Pay for performance

FUND LAUNCH

Sahara Wealth Plus will charge management fee only when it performs.

Sahara Mutual Fund's new offering, Sahara Wealth Plus works on a variable fee structure. An open-ended growth scheme, it has introduced a new concept in the mutual fund industry wherein the fund's management fee is linked to its performance.

According to Rajiv Shastri, chief executive officer of Sahara MF, "the fund wants to earn a fee based on its performance rather than charging a fee from the investor irrespective of performance." The initial public offer will open on July 4, 2005, and close on July 22, 2005.
 

ISSUE SNAPSHOT
IPO	July 4-July 22, 2005
Type	Open-ended, equity
Options	Growth and dividend
Initial offer price	Rs 10
Entry load	2.25 per cent for amounts up to Rs 1 crore, 1.75 per cent for amounts more than Rs 1 crore and less than Rs 5 crore
Exit load	2.25 per cent for three months for amounts greater than Rs 5 crore
Min. application amount	Rs 1,000

Under the variable pricing option, the AMC fee earned depends on the scheme's daily performance.

On an average mutual funds charge upto 2.50 per cent as fee. High management fee charged by mutual funds have been a big issue in US, considering that most actively managed funds have been underperforming consistently.

Of the 2.5 per cent fee, Wealth Plus will charge 1.5 per cent of daily net assets for meeting third-party expenses. The additional 1 per cent management fee permissible under Sebi guidelines will be the variable component pegged to the scheme's performance.

The condition being considered for charging investment management and advisory fee is that net portfolio return (NPR) should be greater than zero and the benchmark return (BR) - in this case, the benchmark is the BSE 500 Index.

If NPR is less than BR and zero, the management fee will be zero; if NPR is greater than either BR or zero, the management fee will be half of the maximum permissible limit and if NPR is greater than both BR and zero, management fee will be the maximum permissible.

The fund proposes to invest in companies based on their RoE (return on equity).

"Wealth Plus will identify companies for investment whose three-year average RoE is at least twice the annualised yield for five-year government of India (GoI) security as on March 31, 2005," says Naresh Kumar Garg, chief investment officer, Sahara MF.

In order to avoid investing in a company which may show a strong RoE in the first year and lesser in future years and vice versa, a company with a three-year average RoE will be preferred.

Also companies which do not show consistency in earnings will be avoided even though they may post higher RoE. Wealth Plus' portfolio will come from the universe of companies which have a market capitalisation of Rs 100 crore at the time of investment.

According to the fund, 199 companies qualify for investments using this benchmark. 
 

How Sahara Mutual Fund schemes fared (Returns in % as on June 21, 2005)
Scheme	3 months	1 year	2 years	3 years	5 years
Sahara Growth Fund - Growth	-1.98	45.22	49.73	-	-
Sahara Midcap Fund - Growth	5.87	-	-	-	-
Sahara Taxgain - Growth	4.65	55.22	56.03	36.57	3.90
BSE Sensex	6.31	49.34	42.07	29.68	8.38
CNX Midcap 200	4.18	102.46	79.59	52.96	25.88

Sahara MF's other schemes like Sahara Growth and Sahara Taxgain have performed creditably in the past in terms of absolute returns, though they lag behind when one considers the performance of its peers.

While the Sahara Growth has managed returns of 49.73 per cent and 45.22 per cent for the past two-year and one-year periods, Sahara Taxgain has given returns of 56.03 per cent and 55.22 per cent respectively.

Sahara's recently launched mid-cap fund has managed returns of 5.87 per cent in the past quarter and, like most other mid-cap funds, trails behind the benchmark CNX Midcap 200 Index.

The key thing to note in the structure of Wealth Plus is that in case it under-performs (returns below benchmark and zero), the fund will take a hit of around 40 per cent of what they would have normally earned (1.5 per cent instead of 2.5 per cent and assuming a fund size of Rs 100 crore).

Thus the onus is on the fund to outperform, which is a comfort factor for the investor. However, from the investor's point of view, the gain he or she will have if the fund underperforms is not much. 
 

Stocks where top diversified funds have increased exposure the most
Company	% of net sssets	Market value (in Rs cr)	Difference in net assets (%)	Difference in market value (in Rs cr)	% change in share price
i-flex solutions	1.72	93.92	0.73	46.00	18.29
ING Vysya Bank	0.71	38.50	0.61	33.40	6.84
Jindal Saw	1.12	61.32	0.36	24.44	12.89
Tata Steel	0.80	43.60	0.38	23.14	6.56
SBI	2.11	114.83	0.17	20.70	14.64
Karnataka Bank	0.51	28.03	0.34	19.77	25.62
Arvind Mills	1.64	89.37	0.19	18.69	21.57
Tata Motors	0.47	25.54	0.29	16.69	4.73
Zee Telefilms	0.30	16.43	0.30	16.43	6.10
Bhel	1.26	68.54	0.18	15.91	11.31
Source: www.mutualfundsindia.com

Considering that the Sensex's average one day returns are about 0.18 per cent, the investor can get back whatever he has lost in five-six days.