The language in the report "Current year the second-best for equity MF inflows" (November 13) suggests that it is something to cheer about. But that's far from the case. This should be an alarm sign for the new or returning investors in mutual funds.
Mutual funds have a penchant for launching new fund offers (NFOs) when the markets are surging. Investors who invest in equity NFOs at such a time get invested at the peak. When the markets fall, as is bound to happen this time also, they lose out. This is what happened to NFOs launched during the bull run of 2008. To name just a few NFOs: Kotak Indo World Infrastructure Fund, Sundaram Energy Opportunity Fund and JM Agri and Infra Fund sank within a couple of years of launch, never to surpass a net asset value of Rs 10. All three of them have been merged into some other scheme managed by the same mutual fund.
Mutual funds cannot run away from being responsible for taking investors for a ride in times like this.
Since indices are bullish, it is natural for investors to be attracted to the markets. From their experience, mutual funds would be aware that entering markets at such a time could burn the investors' fingers. Since fund houses are required to invest the corpus of NFOs within six months, they cannot park the collections in liquid cash. Therefore, the corpus gets invested at artificially jacked up prices and when markets fall, mutual fund investors look at negative returns even as fund houses collects their investment fees.
Mutual fund investors need to be wary of investing in NFOs or even in existing funds at this time and invest only when markets stabilise to a reasonable level.
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Mutual funds have a penchant for launching new fund offers (NFOs) when the markets are surging. Investors who invest in equity NFOs at such a time get invested at the peak. When the markets fall, as is bound to happen this time also, they lose out. This is what happened to NFOs launched during the bull run of 2008. To name just a few NFOs: Kotak Indo World Infrastructure Fund, Sundaram Energy Opportunity Fund and JM Agri and Infra Fund sank within a couple of years of launch, never to surpass a net asset value of Rs 10. All three of them have been merged into some other scheme managed by the same mutual fund.
Mutual funds cannot run away from being responsible for taking investors for a ride in times like this.
Since indices are bullish, it is natural for investors to be attracted to the markets. From their experience, mutual funds would be aware that entering markets at such a time could burn the investors' fingers. Since fund houses are required to invest the corpus of NFOs within six months, they cannot park the collections in liquid cash. Therefore, the corpus gets invested at artificially jacked up prices and when markets fall, mutual fund investors look at negative returns even as fund houses collects their investment fees.
Mutual fund investors need to be wary of investing in NFOs or even in existing funds at this time and invest only when markets stabilise to a reasonable level.
Praveen Godbole Mumbai
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number