Stay Away From New Funds

At a time when almost all equity funds are giving disappointing returns, Dhirendra Kumar, CEO of Value Research tells what should a Mutual Fund investor do and gives his take on various funds. According to him, an investor should stay away from new funds till they actually mature. "The investor should stay clear of relatively new fund till they are at least three-years old."

(Source: value research)

Scheme Expenses

My mutual fund investments are mainly in equity schemes. I noticed that when the Sensex moves upwards, many times the NAV of the funds are on the decrease. My basic fear is that the fund manager's fee is eating away potential returns. I see no other reason why the NAV should fall when the Sensex is on a climb. What do you think? Should I continue with my SIP programme or terminate it?—H.P. Goyal
You are right. An equity fund's net asset value (NAV) may decrease even when the Sensex is on the rise. But you are wrong in assuming that this is result of
a high fund management fee.

There are various charges levied by the fund house. The entry and exit load depend on the period of holding and whether you invest through an agent or not. Other charges, which include the annual fund management charge (FMC) and recurring expenses, are incorporated in the daily NAV. So if you invest for a period of six months, you bear the charge for six months and not the whole year.
The mutual fund industry in India is extremely well organized, transparent and regulated. Mutual funds are not allowed to retain some profits and transfer the balance to investors (by increasing the NAV). So be assured that the funds are not over charging you and are efficiently declaring their NAVs on the basis of their daily performance.
Now let's get to why the NAV may decline when the Sensex rises. The Sensex comprises 30 large-cap stocks. So a rise in this index does not imply that all listed stocks have risen. The portfolio of the mutual fund may be totally different from the Sensex basket. It will declare its NAV purely on the basis of the performance of its own stock portfolio on that day. In the recent market crash, there were days when the mid- and small-cap indices crashed despite the Sensex gaining. Naturally, a portfolio laden with mid- and small-cap stocks would see its NAV fall on such days.
Discontinuing the systematic investment plan (SIP) is certainly not advisable. It is perhaps the best way of investing in equity oriented funds. Continue investing and do not worry about these short-term market gyrations.

(by value research)

Blast from the Past

Hari Mohan, a 45 year old clerk at the MTNL's New Delhi establishment, could not conceal his dismay. “At a time when inflation is at 7.5 per cent, the 6.75 per cent that they are referring to is peanuts,” he says with reference to an article in the newspaper about the bonds issued to investors in lieu of UTI's US-64 schemes unit. Incidentally, the Unit 64 scheme is maturing on May 31, 2008. Hari Mohan is not alone, 83 per cent of 20 million unit holders of the then US-64 schemes stood party to this mass exodus. In April 2003 when the sordid US-64 saga was laid to rest by the then NDA government, it was decided that investors of US-64 be given the option of 6.75 per cent tax-free bonds or liquidation of their holding. Investors holding up to 5,000 units would be offered Rs 12 and for additional holdings they would be offered Rs 10 per unit. “You get paid at the face value for a scheme you held for almost 40 years. So the plan B with tax-free advantage looked lucrative. It was an enforced error,” says Mohan. Rightly said, the tax-free option did look rewarding, then. But it turned out to be one of the most horrendous investment decisions one could have ever made. Consider this - Rs 1 lakh invested (shifted) to the bonds would fetch Rs 1.38 lakh in a span of year (May 31, 2008). Had this amount been invested in other existing schemes of UTI, say UTI Balanced, the amount would have swollen to Rs. 3.43 lakh. Even if you consider the conservative UTI Mahila Unit Scheme, which invests 66 per cent in debt, you would have been sitting on a pile of Rs 2.50 lakh. A little bit of conscious and judiciously decision and the corpus would been a pharaohcious Rs. 11.86 lakh, if invested in Reliance Growth.

