I invested in Franklin India Smaller Companies Fund (G) as part of the Initial Public Offer (IPO) in January, 2006. Since its very inception, except for brief periods of very high market buoyancy, the fund has given a dismal performance. At the time of the IPO, it was marketed aggressively as a close-ended fund with a high growth portfolio. Hence, the chances of high returns being good. But none of that seems to have materialised. Should I exit? Please factor in the penalty charged for early redemption.
-Mahesh Jayaraman
Franklin India Smaller Companies Fund is a closed-ended equity fund. The fund invests 75 per cent of its portfolio in shares of small companies. The fund had a good run since its launch in December 2005 and gained 77 per cent till January 2008. It has lost all its gains in past six months. The Net Asset Value (NAV) is marginally below its face value in August 2008.
Small- and mid-cap stocks generally do better than large-caps in a rising market but also have larger downside in a volatile market. This is evident in the brief history of the fund.
If the market does not witness a sharp turnaround soon, the fund is unlikely to be in good health. In case of broad market turnaround, small and mid-caps tend to follow with a lag. Given the state of the market, which is not very rosy in outlook for the immediate future, one cannot be very optimistic about this fund’s performance.This fund could be small part of a well diversified equity portfolio, but if this is the only fund you own then you should switch to a diversified equity fund.
Franklin India Smaller Companies Fund has a five-year term but investors can redeem paying an exit load of two per cent for redemption between 2 and 3 years.
I am planning to invest in debt funds. I understand that Fixed Maturity Plans (FMPs) too are primarily debt funds. I wish to know more about them and whether I need a demat account to invest in these funds? Please recommend some good FMPs?
- Devi Kiran Kumar
FMPs are closed-ended debt funds. They open for investment only during their new the fund offer (NFO) period. Just like fixed deposits, FMPs also have a pre-defined maturity period. This generally ranges from 15 days to 3 years.There is no need for a demat account to invest in FMPs. You can invest just like any mutual fund scheme by filling up its application form. Since different FMPs have different maturity periods, choose one which suits your investment horizon with an indicative yield that is not way ahead of the prevailing market rates.
What is the tax treatment of arbitrage funds? Should I invest in an arbitrage fund with a horizon of four months?
- Nilesh Patel
Arbitrage funds mostly invest in equities, therefore they are treated like equity-oriented mutual funds and have the identical tax treatment. But there are some arbitrage funds that specify in their offer documents or their fact sheet that they would be treated as debt funds and thus will have similar tax implications. Before you invest in an arbitrage fund, check whether it is treated as a debt or equity fund.
Since your investment horizon is four months, you may opt for an FMP rather than an arbitrage fund. FMPs usually state an indicative return during the new fund offer stage.
My query is on behalf of a retired person, who has invested a huge amount in top rated funds like SBI Magnum Multiplier, Magnum-Balanced and ICICI Infra in January 2008, when the markets were at the peak. But since then, markets have fallen steeply.What should he do considering the fact that the investor is retired and has surplus money? Should he redeem or stay invested?
- Manu Narang
The stock markets have tumbled and so have the mutual funds NAV, but one needs to be patient. Since the person has invested in some well rated funds with good performance record, he need not worry too much about recent market movements. Equity investments are meant for a long-time horizon of five to seven years. Since the person has made the investment this year and the fund selection is good, he should remain invested.
When a mutual fund declares dividend, which day does the NAV gets adjusted? For example; the record date for the last dividend declared under Birla Sun Life Tax Relief 96 was June 27. The fund declared a dividend of 50 per cent on face value of Rs 10. But I could not figure out the exact date when the NAV got adjusted for the dividend.
- Abraham
Generally, the NAV of a fund is adjusted for the dividend on the record date. In case of Birla Sun Life Tax Relief ’96 too, the adjustment for dividend was made on the record date. The recent dividend under Birla Sun Life Tax Relief 96 is:
Dividend Declared - 50% (Rs 5 being 50% of face value of Rs 10)
Record Date - June 27, 2008
NAV as on June 26, 2008 Rs 74.61
NAV as on June 27, 2008 Rs 66.61
The slip in the NAV was of more than Rs 5 on June 27 because of the market fall. This resulted in 3.95 per cent erosion in the NAV, while the Sensex fell by 4.3 per cent on same date.
Value Research
