"More people in the world know the meaning of Gucci, Vertu, and Lexus than know the meaning of life," quoted one of my friends. I understand that the same is true even in the world of mutual fund investing. Several investors that I have interacted with track the 10-year G.Sec yield, Hengseng Index and US Fed rate cuts on a regular basis, but do not have the right understanding of what does Net Asset Value (NAV) of mutual fund implies.
Yesterday, I was travelling to my office in Borivali Fast, of course in the Ist class couch! During my travel, I found one person advising two of his friends about how to choose between equity schemes of different mutual funds. The expert was sounding as confident as any on any of the market news programs of TV channels. Naturally, the discussion came down to examples. There are two diversified equity schemes with different NAVs but largely comparable portfolios. NAV of Scheme A was Rs.15 and the one of Scheme B was Rs 55 (this being an illustration, the speaker was not giving out any names for the schemes.).
The Advisor said, "Since the portfolios of both the schemes are almost comparable, the risk-return proposition of both the schemes is the same, except that the NAV of Scheme B has run up quite a lot, whereas the NAV of Scheme A is still very low. Don't undervalued stocks run up faster than the overvalued ones? The Scheme A is undervalued, therefore you must invest in scheme A rather than in scheme B."
Oops, I could not resist and poked my nose into the discussion. "My dear fellow Pravasi Borivalites, you are getting it all wrong!" said I and offered the following explanation.
There is a difference between the price of a listed security and the NAV of a mutual fund scheme.
1. Listed security has a price, determined by the demand and supply of the security. Whereas the unit's NAV of the scheme has a value determined mathematically, by the prices of the securities in the portfolio.
2. Most of the time, the market price of a listed security is different from its book value. This happens because, the security's market price is a function of "the book value and the market view" of the market participants. On the other hand, the book value and the market price of the unit is the same, and remains always the same. This is reflected as the NAV per unit of the scheme. Unlike in case of security's price, Scheme's NAV is not affected by the view of the Unitholders (existing or prospective) on the scheme.
Whether the scheme in which you are planning to invest has an NAV of Rs 15 or Rs 55 does not matter at all. The return of 10% in the scheme will take Rs 15 NAV to Rs 16.5 NAV and Rs 55 NAV to Rs 61.5 NAV.
Now let me make this point by using an analogy. Consider this: If you are investing Rs 100,000 in Fixed Deposit (FD), there would be 4 Fixed Deposit Receipts (FDRs) if the denomination is Rs 25,000 and 2 FDRs, if the denomination is Rs 50,000. If you have Rs 1 lac to invest you will get either 2 or 4 fixed deposit receipts on which your income (interest earning) will remain the same. If you choose to invest in 4 FDs of denomination 25,000, does not mean you have got those cheaper and therefore you will earn more on interest.
Please appreciate that the level of NAV is as irrelevant in MF investment decision as the number of the FDRs while investing in FD. It is just an equation; as long as the numerator (investment amount) does not change, the denominator (NAV / number of FDRs) does not have ANY material impact on the return potential of your investment.
The Advisor fellow pravasi wouldn't relent. "That is ok, but there is also one more reason for recommending Scheme A - it has declared dividend of Rs.3, with tomorrow as the record date."
I continued, "Friend, dividend from an equity scheme is not an additional gain or income. The ex-dividend NAV of the Scheme goes down to the extent of dividend declared. Hence the ex-dividend NAV of Scheme would go down by Rs 3. Dividend is a part of your investment value that is given back to you. If you are invested in a scheme and the scheme declares a part of the growth as dividend, it could be a tax efficient way of booking profit. But investing in a scheme because it is declaring dividend in near future is like you putting your money from your one pocket to another."
He asked, "Which factors should then we watch out for while selecting an equity scheme?" By this time, the train was at its destination and we became part of the jostling crowds hurtling towards their workplaces.
Bhavdeep Bhatt
Associate Vice President - Marketing
Kotak Mahindra Asset Management Company Ltd
The views expressed above are personal and not those of my company
(Source: Value Research)
Mutual Fund News update from Nishit Doshi (9824021680) a leading MF Advisor based in Ahmedabad. Gujarat.
