Fund houses may introduce schemes that look in sync with the current investing trend, but do you really need them?
Fund houses always want to capture the latest ‘buzz’. For instance, in the late 90s, a horde of information technology schemes were launched. More recently, schemes with a part investment in gold or public sector stocks are being launched. But as an investor, before jumping onto the latest bandwagon, one must check if the chosen scheme suits their investment needs. This is important, as often many of these schemes may not even fulfill the basic objective of wealth generation.
Some examples of the unique schemes that have come out in the recent past would include equity schemes with a life cover or monthly income plans that invest in gold. Several theme based-schemes like multicap, public sector, power, natural resources, financial services, regional investments and so on, have also been launched off late.
Of course, these schemes offer investors a lot of variety. But at the same time, they create a lot of confusion, in terms of where and how much to invest. At times, an individual may invest in a certain scheme just because of the theme and completely forget that there has to be some synchronisation of his financial goals with the fund’s objectives.
Let us now look at some of these ‘unique’ schemes in detail.
MIP with gold: A recent new fund offering is an MIP with partial allocation to gold. A major part of the fund is invested in debt instruments. Only a small part, say 15 to 20 per cent, is invested in gold. Obviously, the scheme will only be able to partially catch the appreciation in gold prices and hence the returns of the MIP will not improve substantially.
Instead, if the investor were to do proper asset allocation and invest in a debt scheme and gold, either in the physical form or through exchange-traded funds, separately, the returns could improve substantially. In such a scenario, the apparent benefit is that the investor can balance his portfolio by adding or reducing a particular asset class depending on its appreciation and market sentiments.
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Schemes with life cover: Another example of such funds is schemes with a life cover. Instead of having a mutual fund scheme with life insurance, normally it would make more sense to buy a pure term insurance and invest in a mutual fund scheme individually. The reason: a mutual fund scheme will provide life cover to a limited extent for a limited period. The cover is linked to the amount of investment and in reality, contrary to the scheme objective may not be adequate.
International exposure: Then, there are schemes with international equity exposure. Historically, they have not given exceptional returns to the investors.
For fund houses, launching a number of variants helps them boost their assets under management. And catching the latest theme in the market makes them look in tune with the times. In many cases, it also distinguishes them from other fund houses.
While it makes sense for fund houses to try and tap investors’ funds by coming out with the latest themes, it seldom makes sense for the individual investor to fall for that.
| SCHEMES WITH A DIFFERENCE > Recently, fund houses have launched unique schemes – with life cover or MIPs with part investment gold. > Earlier, there were theme-based schemes like multicap, PSU, power, natural resources, financial services, China and so on. What to do? > Only invest your excess funds in them. > If you have invested in such schemes, give the fund a chance to perform. > If you want to take the risk of investing in the ‘unique’ funds, be selective. > At times, it is better to stick to plain vanilla funds or index funds. |
Already invested?: If you have invested in such schemes, give the fund a chance to perform. Some of the unique or theme funds may under perform at times due to adverse market conditions and can bounce back after some time.
However, if a fund trails the benchmark for some time, then switching to another investment is advisable. The investor should take exposure to schemes only after understanding the product and ensuring it meets his or her requirement.
Yes, it is possible that you may have some excess cash left over after the asset allocation to invest in such schemes. But before investing, be selective. Avoid investing in themes in which you already have exposure. If you find a gap in your investment portfolio, look for funds operating in that space with a proven track record. Most times, however it would be better to stick to plain vanilla funds or index funds.
The author is a freelance writer