to not only the pharma sector but also to one stock. The lesson: Keep in mind your indirect exposure to the sector and the stock. It can be risky to buy more of a stock that your fund already holds in substantial quantities.

Similarly, one also needs to evaluate if one’s different fund schemes are all holding almost the same stocks. It makes no sense then to buy multiple schemes, it only serves to increase the effort in management of so many folios and also exposes one to only a few stocks.

While precise exposure one has to each stock and sector, if one takes mutual fund portfolios into account, can become complicated, it makes sense to have a broad idea of where the money is being invested. Appropriate strategies can then be devised to diversify investments.

The same holds true for asset allocation. Investment in a balanced fund implies that a portion of your investment is already in relatively risky instruments. Take this into account when you consider your cumulative exposure to debt and equity. Such constant assessment will enable you to ensure that the portfolio remains adequately diversified at all times. It will also help cut down on tax complications arising from constant buying and selling of different securities done in order to rebalance the cumulative portfolio.

Volatility forces funds to extend NFO closing dates

MUMBAI: Investor response to new fund offers (NFOs) of domestic mutual funds (MFs) has been hit due to sharp fluctuations witnessed in the stock market over the past 10 days.

In a last minute effort to attract more funds, MFs are extending the closing dates for their NFOs by up to one week. Three funds which had NFOs running during the last couple of weeks have extended deadlines by two days to a week.

Kotak Mahindra Mutual Fund has extended the NFO period of its close-ended balanced scheme Kotak Dynamic Asset Allocation to December 13, from the earlier scheduled close of December 7. The scheme had opened for subscription on November 14. Similarly, HSBC Mutual Fund has extended the offer period for HSBC Tax Saver Equity Fund to December 19. The fund was scheduled to close on December 15, 2006.

Sanjay Prakash, CEO, HSBC Investments, says, “The three days extension was a move for distributors, some of whom wanted more time to take in some late applications.” When asked if this extension was because of the market volatility, he said, “I won’t attribute it to volatility. In fact I am against such extensions as people may attribute it to fund not receiving a good response from investors.”

Since the fund had reached out to 165 cities, the extension was to accommodate applications from far off cities, he added. An analyst tracking mutual funds at a domestic brokerage says that fund houses extending NFO deadlines have been fairly rampant in the past couple of months.

While commenting on the extensions over the past couple of weeks, the analyst says, “With the kind of volatility seen in the equity markets in the last couple of weeks, less-than-satisfactory investor response could have led to such moves by funds.”

ING Mutual Fund has extended NFO period of its close-ended fund-of-funds scheme Optimix Dynamic Multi-Manager FoF Scheme-Series II to December 22. The NFO was earlier scheduled to close on Wednesday. Says Mugunthan Siva, CIO, Optimix, “The extension was aimed at collecting as much as possible since the last few days see maximum action. We are hoping to see good inflows in the next three days.”

On the question of volatility, he said that investors may be hesitant to invest in with the market suddenly turning choppy. However, he added that Optimix’s Series II NFO has seen more interest than the previous fund-of-fund schemes from the fund house due to its volatility friendly features.

Did you invest in the best equity funds?



Congratulations on choosing Equity Mutual Funds for creating wealth rather than investing directly in the stock market. It’s surely a wise decision.

But, are you riding on the horses or on the laggards? Have you ever tired to check that?

When the markets are on a roll, all Equity Funds give positive returns. Don’t be happy with just that.

In last one year, ended 30.11.06, out of the 120 fully diversified funds and 20 midcap funds, the best returns generated are up to 71% and the least being a measly 4%. The average return being that of the 65th positioned Equity Fund at 40%, when the 140 Equity Funds are arranged in descending order based on their returns over the last one year.

And now, the acid test…

• A year back, did your financial advisor advise you to invest in mutual funds that have outperformed the rest of the funds or underperformed?
• The best 35 funds (1st Quartile i.e. 1st 25% funds) have generated 50-70% returns.
• The next 35 funds (2nd Quartile i.e. 2nd 25% funds) have generated 40-50% returns.
• The next 35 funds (3rd Quartile i.e. 3rd 25% funds) have generated 30-40% returns.
• And the last 35 funds (4th Quartile i.e. last 25% funds) have generated 4-30% returns.

