“The only sustainable competitive advantage is the ability to learn faster than competition.” – Arie de Geus.
Very well said by the famous Dutch writer – author of ‘The living Company’!! But very often wisdom seldom dawns upon few to learn faster than competition, and bring in a competitive advantage in whatever we do. Here let’s talk about investing in mutual funds.
While mutual fund houses launch several New Fund Offers (NFOs), in their race / competition to top the Assets Under Management (AUM) charts, our experience states that very often many of investors’ fall for the 10 proposition, without evaluating whether deploying their hard earned money in them would be a “value” proposition. And interestingly to capture on positive investor sentiments, most fund houses launch new mutual fund schemes, when sentiments in the capital market are upbeat, along with investor confidence being high. Mutual Fund distributors / agents / relationship managers too, make hay when the sun shines, as they embolden investing in these NFOs, putting their interest (of earning luring commissions provided by mutual fund houses) at the forefront, without undertaking proper need analysis.
Recall the bull phase prior to the emergence of the U.S. sub-prime mortgage crisis. The markets were flooded with numerous NFOs in the year 2006 until mid-2008 (when the impact of the U.S. sub-prime mortgage crisis intensified and Lehman Brother bankruptcy was announced); where close to 300 mutual fund schemes (include the investment options therein) - across categories of mutual funds were launched. Sector funds were launched in galore by many fund houses, along with mutual fund schemes focusing on the mid and small cap space. All enticing stories were built around the infra funds, energy sector funds, media & entertainment funds, banking funds and mid & small cap oriented funds which encouraged many of you investors to fall for the 10 offer price, without recognising whether it imbibes value for long-term wealth creation. It was a failure to recognise one of classic quotes’ of Mr Warren Buffett (Investment Guru) which is “Price is what you pay. Value is what you get.”
Performance of some popular NFO launches which caught investor attention
|Scheme Name ||Inception Date ||AUM of 1st portfolio |
after inception ( in cr.)
|6-Mth (%) ||1-Yr (%) ||3-Yr (%) ||5-Yr (%) ||Since Inception (%) ||Std. Dev (%) ||Sharpe Ratio ||Portfolio Turnover Ratio (%) |
|Reliance Mutual Fund |
|Reliance Long Term Equity (G) ||27-Dec-2006 ||2,123 ||-10.7 ||-22.3 ||19.8 ||- ||7.2 ||8.52 ||0.11 ||11.00 |
|Reliance Top 200(G) ||09-Aug-2007 ||2,645 ||-13.0 ||-18.7 ||16.6 ||- ||3.3 ||8.06 ||0.07 ||94.00 |
|Reliance Natural Resources (G) ||26-Feb-2008 ||5,318 ||-9.7 ||-12.4 ||14.1 ||- ||-1.0 ||8.07 ||0.04 ||99.00 |
|Reliance Equity (G) ||29-Mar-2006 ||5,820 ||-16.5 ||-26.0 ||5.1 ||2.1 ||3.0 ||7.48 ||-0.03 ||102.00 |
|SBI Mutual Fund |
|SBI BlueChip (G) ||17-Feb-2006 ||3,014 ||-12.9 ||-21.4 ||16.5 ||3.0 ||4.3 ||8.80 ||0.08 ||66.00 |
|SBI Infrastructure-I (G) ||10-Jul-2007 ||3,286 ||-13.0 ||-28.2 ||8.7 ||- ||-4.5 ||9.70 ||0.00 ||139.00 |
