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Conventional
wisdom suggests that mutual funds are the perfect vehicles for
retail investors seeking to invest in the stock market. As this
magazine goes to press, the BSE Sensex is trading at over 7,700,
and this looks like a piece of good advice. Conventional wisdom
also suggests that investors cannot go wrong if they pick mutual
funds on the basis of their past returns, their current portfolios,
and the credentials of their (fund) managers. This, too, is good
sound advice, one reason why this magazine features, every month,
a scoreboard of the best performing mutual funds on the basis
of absolute and risk-adjusted returns. Jigar Shah, Head of Research,
K.R. Choksey Shares & Securities, lists load factor (fees
charged at the time of entry or exit), regularity of dividend
declarations and effectiveness of risk-management practices as
some other issues that investors would do well to consider while
picking a fund. However, there is a slight paradox in this approach
when it comes to dividend schemes (it applies to other schemes
too but manifests itself far more strongly in these), and if investors
are, one, aware of this, and two, willing to take on a little
risk, they could well find themselves better off. This is the
NAV paradox.
The NAV Factor
The NAV (net asset value) of a scheme denotes
the market value per unit issued by the scheme. MFs invest money
entrusted to them by investors in various securities. The NAV
is arrived at by dividing the total market value of all the securities
that a scheme holds by the number of units issued. For instance,
if the total market value of securities held by a scheme is Rs
100 crore, and the scheme has issued five crore units (of Rs 10
face value each), the NAV of the scheme would be Rs 20. Since
the value of underlying securities changes on a daily basis, the
NAVs of mf schemes also change every day.
Here's the paradox: by picking funds purely
on the basis of NAV, investors may actually be getting a raw deal.
Here's how (see How NAV Helps): an investor who puts in Rs 1,00,000
into a scheme with an NAV of Rs 10 will earn more than an investor
who puts in the same amount in a scheme with an NAV of Rs 20,
even if the first returns 20 per cent, and the second 30 per cent
every six months for the rest of his life.
The caveat: Schemes with higher NAVs would
have, usually, been around longer and have, thus, survived the
market's vagaries longer. That would seem to reflect on the quality
of fund management, something that investors need to look at in
ideal circumstances.
One way out for investors is to look at initial
public offerings (IPOs), especially those from asset management
companies that have a clutch of high-performing funds (examples
include Franklin Templeton, HSBC and HDFC mutual funds). Even
at 7,700-levels, a fund that starts off with an NAV of Rs 10 can
see a significant upside if it is managed optimally. Another is
to look at young fund schemes that have been performing reasonably.
Even from the capital appreciation point
of view, it makes more financial sense to invest Rs 1,00,000,
say, in a scheme with an NAV of Rs 15, than in one with an NAV
of Rs 60. A 10-rupee appreciation in the first, will net the investor
Rs 66,667. A 20-rupee appreciation in the second will net him
a mere Rs 33,333.
Listen to what your investment advisor says
(she will probably ask you to ignore NAV and look at returns and
the track record of the fund manager), then, go out and make up
your own mind. After all, it is your money, not hers.
BT MUTUAL FUNDS
A Month To Cherish
The markets sprinted unbelievably in July,
but mutual funds finally caught up, and even surpassed them. A
BT-Mutualfundsindia.com report.
A happy trend
has emerged over the last two months. The last trading days of
June and July have seen the benchmark BSE Sensex closing at its
(then) all-time highs: 7,193.85 in June, and 7,635.42 in July.
But unlike in the last quarter, mutual funds (MFs) were not caught
napping this time; they finally registered returns that beat the
markets.
Equity-diversified schemes registered average
returns of 9.04 per cent compared to a piffling 2.58 per cent
in June. Compared to this, the broad-based Nifty and Sensex gave
4.12 per cent and 6.13 per cent returns, respectively. Of the
108 schemes considered, 100 were able to beat the Sensex and,
amazingly, all the 108 schemes beat the Nifty. Then, unlike in
June, MFs were net purchasers in July in both the equity and the
debt markets. MFs bought a net amount of Rs 392.66 crore in the
equity market and Rs 3,827.57 crore in the debt segment. The AUM
(assets under management) of the industry, which stood at Rs 1,65,332.35
crore in June, 2005, went up to Rs 1,76,459.18 crore in July for
just 28 mutual funds.
Category Wise Performance
Here's how schemes in individual categories performed.
In the diversified category, SBI Magnum Sector
Umbrella (Emerging Business) retained top billing once again;
its NAV appreciated 14.22 per cent and its corpus went up by Rs
56.85 crore. Its highest exposure was in the electrical and electronic
equipment sector. Sectoral schemes saw a huge improvement in their
average returns, from 3.54 per cent in June to 7.21 per cent in
July. The banking sector returned two toppers and was the best
performing sector of the month. In the balanced category, Kotak
Balance came out tops, registering 8.76 per cent returns for the
month. This scheme had 63.7 per cent exposure to equity, and its
top holding was Bharat Heavy Electricals where it had a 3.76 per
cent exposure. Kotak Balance's fund size increased almost 136
per cent over the month.
Monthly income plans (MIPs) also saw a huge
improvement, registering average returns of 20.44 per cent in
July, compared to just 9.58 per cent in the previous month. Topper
UTI MIS Advantage Fund registered a high 40.71 per cent simple
annualised return, which outstripped its 5.9 per cent return in
June by a large margin. The corpus of the scheme went up from
Rs 29.55 crore to Rs 30.88 crore, and it had, on average, 20 per
cent exposure to equity and 75 per cent to debt. Bucking the trend
was income funds, which managed only 5.32 returns in July, compared
to a better 7.84 per cent in June. Tata Income Plus Fund rip came
out on top this time providing its investors' with 18.36 per cent
simple annualised returns. However, the corpus of the scheme came
down marginally from Rs 6.54 crore to Rs 6.35 crore.
Liquid schemes were stable as usual, registering
4.83 per cent returns on average, compared to 4.79 per cent in
June. The topper here was Reliance Liquidity Fund, a new scheme
launched in mid-June. It generated 5.67 per cent simple annualised
returns for the month, and its corpus jumped from Rs 377.38 crore
to Rs 826.46 crore. Gilt funds also bucked the trend as their
average returns fell from 8.11 per cent in June to a mere 5.21
per cent in July. Reliance G-sec Fund LTP Retail came out on top
generating 12.88 per cent returns for the month, and its average
maturity went up from 1.09 years (398 days) to 8.33 years (3,040
days).
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