The mutual effect

 

 

What do we tell you? Do we show you the last one year/ two year/ three year returns of Mutual Funds and ask you to choose the best? Amusingly, the solution is actually that simple. Unfortunately most Indians don't believe in simple solutions and conjure up newer methods of financial insolvency. Started with an aim to provide a platform for enabling the common man to invest in a professionally managed and risk diversified basket of securities at a relatively low cost, mutual funds are now actively responsible in augmenting the wealth of retail investors. Not only that, it has turned out to be one of the preferred investment options for other investor categories as well.

Though the industry has crossed many milestones since its inception in 1963 with the incorporation of Unit Trust of India, it witnessed a real upward drive only in the past few years. In terms of assets under management (AUM) the industry has ballooned to 6.77 times, at the end of November, 2007 (Rs 5,379 billion), of what it was at the end of March, 2003 (Rs 794 billion).

But what was it that made an industry that was moving at a turtle’s pace catch up with the rabbit? Well, the name of the game is competition. And it started with the entry of private players. Once the private sector players got the green signal in 1993 they never looked back. Their share of the pie started getting dramatically bigger. On the way to their achievements what they added to the industry was higher innovation and customisation. Also, they transferred in the factor of internationalisation to the industry by cross-border investments and by joint ventures with global players, thus, helping the Indian Mutual Fund industry to move towards global standards. Agreeing with this, Rajan Mehta, Executive Director, Benchmark Asset Management Company Pvt. Ltd, comments, “The private sector has certainly brought fresh ideas in India like the first open-ended fund was private, first exchange traded fund was private, first Gold ETF was private and the list goes on and on.” Apart from this, “Competition from the private sector players has also made the public sector players more efficient in their operations, which also has benefited the investors,” comments Krishnan Sitaraman, Head, Fund Services & Fixed Income Research, CRISIL Fund Services, CRISIL Limited. While there were 386 schemes at the end of October 2003, today the industry has a total of 809 schemes offering a pool of dynamic investment opportunities that cater to a variety of investors. This is because of the increasing thrust on customisation of products and development of specialised products like real estate funds, energy funds, small companies funds, emerging marketing funds, and so on and so forth However, at the end of the day what matters the most is how much moolah you raked in. And that’s where the industry has hit the bull’s eye. Believe it (or not) in terms of returns many mutual fund schemes have left investors speechless by offering returns as high as 100 percent. Considering last 12 months the top 10 performers of the industry have yielded 80% (according to data available with valueresearchonline) or above with the top performer Reliance Diversified Power Sector fund returning a mind blowing 112%, which simply means Rs 10,000 invested by an investor before 12 months now stands at Rs 21,200. This is not an isolated case. Annualised return of over 100 percent has become a regular trend for the top performers over last couple of years. Over a broader time-frame also the equity-based mutual funds have offered returns worth mentioning. Reliance Diversified power sector fund, which is also the top performer when we consider returns over past 2-years and 3-years, has returned 87.80% and 88.81% respectively during the above mentioned period. That means an investor who had invested Rs 10,000 two years and three years ago can now see the amount grown up to approximately a mind-boggling Rs 35,270 and Rs 67,310 respectively. Even the second best performers, on the basis of two years return, like ICICI Prudential Infrastructure, have ballooned Rs 10,000 to Rs 30,807, whereas Taurus Starshare has converted it to Rs 48,784. Further, most of the equity-based mutual fund schemes have outperformed the benchmark indices in terms of returns. market has definitely helped mutual funds to garner good returns for the investors. But, it’s only a half truth. The bull run has actually helped only the equity-based funds to provide windfall gains to the investors, whereas, it has failed to do any magic for investors in the debt fund category. In terms of annualised returns for last 12 months while Canara Robeco CIGO – Growth fund has managed to return the maximum 22.06%, Escorts Income Bond – Growth fund as the second best has returned 21.87%. Going by a larger timeframe of three-year return while Escorts Income Bond – Growth has returned 20.64%, Canara Robeco CIGO – Growth fund has offered 19.66% as the top two performers. On top of it interest rate fluctuations over last 12 months had worsened the situation further. As K. K. Mittal, Fund Manager, Escorts Mutual Funds comments, “This category has a different flavour and attracts absolutely risk-averse investors. But with the roller-coaster ride that interest rates have taken over last 12 months, returns from debt-based mutual funds too have shown unlikely fluctuations. And this has been a major reason why investors have started looking for better opportunities.”

Another problem that the mutual fund industry is facing at present, as felt by many experts, is the overflow of specialised funds. The increasing velocity at which specialised funds are getting introduced can be understood from the fact that out of the 11 new equity funds (that surfaced during November and the first week of December) 10 were specialised funds. As per Mittal, “It has become a growing concern for common investors. Because while initially the onus of understanding the risk was in the hands of the fund managers, now it is shifting towards the common investors. With lots and lots of specialised funds coming in investors now need to study and understand details of the risk associated with each funds as they represent different sectors only. It’s not a hassle-free investment for them any more.”

But then if the investor has to take the hassle of understanding the risk associated and he has to invest like a trained investor or a professional then why should he not directly get into the equities market. After all, that will be more profitable for them as for example while the top performer Reliance Diversified Power sector fund has offered a return of 112% in last 12 months some stocks which are placed in the fund’s portfolio like Jindal Steel & Power Ltd (605%) and Reliance Energy Limited (248%) have yielded more than double of what the fund has returned.

So finally, we come back to square one. What is the best fit for mutual fund investments? If you are still asking that question, you missed the most important part of the story. The MF tables! Given two pages back. Go ahead dude, turn the pages, it's that simple!