|UTI Mutual Fund |
|UTI Leadership Equity (G) ||27-Feb-2006 ||1,821 ||-13.0 ||-20.4 ||13.8 ||4.4 ||5.6 ||7.88 ||0.05 ||65.59 |
|HDFC Mutual Fund |
|HDFC Mid-Cap Oppor (G) ||05-Jul-2007 ||1,349 ||-2.7 ||-10.4 ||30.5 ||- ||10.0 ||8.28 ||0.19 ||24.23 |
|HDFC Long Term Equity (G) ||10-Feb-2006 ||1,455 ||-11.9 ||-16.2 ||19.3 ||- ||7.1 ||7.99 ||0.11 ||57.77 |
|HDFC Infrastructure (G) ||19-Mar-2008 ||1,608 ||-18.0 ||-28.7 ||16.3 ||- ||-0.5 ||9.83 ||0.07 ||40.76 |
|Fidelity Mutual Fund |
|Fidelity International Opp (G) ||28-May-2007 ||1,723 ||-11.8 ||-14.5 ||19.5 ||- ||4.8 ||8.14 ||0.10 ||11.00 |
|Fidelity India Spl.Situations (G) ||24-May-2006 ||1,799 ||-12.2 ||-18.2 ||19.0 ||7.9 ||9.8 ||9.63 ||0.10 ||29.00 |
|Franklin India Mutual Fund |
|Franklin India Smaller Cos (G) ||13-Jan-2006 ||1,427 ||-12.0 ||-21.8 ||22.6 ||3.8 ||4.3 ||10.11 ||0.11 ||53.86 |
|Franklin India High Growth Cos (G) ||26-Jul-2007 ||1,594 ||-13.9 ||-22.8 ||20.4 ||- ||2.5 ||9.49 ||0.10 ||77.34 |
|Franklin Asian Equity (G) ||17-Jan-2008 ||461 ||-13.1 ||-9.0 ||13.0 ||- ||0.0 ||5.94 ||0.07 ||61.32 |
|DSP BlackRock Mutual Fund |
|DSPBR Small & Mid Cap (G) ||16-Nov-2006 ||1547 ||-7.6 ||-17.1 ||31.7 ||- ||10.8 ||9.58 ||0.19 ||115.00 |
|DSPBR World Gold (G) ||18-Sep-2007 ||1232 ||-2.7 ||4.4 ||24.7 ||- ||16.7 ||10.09 ||0.18 ||- |
|DSP BlackRock Mutual Fund |
|HSBC Unique Opp (G) ||21-Mar-2007 ||650 ||-16.5 ||-23.9 ||15.2 ||- ||-1.2 ||8.47 ||0.04 ||264.00 |
|HSBC Small Cap (G) ||31-Mar-2008 ||86 ||-19.4 || ||12.2 ||- ||-1.7 ||9.44 ||-0.23 ||58.00 |
|HSBC Dynamic (G) ||24-Sep-2007 ||486 ||-12.5 ||-18.3 ||11.1 ||- ||-2.1 ||6.42 ||0.01 ||173.00 |
|HSBC Progressive Themes (G) ||24-Feb-2006 ||1,672 ||-17.7 ||-35.4 ||3.9 ||-2.5 ||0.0 ||8.29 ||-0.05 ||292.00 |
|Tata Mutual Fund |
|Tata Equity Mgmt (G) ||10-Jul-2006 ||387 ||-6.5 ||-15.5 ||19.9 ||4.4 ||5.7 ||7.09 ||0.11 ||34.00 |
|Tata Grow Economies Infra-A (G) ||15-Apr-2008 ||34 ||-7.2 ||-8.2 ||16.2 ||- ||3.7 ||6.77 ||0.09 ||1.00 |
|Tata Capital Builder (G) ||20-Sep-2006 ||258 ||-11.9 ||-20.4 ||15.0 ||5.3 ||5.8 ||4.73 ||-0.03 ||31.00 |
Indo-Global Infra (G) ||21-Nov-2007 ||1,803 ||-12.2 || ||7.4 ||- ||-9.1 ||4.77 ||-0.42 ||- |
|ICICI Mutual Fund |
|ICICI Pru Focused Blue Chip Equity(G) ||26-May-2008 ||530 ||-10.2 ||-12.2 ||26.2 ||- ||13.0 ||7.66 ||0.17 ||42.00 |
|ICICI Pru Indo Asia Eq (G) ||19-Oct-2007 ||1,001 ||-12.7 ||-14.4 ||17.6 ||- ||-1.1 ||7.95 ||0.08 ||78.00 |
|JM Mutual Fund |
|JM Core 11 (G) ||05-Mar-2008 ||574 ||-22.0 || ||-8.2 ||- ||-27.7 ||7.01 ||-0.44 ||2.67 |
|BSE SENSEX || || ||-14.2 ||-18.7 ||16.2 ||6.0 ||- ||9.01 ||0.06 ||- |
|BSE-100 || || ||-14.0 ||-20.4 ||16.9 ||6.5 ||- ||9.34 ||0.06 ||- |
|BSE-200 || || ||-14.6 ||-21.6 ||17.5 ||6.4 ||- ||9.45 ||0.07 ||- |
|BSE MIDCAP || || ||-14.8 ||-27.7 ||18.2 ||3.0 ||- ||11.37 ||0.07 ||- |
|CNX Midcap || || ||-15.0 ||-26.1 ||21.4 ||8.1 ||- ||9.97 ||0.10 ||- |
|S&P CNX Nifty || || ||-14.0 ||-18.9 ||14.9 ||6.9 ||- ||8.92 ||0.05 ||- |
Note: The aforementioned list is not exhaustive, and consists of some funds which caught investors’ attention.