Thursday, December 6, 2007
The Real Estate Syndrome
A lot of fears seem to be plaguing the real estate market. Many believe that a correction in prices is imminent in major Indian cities. Last year, it is estimated that around $10 billion was raised globally to be invested in Indian real estate. But market insiders say a large portion of this money still remains uninvested. And of course, fears abound that foreign investment in this country may slow down thanks to the global credit crunch.
(Source: Value Reserch)
So in the midst of such news, the 9-year, close-ended HDFC real estate fund was a pleasant surprise. The recent closing of its $800 million (Rs 3,280 crore) sponsored international real-estate fund - HIREF International LLC - was only open to foreign investors. An Israeli firm, Gazit Globe Ltd, apparently invested $110 million in this fund.
Obviously, investors still believe that the Indian real estate market currently presents a very compelling investment opportunity. Recently, Hines, the American real estate giant is said to have committed a $300 million fund for investment in Indian projects through its subsidiary, Hines India Real Estate.
Indu Projects Ltd, an infrastructure development company, got three US-based realty private equity investors to invest more than Rs 450 crore in equity. The company is executing projects worth around Rs 16,500 crore and plans to come out with an IPO next year.
Talking of IPOs, Business Park Town Planners Ltd, a 4-year old real estate developer, plans to raise up to Rs 2,000 crore through an IPO. The company is wholly owned by its promoters who plan to offload a 10% stake in this IPO. Last month, the company offloaded a 5% stake to Hong Kong-based Citigroup Property Investors. Earlier this year, India Global Commercial Real Estate (Merrill Lynch's real estate arm), invested Rs 218 crore in the company's infotech park project in Gurgaon.
(Source: Value Reserch)
Extension of NFO of ICICI Prudential FMP - Series 39- Six Months Plan A
ICICI Prudential Mutual Fund has extended the offer period for its ICICI Prudential Fixed Maturity Plan - Series 39 Six Months Plan A by one day. Now, the offer would close on December 7, 2007.
(Source: Value Research)
(Source: Value Research)
New Funds - ING Global Real Estate Fund
ING Investment Management has launched a global real estate fund- ING Global Real Estate Fund. It is an open-ended feeder fund that will predominantly invest (at least 65 per cent of its assets) in the ING Global Real Estate Securities Fund. The scheme may also invest in the units of other similar overseas mutual fund schemes.
Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs) will be the two main securities that the fund will invest in. This makes it the first fund to be truly focused upon the real estate sector as well as diversified across geographies.
ING Real Estate is one of the largest real estate investment managers in the world with US$68 billion in assets as of 31 December 2004.
Scheme Details
Issue Opens: November 20, 2007
Issue Closes: December 14, 2007
Fund Category: Open-End, fund of funds Scheme
Benchmark Index: Citigroup World Property Index
Minimum Investment: Rs 5,000
Entry Load: 2.75 per cent for investment less than Rs 2 crore
Exit Load: An exit load of 1.5 per cent would be charged upon redemption within 12 months from the date of allotment
About the Fund Manager
Ms. Jasmina Parekh is the designated fund manager for the scheme. Prior to joining ING Investment Management Pvt. Ltd in May, 2006 her last assignment was with ASK Raymonds James as a Senior Manager (Equity Sales). Parekh has a total experience of 8 years and has worked with companies like Buildwell Plant and Equipment, Hermes Securities (BRICS), Quantum Information Services and KR Choksey Shares and Securities.
Performance History: ING Mutual Fund
ING AMC started its operation in the year 1999. Currently they are managing assets worth Rs 9,763 crore out of which Rs 822 crore is contributed towards equity.
Historically, the fund house's equity funds have lacked strong performance records. However, there have been noticeable improvements of late. Particularly noteworthy are ING Domestic Opportunities which is currently rated four-star and ING C.U.B. which has delivered exceptional returns of over 73 per cent in the last one year.
Opinion
ING Global Real Estate Fund is the first Real Estate investment avenue for individual investors. Its key plus point is diversification in a completely unrelated asset class besides the parent company's good performance track record with its existing fund. However, return from investment in the fund with be treated like a fixed income fund. The appreciating rupee may also lower the fund's return.