Check where your funds feature in the above 4 categories!

Now let’s analyze some funds in each category:

* Best Performers – 1st Quartile: 50 - 70% returns

If your advisor had recommended these funds to you, be sure that you’ve got the best advice available in India. The advisor is a genuine expert and truly gives ethical advice keeping your best interest in the forefront. Check if your advisor had advised you to invest in the following funds during Oct - Dec ‘05 (Last 1 year returns mentioned):

Sundaram Select Midcap: 71%, SBI Global: 66%, Franklin India Opportunities: 63%, Pru ICICI Dynamic: 61%, Tata Select Equity: 59%, HSBC India Opportunities: 56%, SBI Contra: 55%, DSP ML Opportunities: 51%, SBI Multicap: 50%

... if you had even 2-3 of these, you are getting the best advice.

* Above Average Performers – 2nd Quartile: 40 - 50% returns

You should still be happy if you’ve invested a year back in the following funds; as to predict the ‘Future Winners’ who would perform in top quartile is an extremely difficult task. Check if your advisor had advised you to invest in the following funds during Oct - Dec ‘05 (Last 1 year returns mentioned):

SBI Multiplier Plus: 50%, Franklin Flexicap: 49%, Reliance Vision: 48%,
Reliance Growth: 47%, HDFC Equity: 46%, Pru ICICI Emerging Star: 45%,
ABN Opportunities: 45%, ABN Equity: 44%, Birla Midcap: 42%

... feel good if your advisor had advised the above funds to you.

Now starts the problem…

* Below Average Performers – 3rd Quartile: 30 - 40% returns

Even if you have got a 30 - 40% return over last one year in your Equity Funds, there’s no reason to feel happy. The market itself has gone up by 40%. So, for the amount of risk taken in equities, and the opportunity lost by not investing in the right fund, its you who has lost at the end of the day, not your advisor. Right? Check if your advisor had advised you to invest in the below mentioned funds during Oct - Dec ‘05

Principal Growth: 40%, Templeton Growth: 37%, Stanchart Classic Equity: 35%, Chola Multicap: 35%, UTI Master Share: 33%, Birla Gennext: 33%, Kotak Global: 32%, Principal Junior Cap: 33%, Chola Midcap: 33%

Ask your advisor, on what basis had he recommended you to invest in the above funds. He won’t have a justified answer. You’ve got to change your financial advisor if most of your Equity Funds have given a 30 - 40% return on investments done one year back.

* Worst Performers – 4th Quartile: 4 - 30% returns

Believe me, your advisor has taken you for a ride by advising you the funds which most probably have earned him maximum commission or has helped him fulfill his distribution targets. If not, at least one thing is sure; he doesn’t have any knowledge of mutual funds. Check if your advisor had advised you to invest in the below mentioned funds during Oct - Dec ‘05.

Tata Midcap: 29%, UTI Divided Yield: 28%, HDFC Capital Builder: 27%
Franklin Prima Fund: 25%, UTI Dynamic Equity: 23%, Tata Dividend Yield: 20%, Birla Dividend Yield: 14%, JM Emerging Leaders: 9%, ABN Dividend Yield: 4%

Now what do you do? Get Angry? No, GET SMART!

First, you should change your financial advisor. Second, ask yourself that on what basis you had chosen to invest in those funds.

If the answer is Past Performance, believe me, you will rarely find a winner year after year. WINNERS ROTATE.

If it was for Convenience (the advisor being conveniently located) then you have paid a heavy price for choosing convenience over quality advice.

If Rebate was the reason, please calculate your total gain (Return + Rebate), is it equivalent to a return of 40-50% (2nd Quartile Performance) or 50-70% (Best Quartile Performance)?

• Some Midcap Fund NFOs which recently hit the market, and have disappointed / may disappoint investors due to large corpus size are:
• Franklin Smaller Companies Fund: Corpus Rs. 1427 crore. Last 6 months return at 10% - one of the lowest in its category.
• DSP Small & Midcap Fund: Corpus Rs. 1517 crore.
• Reliance Long Term Equity: NFO closed on 11 Dec ‘06. Expectedly has collected over Rs. 2000 crore.

