Tata's next me-too

NFO REVIEW

Tata Mutual's sixteenth equity fund offering has nothing new to offer, except that it claims greater stability due to its closed-ended structure.

The volatility in the markets and lack of investor appetite has not deterred Tata Mutual Fund from launching a new fund. Last week, it added another plain vanilla equity fund to its existing portfolio of fifteen equity funds.

The only thing that distinguishes the Tata Capital Builder Fund (TCBF) from the rest is its structure as a close-ended fund. After three years, the scheme will go open-ended while during its close-ended avatar it would offer a weekly exit option.

Seeking quality businesses
TCBF aims to focus on building capital through medium-term investing in quality businesses. It would invest in a diversified equity portfolio across market capitalisations.

"A booming economy, high growth companies and a vibrant stock market offer potential for capital building. However, investors should remain unaffected by short-term market volatility and buy into companies with medium-term earnings visibility based on strong fundamentals and proper research. This fund aims to build a diversified portfolio of such companies," says Ved Prakash Chaturvedi, managing director, Tata Asset Management.

While the fund would invest in businesses with a sustainable competitive advantage and earnings visibility, near-term volatility in stock prices may serve as entry points.

Close-ended=stable?
So, what's different in this offer? Existing funds too look for companies with visibility in earnings, having strong fundamentals and a competitive advantage. Justifying the new launch Chaturvedi says, "The key benefit is a close-ended structure since it ensures a stable corpus and thus better returns."

But with a weekly exit option available can the fund really maintain a stable corpus? "Investors won't quit because the exit charges are high at around 4 to 6 per cent," he adds.

Though the logic sounds good in theory, only time will tell whether a stable corpus, if at all, will result in better performance in practice.

So far, there is no evidence that closed-ended funds""considering the likes of Morgan Stanley Growth Fund and the umpteen schemes of UTI Mutual and other public sector mutual funds in their earlier avatars""fare any better than open-ended funds.

Saving on issue expenses
Having a stable corpus is not the only reason why fund houses are launching closed-ended funds. In a recent guideline, SEBI (Securities & Exchange Board of India) disallowed open-ended funds from charging the initial issue expenses in new fund offers to the fund scheme.

Open-ended schemes now have to meet sales, marketing and other expenses connected with sales and distribution of schemes from the entry load and not through the initial issue expenses.

However, closed-ended funds are allowed to amortise initial issue expenses up to 6 per cent of the issue over the tenure of the scheme. Thanks to this regulation, most of the new schemes launched have been closed-ended.

In fact, the Tata Equity Management Fund which was launched in June is also a closed-ended fund. Also, the Standard Chartered Enterprise Equity Fund, which was launched in the month of April, is a closed-ended fund.

Past performance
So far, schemes in the Tata Mutual Fund have had varying degrees of success. Here's a low-down on how Tata's equity funds have fared.

On the brighter side, over the past one year, Tata Pure Equity Fund which focuses on investing in undervalued large cap companies has delivered returns of about 34 per cent and Tata Select Equity Fund which invests predominantly in basic sectors from the old economy has delivered returns of about 33 per cent; Tata Equity Opportunities Fund which focuses on capitalising on special opportunities arising from time to time has delivered returns of about 29 per cent; Tata Infrastructure Fund which predominantly invests in infrastructure-oriented sectors delivered returns of about 38.5 per cent whereas their benchmark Sensex has delivered returns of about 41 per cent during the same period. 
 

REPORT CARD Scheme Performance (%) as on July 20, 2006
Scheme	1 year	3 year	5 year
Tata Dividend Yield Fund	6.26	-	-
Tata Equity Opportunities Fund	29.31	56.76	-
Tata Equity P/E Fund	15.51	-	-
Tata Growth Fund	2.57	41.02	32.03
Tata Index Fund Nifty Plan	44.72	41.53	-
Tata Index Fund Sensex Plan	38.69	40.90	-
Tata Infrastructure Fund	38.52	-	-
Tata Life Sciences & Tech	25.62	50.59	33.48
Tata Midcap Fund	2.68	-	-
Tata Pure Equity Fund	34.05	55.54	36.85
Tata Select Equity Fund	33.04	54.28	38.66
Tata Sevice Industries	16.46	-	-
Tata Tax Savings Fund	11.29	48.53	36.12
Note: Tata Contra Fund & Tata Tax Advantage Fund have been in existence for less than a year.

Ifcompare past one year returns, Tata Pure Equity Fund ranks 36th and Tata Select Equity Fund ranks 39th out of the total 127 diversified equity funds. (Source: valueresearchonline.com). The average diversified equity fund category returns were about 25.7 per cent during the same period.

On the other side, Tata Growth Fund has delivered only 2.57 per cent returns; Tata Dividend Yield Fund which aims to invest at least 70 per cent of its assets in stocks with high dividend yield has delivered returns of only 6.26 per cent; Tata Equity P/E Fund which invests at least 70 per cent of its net assets in stocks with P/E ratios less than that of the BSE Sensex delivered returns of 15.5 per cent during the one year period.

Then again, Tata Service Industries Fund which invests predominantly in companies from the service sector has delivered only 16.5 per cent returns during the same period.

Their definition of services covers the following sectors""banks, construction, dredging, finance, hotels, media & entertainment, retailing, software, telecom services and textile products.

Tata Tax Saving Fund which is an equity linked tax savings scheme has delivered returns of only 11 per cent whereas the average equity-tax planning category returns over the past one year is about 20.16 per cent. Hence, the fund ranks 18th out of the 20 funds in the equity-tax planning category. (Source: valueresearchonline.com).

Tata Mid Cap Fund whose objective is to invest at least 65 per cent of its assets in mid cap companies has delivered only 2.68 per cent returns during the same period whereas its benchmark CNX Midcap 200 delivered returns of about 8.7 per cent.

Tata Life Sciences and Technology Fund which aims to invest in fast growing, intellectual property driven new economy sectors has delivered returns of about 25.6 per cent in the last one year.

With the fund house delivering a mixed performance, it's difficult to say whether the new fund will top the charts or trail the indices. TCBF will be open from July 18 to August 18, 2006 and the minimum application amount is Rs 5,000.