The recovery in the markets has lead to a slew of new fund offers. Should you invest?
The market turnaround from March 2009 lows on the back of a stable government, improvement in macroeconomic indicators as well as better-than-expected corporate earnings has set the mutual fund cash registers ringing again. Inflows into mutual funds for the month of July were up 24 per cent over the previous month, helping the total AUM exceed Rs 7 lakh crore for the first time in Indian mutual fund history.
While part of it is the money that was withdrawn on account of advance tax payments in June, the incremental addition was largely on account of the upward movement of the markets. Aided by FII inflows in July which grew by more than 3.5 times over June, the Nifty grew by 8 per cent in the same period. The upward movement in the market meant a jump in net inflows into equity funds in July to Rs 4,200 crore which accounts for nearly half of the equity inflows for the 2009 calendar year, estimates rating agency Crisil.
Fund managers say that the risk aversion which had gripped the markets since the last quarter of 2008 seems to have receded with improvements in economic indicators in India as well as in developed markets. While recovery make take two more quarters, fund houses have sensed the uptrend and are piling on new fund offers (NFOs). However, financial advisors suggest that due diligence be done before investment decisions are made. For one, they are advising clients to invest in NFOs falling under new norms which does away with entry loads.
What about investments in ongoing NFOs? Gaurav Mashruwala, a leading certified financial planner, says that most of the themes have been exhausted. Unless it is a product from a recently set up fund house or it offers a different theme (invest in overseas markets) which may not have been available earlier or it is a product based on changing market conditions, it will be difficult to differentiate the product.
He is more comfortable with a product that has been around for a decade so investors can see their performance across cycles, especially the performance during a slowdown. Investors should invest in these funds for at least 5-7 years if they seek higher returns vis-à-vis other investment products.
While there are a plethora of choices both in the NFOs and existing funds, in addition to an underlying unique theme, financial advisors say that you should keep an eye on the benchmark it is attached to as it will not only help to fill your gaps in asset allocation (small, medium and large caps) but also help understand whether the fund is adhering to the norms followed by respective benchmarks.
Here is an analysis of the ongoing NFOs.
Shinsei Industry Leaders
Shinsei Mutual Fund, a joint venture between Shinsei Bank, Freedom Financial and investor Rakesh Jhunjhunwala, is playing it safe with its first equity offering, the Shinsei Industry Leaders Fund. The fund says it will be investing in industry leaders with sustainable business models and a potential for income and capital appreciation. Elaborating on “industry leaders”, N Sethuraman, CIO, Shinsei Asset Management and fund manager for the scheme, says that investments will be made in stocks if they fulfil either of three criteria: The company should have the largest market share or is the fastest growing or is the most profitable in a sector.
The fund house will zero in on 100-120 stocks from 40 sectors which are expected to do well and then look at valuation parameters to reduce this to about 25-30 stocks. With most such companies being well researched, how does the company hope to make large gains from its investments? The fund says that its back testing since 2004 showed that such companies have outperformed the BSE 100, its benchmark, and will generate good gains when held over the medium term.
It believes that financial strength, price leverage and entry barriers enable these companies to generate consistently high returns over a period of time. The fund will pick up large and mid cap stocks from across sectors and put a valuation filter to finalise its portfolio. Given that the fund will pick companies with a good track record, have high entry barriers and will be sufficiently diversified, this fund is apt for conservative investors. While the fund managers are experienced, the drawback is that the fund house has no track record that investers can benchmark against. Canara Robeco F.O.R.C.E
This fund would be looking at stocks in the banking and financial services (BFSI), retail and the entertainment sectors. Within the consumption space, the fund believes that sectors such as FMCG, and to a lesser extent auto and telecom are well-penetrated, while those that the fund is targeting have higher growth prospects and thus offer maximum scope for wealth creation. Justifying the need for a fund in these sectors, Anand Shah, head of equity at Canara Robeco, says that a high amount of household savings, low insurance penetration and equity participation means that there is good growth potential in the BFSI segment.
Even in the case of retail, the market share of organised retail is just four per cent of the retail market, offering scope for further growth. Similarly, the 15 per cent market share of the digital cable and DTH segments are expected climb to over 50 per cent. Since the investment universe will cover only three sectors and only one sector (BFSI) has a large enough investment universe, the fund will have limited choices.