Amortisation:

There are over 50 Equity Funds, including funds of Sundaram, Tata, SBI, Birla, Reliance, ABN AMRO, ING, Principal, JM, Kotak, Birla, StanChart, UTI, Pru ICICI, HDFC & HSBC which have a fixed amortisation cost to be deducted from some schemes every year. And the corpuses of these 50 Equity Funds have already gone down and the funds are taking a bad hit due to fixed amortisation cost which is deducted every year. Does your advisor know about these 50 Equity Funds? (Also read - Find out your IQ - Investment Quotient)

Eg. JM Emerging Leaders NFO collected Rs 208 crore. Amortisation cost was around 1% pa i.e. 2 crore pa. The corpus has come down to just Rs. 56 crore now. So this year 2 crore will be deducted from 56 crore corpus i.e. almost 4% (over and above your entry load & fund management charges).

One more advice: Do not get carried away by ‘PMS’ – Portfolio Management Services started by Stock Brokers, institutions and fund houses.

Conclusion:

• By investing in right funds - ‘FUTURE WINNERS’, and exiting at the right time, you generate the most superior returns.
• To find a genuine advisor is very difficult in India. There have been several media reports about how financial advisors and banks acting as wealth managers and investment advisors have been fooling the retail investors and HNIs too! Come on wake up!

Jaydeep Kashikar

The author is, Director, BrainPoint Investment Centre. He may be reached at .

Align your portfolio to your needs; not market needs

There have been many queries from individuals wanting to know whether it makes sense to invest in 8% fixed deposits that are offered by many banks now. Similarly individuals also want to know whether it is ‘good’ time to invest or disinvest from equity markets. These are not stand-alone phenomena. Any change in market condition would have individuals querying whether they need to take any action.

Unfortunately we always align our investments to market conditions. Ideally they should be aligned to our conditions (needs). Markets are always dynamic. There are developments in investment markets 24x7. If we keep modifying our investments based on market dynamics we will struggle to meet our own needs.

All kinds of investment opportunities have their characteristics. A prudent investor is one who remains focused on to his/her needs (financial goals) and chooses investment opportunities that will make his/her reach those needs.

Most of us want to save and invest. We want to create lots of wealth. Unfortunately we do not know for what we want to save and invest and how much wealth we want. Our goals are not clearly written, defined and quantified. Because our goals are not clearly written, defined and quantified we start focusing on market condition.

Imagine if we are saving money for our 6 years old daughter’s higher education. This means our goal is at least 10 years away and hence we choose equity as an asset class. Now if stock market was to fall for 10 weeks we will not panic. This is because we know our goal is 10 years away and hence 10 bad weeks has no relevance.

Suppose we board Gujarat Mail train from Mumbai, which goes to Ahmedabad. We want to goto Surat – which is approximately midway. In train there will be passengers who will get down before Surat. There will also be passengers who will go beyond Surat. However nothing will affect us, neither passengers alighting before us nor those continuing journey after us. We are sure of our destination. If we were not sure of our destination then every time the train stops at any station we will wonder whether we need to alight the train at the station.

Similarly when we are not focused on to our financial goals we start wondering at every market developments.

If we want to lead healthy financial life then we need to clearly define our financial goals and stay focused on goals. If we have not defined goals then we will keep wandering and our financial life is not about wandering.

Mutual funds are one of the investment vehicles, which may be utilised for reaching our various financial goals. For our contingency needs we may use liquid funds linked with ATM facility. For our financial goals, which are 2/3 years away we may opt for debt-based funds. If we need regular income during retirement, one of the options is a monthly income plan. For our long terms needs – beyond 7 years - we have variety of equity funds. Now we also have mutual fund schemes, which invest in global market and can help us diversify our portfolio across countries and currencies. Also days are not far off when we will have gold mutual funds and real estate mutual funds for common man.

- Gaurav Mashruwala

The author is a Certified Financial Planner. He may be reached at