(Source: Value Research)
Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs) will be the two main securities that the fund will invest in. This makes it the first fund to be truly focused upon the real estate sector as well as diversified across geographies.
ING Real Estate is one of the largest real estate investment managers in the world with US$68 billion in assets as of 31 December 2004.
Scheme Details
Issue Opens: November 20, 2007
Issue Closes: December 14, 2007
Fund Category: Open-End, fund of funds Scheme
Benchmark Index: Citigroup World Property Index
Minimum Investment: Rs 5,000
Entry Load: 2.75 per cent for investment less than Rs 2 crore
Exit Load: An exit load of 1.5 per cent would be charged upon redemption within 12 months from the date of allotment
About the Fund Manager
Ms. Jasmina Parekh is the designated fund manager for the scheme. Prior to joining ING Investment Management Pvt. Ltd in May, 2006 her last assignment was with ASK Raymonds James as a Senior Manager (Equity Sales). Parekh has a total experience of 8 years and has worked with companies like Buildwell Plant and Equipment, Hermes Securities (BRICS), Quantum Information Services and KR Choksey Shares and Securities.
Performance History: ING Mutual Fund
ING AMC started its operation in the year 1999. Currently they are managing assets worth Rs 9,763 crore out of which Rs 822 crore is contributed towards equity.
Historically, the fund house's equity funds have lacked strong performance records. However, there have been noticeable improvements of late. Particularly noteworthy are ING Domestic Opportunities which is currently rated four-star and ING C.U.B. which has delivered exceptional returns of over 73 per cent in the last one year.
Opinion
ING Global Real Estate Fund is the first Real Estate investment avenue for individual investors. Its key plus point is diversification in a completely unrelated asset class besides the parent company's good performance track record with its existing fund. However, return from investment in the fund with be treated like a fixed income fund. The appreciating rupee may also lower the fund's return.
(Source: Value Research)
Manager Speak - No Crash Landing
Dongre joined UTI AMC in 1994. But this 38-year old fund manager got everyone's attention in 2006 when his fund, UTI Infrastructure, topped the return charts. He started off as a debt analyst, providing support to the fund management. He also worked as an equity research analyst before dabbling in equity dealing for a while. Prior to UTI, he had a stint with Reliance Petroleum at their Hazira plant. Dongre holds an engineering degree and an MBA from IIM (Kolkata).
Do you see a market crash in the near future?
If a crash is taken to mean a 25-30 per cent decline, I do not see a market crash in the near future. However, a correction of 8-10 per cent in the short term cannot be ruled out. This is specially the case with lower earnings growth expectations of 2QFY08 and domestic politics leading to early announcement of general elections.
What is the strategic and tactical orientation of your fund?
UTI Infrastructure Fund has been following a top-down approach with regard to stock selection, keeping in mind the evolving economic scenario. The fund has capped its exposure to various sub-segments within the infrastructure theme thereby ensuring a diversified portfolio within the broad theme. The fund has good mix of large-cap and mid/small-cap stocks, thereby ensuring a good return potential as well as liquidity of the portfolio.
Which are your top sector preferences?
Engineering & Construction
Power Equipment and Power Generation/ Transmis-sion/Distribution
(Source: Value Research)
Do you see a market crash in the near future?
If a crash is taken to mean a 25-30 per cent decline, I do not see a market crash in the near future. However, a correction of 8-10 per cent in the short term cannot be ruled out. This is specially the case with lower earnings growth expectations of 2QFY08 and domestic politics leading to early announcement of general elections.
What is the strategic and tactical orientation of your fund?
UTI Infrastructure Fund has been following a top-down approach with regard to stock selection, keeping in mind the evolving economic scenario. The fund has capped its exposure to various sub-segments within the infrastructure theme thereby ensuring a diversified portfolio within the broad theme. The fund has good mix of large-cap and mid/small-cap stocks, thereby ensuring a good return potential as well as liquidity of the portfolio.
Which are your top sector preferences?
Engineering & Construction
Power Equipment and Power Generation/ Transmis-sion/Distribution
(Source: Value Research)
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