(by value research)

In The Pink Of Health

The struggling pharma funds have staged a smart recovery after a lackluster performance for the past few years. The BSE Healthcare Index, that crashed along with the rest of the market in January 2008, has recovered quickly and gained 17.7 per cent in the past three months. In 2005-06, the Equity: Pharma category was the worst performing category in the equity class of mutual funds. The average return of the category in the three-year period (2005-07) stood at 20 per cent, a far cry from the 47.3 per cent return by equity diversified funds. This small category with
five funds has also witnessed a steep fall in assets under management since then. The combined AUM that stood at Rs 623 crore in January 2005 is down 60 per cent to Rs 254 crore, Reliance Pharma alone accounting for Rs 122 crore. Surprisingly, none of the five funds in this category have a large-cap heavy portfolio.
However, in the three month period ended May 2, 2008, the pharma category of mutual funds bounced back. In the period, the average return of pharma funds stood at 10.28 per cent, at a time when almost all equity categories posted negative returns. Reliance Pharma, the category topper for the past two years could not manage to retain its position. Magnum Pharma took very concentrated bets with 48 per cent of the portfolio in just two stocks. As a result, it could not capitalise on the surge in the sector and was the only one to post negative returns.
Fund

Return (%)*
UTI Pharma & Healthcare

16.35
JM Healthcare Sector

15.18
Franklin Pharma

13.92
Reliance Pharma

6.35
Magnum Pharma

-0.4
Category Average

10.28
*February 2- May 2, 2008
The robust numbers declared by various pharma companies helped the sector rally. For instance, Ranbaxy Laboratories, the second largest aggregated holding of these funds, reported a 60 per cent growth in its PAT over 2007-08. Smaller players like Glenmark Pharma reported a 188 per cent rise in profits on a y-o-y basis.
Stocks

Return (%)*
Glenmark Pharmaceuticals

39.82
Ranbaxy Laboratories

33.87
Sun Pharmaceutical Industries

28.98
Glaxosmithkline Pharmaceuticals

25.60
Biocon

23.66
*February 2- May 2, 2008
(by valueresearch)

Biggest of them All

Three months after its launch in January 2008, Reliance Natural Resources Fund has emerged as the India's largest equity fund with assets under management (AUM) of Rs 5,589 crore (April 2008). The fund overtook ICICI Prudential Infrastructure Fund which topped the charts in March with an AUM of Rs 5,390 crore. It was not too long ago that the AUM of Reliance Mutual Fund touched Rs 1 lakh crore. In January 2008, when most investors refrained from investing and fund houses had a tough time mobilising funds,Reliance Natural Resources managed to collect a whopping Rs 5,660 crore. It was the second largest collection by an equity mutual fund; the top place occupied by another Reliance family member - Reliance Equity, which mobilised Rs 5,790 crore in 2006. The equity funds from the Reliance stable do not hesitate from taking aggressive cash calls. This fund is no exception as the fund currently maintains extremely high cash levels. Though the cash component decreased in April to 53 per cent from March levels of 62 per cent, the fund manager is still waiting for the right opportunity to invest in stock markets. The fund's AUM has eroded by Rs 71 crore since launch but the high cash strategy helped the fund protect the downside. The fund posted a positive return of 0.5 per cent since February 26, 2008 (first NAV date), at a time when the average return of the equity diversified funds has been (-) 6 per cent (February 26 - May 8, 2008). Looking at the portfolio, various large cap stocks like Reliance Industries , ONGC and ACC have been included. However, the fund is quite keen on diversifying by investing in securities abroad. As per its mandate, the fund can invest up to 35 per cent of its assets in foreign securities. The exposure to such stocks has been increased in a short span and close to 7 per cent of its assets account for such foreign securities. Though the investment in such assets is small, the fund manager has selected companies like Arcelor Mittal (world's largest steel producer) and Freeport McMoRan Copper & Gold (world's largest publicly traded copper company). The fund's maximum international investment is in companies engaged in the global water industry. This investment is through PowerShares Water Resources ETF, a water index based international ETF.

(by valueresearch)