Is it always advisable that new fund offers (NFOs) of unproven fund houses should be avoided? What if the fund manager of the new fund is the same as that of a fund which has been a good performer?
-Sutanu Ray
You are right in your belief that the fund manager has an important role in the performance of a fund. But, remember that other factors such as the fund’s objective and style, fund house’s expertise, and so on also have a hand in its success.
The new fund might have a different objective and investing style, which will affect the fund manager’s decisions. Also, the freedom given to the manager is different in different fund houses. Hence, the efficiency with which he is able to generate returns for one fund may not be the same in others. Also, the effectiveness of a fund’s investing style cannot be predicted in advance.
We also suggest you should not chase a fund manager. This might force you to churn your portfolio frequently, despite the fund’s strategy working all fine and you may end by paying loads whenever the fund manager moves to some other fund/fund house.
Hence, by and large, NFOs should be avoided.
I would like to invest around Rs 10 lakh in a liquid fund for the short term. Is this the right time to invest in a liquid fund? I am a little sceptical about the fiscal deficit, which will force the government to borrow from markets. What will be the effect of government borrowings on the returns of liquid funds? Please suggest some good liquid funds. Also, should I invest in a growth option or a dividend option?
-Vishal
Your doubts about the interest rate volatility in the coming times are well based. As the government borrows by issuing bonds, the bond prices will drop, while the interest rates will rise. As a consequence of falling bond prices, the debt funds will also lose.
However, as per the new norms for liquid funds, they have to invest all their assets in instruments with a maturity of up to 91 days only. Due to this short maturity profile, the risk of uncertainty in interest gets ruled out to a large extent , making them much more stable as compared to debt funds. Also, debt securities with maturity of a year or less are valued on the basis of their yield-to-maturity (YTM), which means intermediate changes in interest rates will not affect their valuations.
You may pick from ICICI Prudential Liquid, HDFC Cash Management Savings and UTI Money Market Mutual Fund. If you plan to use these funds within one year, go for the dividend option. Dividends will be subject to a dividend distribution tax at 28.33 per cent, while the capital gains within one year will be taxable as per your tax slab.
I have 500 units of Morgan Stanley Growth Fund purchased at Rs 8 per unit. They have not even given good dividends. Should I hold on to this investment?
- Sunil Gupta
A fund pays out dividends from its distributable surplus, i.e. the NAV above its face value. Growth in a fund’s NAV does not necessitate dividend payouts by the fund. Morgan Stanley Growth Fund, although an old one, has not been a good performer in its category. You may consider other large-cap diversified equity funds that have been good performers over the years. You can choose from DWS Alpha Equity, HDFC Top 200, DSPBR Top 100, Franklin India Prima Plus and Magnum Contra.
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