(NAV data is as on October 11, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)
The table above makes it evident that some fund houses, which painted the city with their advertising hoardings, attracting investor attention during the exuberant bull phase of the equity market (prior to the sub-prime mortgage crisis and Lehman Brother bankruptcy), haven’t shown the same excitement in their performance. In fact some mutual fund schemes which evinced huge interest (as depicted by their 1st AUM after inception) have delivered unappealing returns even today after 3 years of existence. Mutual fund schemes which focused on the infrastructure theme (which was the flavour of the season then) have performed miserably when seen over a 3-Yr time frame and even since inception. Moreover, from the risk-adjusted stroked by them have been quite uninspiring, wherein in some of them have also exposed investors to very high risk. The bear phase of the Indian equity market followed immediately after the U.S. sub-prime mortgage crisis and Lehman Brother bankruptcy, hammered them down as the underlying stocks in the infrastructure space were a witness to project execution delay and correction (of 30%-40%) to realty prices.
Even now while the Indian equity markets as well as real estate prices have recovered, the outlook for infrastructure sector hasn’t improved as the infrastructure theme continues to face the brunt of the anti-inflationary stance adopted by the Reserve Bank of India (RBI), thus putting pressure on the performance of the underlying stocks held by most infrastructure mutual funds in the portfolio.
Similarly, some funds which were launched exuding confidence in the synergy of emerging Asian economies and other international opportunities, too failed to deliver very inspiring returns, as they were privy to the turbulence of global economic headwinds unfolding across the globe – especially from the U.S., Euro zone and natural calamities faced by Japan.
Even now while the global economy is under a recovery mode, the edginess remains as the downbeat economic data from the developed economies is making even the emerging economies nervous as they too reeling under inflationary pressures, which in turn is showing a detrimental impact on the portfolio held by most such offshore or international opportunities mutual funds.
Likewise, some of the diversified equity funds which were launched exuberantly, merely to be in the bandwagon of NFOs have failed to deliver inspiring returns for their investors. However, having said that there are some mutual fund schemes from reputed fund houses following strong investment processes and systems, which have managed to create wealth for investors – especially those focusing on domestic opportunities and the ones having a mid and small cap bias, due to prudent investments made by them.
Judging the value addition criteria is vital!!
Hence while evaluating NFOs, it is vital to assess whether adding a NFO would add “value” to your portfolio. Can it bring to your portfolio something that an existing fund can't? Our research reveals sometimes fund houses launch new schemes whose portfolios nearly replicate the portfolio of the existing schemes, which thus indicate that sometimes NFOs are launched to create excitement in the market which helps mutual fund houses to garner more AUMs. A lot of investors perceive the 10 offer price to be cheap. Moreover, the myth of earning luring dividend from cheap offer price also entices some investors to invest in NFOs. But, they forget the fact the dividend declaration in mutual funds is subject to the performance of the respective mutual fund scheme.
So, should all NFOs be given a miss?
No, not at all!! As mentioned in the para above it is vital to judge whether it would be a “valuable proposition”. Offerings which are unique in nature, and distinct from the existing mutual fund schemes, can be considered. But here too, you need to understand the nature of the mutual scheme and its traits, thereby judge whether it aligns with your risk appetite – which is a function of your age, income, investment objective and nearness to your goal. We think investors should stay away from thematic / sector funds as they a very high risk investment proposition, and even if someone really want to discover the investment opportunity within that sector or theme, then a diversified equity fund following an opportunities style would add great value to the portfolio and help create wealth over the long-term, due to fluid investment approach followed.
Remember, it is imperative for you to invest you hard earned money wisely and not get lured by the excitement created by such fund launches or even the luring sales pitches given by your mutual fund distributor / agents / relationship managers. This is because today’s market excitement need not guarantee you tomorrow’s performance.
This article was written exclusively for Equitymaster, India's leading Independent research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian Stock Market.