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SHANBHAG'S WONDERLAND Why ignorance about the mutual funds may not be bliss. By A N Shanbhag
Although it is, partly, the mutual funds and, mainly, the Government of India that are responsible for this confusion, I thought I should make one more attempt to restore the confidence of you, the investor, in the mutual fund. Let me, therefore. tell you three things the mutual fund is -- and three things it isn't. Three Things The Mutual Fund Isn't A Mutual Fund Unit Is Not A Fixed Deposit With A Company. Because of the launch of the close-ended schemes and the promise of minimum assured returns by the mutual funds, the investor was led into believing that the mutual fund unit is identical to a company fixed deposit. Sure, like fixed deposits, units have redemption dates and assured returns, but they also boast of Section 80-L tax-concessions. A Mutual Fund Unit Is Not An Equity Share In A Company. Because the Securities & Exchange Board of India insists that a close-ended mutual fund scheme must be listed on the stockmarket during its lock-in period of three years, the investor equates a mutual fund unit with an equity share. And he gets confused when units, because of the lack of floating stock, do not behave like shares, and, moreover, trade at hefty discounts to their Net Asset Values (NAVs). A Mutual Fund Unit Is Not An Initial Public Offering (IPO). Because the mutual fund unit was novel, and listed on a stock exchange immediately after its allotment, the investor equated it with an IPO. However, units did not behave like IPOs, which quoted at premiums on the stock exchange after they listed. Moreover, the unit's launch expenses of 6 per cent scared the investor since it took the NAV on allotment to Rs 9.40. Three Things The Mutual Fund Is Essentially, the mutual fund is a trust; not a share, a debenture, or a fixed deposit. Whatever profits it earns have to be distributed amongst the unitholders in the mutual fund on an equitable basis. So, high profits, high distribution; low profits, low distribution. Equity-based schemes yield dream returns in a bull market, but, in a bear market, they become a nightmare. Debt-based schemes yield more modest, but more-or-less assured returns that are higher than those offered by the banks. And the balanced schemes are both a little risky and a little safe. By-passing the problems of the close-ended schemes, the open-ended schemes have, virtually, become savings bank accounts with higher returns. Especially when the difference between the sale and repurchase prices fall to a marginal level, and the funds become no-load, both on entry as well as at exit. Of course, what I like most about the mutual funds is the concessional tax that is levied on the long-term capital gains from them. All over the world, economists recognise the retail investor as the artery supplying lifeblood to the heart of the economy: its stockmarkets. Unless he returns to the stockmarkets -- on his own or, better still, through the mutual funds -- they will not rise on a sustained basis. And that is why the cobwebs about the mutual funds must first be cleared. It may take some more time but, eventually, the mutual fund will prove to be the most plausible parking-place for your investible funds in this country. Remember: I said it here first. |
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If there has been a
wholesale crisis of retail confidence in the mutual funds industry, it is only because of
the small investor's lack of comprehension of this investment option. 