Moreover, sectoral themes tend to carry higher risk. The fund manager says that initially the focus of investments will be the stocks in the BFSI space which will account for half of the investments. The fund house says that since the fund would invest in the fastest growing services businesses, it should translate into high growth rates for these companies. While there are no comparables in the market, investors should consider the track record of other schemes which offer these three sectors as investment themes on an individual basis, before opting for the F.O.R.C.E fund.
| FUNDS ON OFFER | ||||||
| Equity Scheme | Open/Close ended | Fund Manager | Benchmark index | Opens | Closes | Theme |
| Canara Robeco F.O.R.C.E | Open | Anand Shah | BSE 100 | 20-Jul | 18-Aug | Focus on BFSI, retail, entertainment; no comparable scheme. For aggressive investors |
| Shinshei Industry Leaders | Open | David Pezarkar | BSE 100 | 27-Jul | 25-Aug | Shinsei’s first equity fund; investments in industry leaders. For conservative investors |
| Sahara Star Value | Open | A N Sridhar | BSE 200 | 30-Jul | 28-Aug | Value theme no different from competitor schemes. Invest if you prefer this fund house |
| ICICI Pru R.I.G.H.T | Close | Prashant Kothari | S&P CNX Nifty | 9-Jun | 9-Sep | Tax scheme to invest in large caps; existing options are in mid-cap space. Low-risk option |
| Kotak Select Focus | Open | Krishna Sanghvi, Emmanuel Elango, Abhishek Bisen | S&P CNX Nifty | 22-Jul | 20-Aug | High-risk, high return scheme; competitor options available. For aggressive investors |
The Kotak Select Focus is the 13th equity offering from the Kotak Mutual Fund which has about Rs 5,000 crore of equity assets under management. Considering that the objective of the fund is to invest in a few selected sectors, how is the new scheme different from other Opportunities and diversified funds? Krishna Sanghvi, fund manager for the scheme, says that that unlike other schemes which may like to have an exposure even in areas where the fund is underweight, the Select Focus will limit itself to sectors which it is bullish on.
The fund arrives at a top down sector outlook and follows it up with stock level investment strategy with a twin objective of good growth prospects and reasonable valuations. Considering the fund’s concentrated sector strategy, the scheme is aimed at investors who can stomach higher risk for higher returns. The equity portion (minimum 65 per cent allocation) will be managed by Krishna Sanghvi and Emmanuel Elango while the debt portion will be handled by Abhishek Bisen.
ICICI Pru R.I.G.H.T
The ICICI Pru Rewards of Investing and Generation of Healthy Tax Savings (R.I.G.H.T) seeks to invest about 85 per cent of the corpus in large caps in sectors which are non-cyclical in nature such as IT, Telecom, Healthcare and FMCG. This is a 10-year close-ended tax saving scheme similar to the ELSS funds and will have a lock-in period of three years. Amount invested in this fund up to a maximum of Rs 1 lakh will be eligible for deduction from taxable income under 80C.
The fund house, however, already has a scheme the ICICI Pru Tax Plan along these lines. The fund house says that the difference between the two is that while the R.I.G.H.T will be investing in large caps, Tax Plan’s mandate is long term appreciation from investment in mid caps. The fund house says that a majority of the funds in the market place which offer tax savings theme focus on the midcap space. Being underweight on cyclicals and a three-year lock-in, the fund house is projecting this as a product well suited for conservative investors.
While these stocks are well known, the fund house believes that performance of the companies being secular in nature, the stocks will ensure stable and profitable growth. If you are looking for moderate returns coupled with tax savings then this fund might fit the bill but if your returns expectations are high, then tax savings plans which have a higher mid cap exposure could be the right plan for your portfolio.
Sahara Star Value Fund
The Star Value Fund plans to invest in fundamentally strong companies which quote at valuations that are at least 20 per cent lower or less than the average of the peer group. The fund house believes that though markets have corrected significantly from their peaks, there are several stocks which are available at attractive levels despite the recent recovery. The fund projects this scheme as one which will build wealth, offer diversification and being a contrarian, offer stability to the portfolio.
So far, the fund house has launched nine equity schemes which are a mix of sectoral (Infra, BFSI, Power funds), growth, midcap, tax and large cap funds. The performance of these funds has been satisfactory with most beating the benchmarks over one, three and five year periods. While the fund house does not have a “value-oriented” fund, the theme is hardly different from the various value and contra funds available in the market. Investors looking for a value-fund may spread their investments between existing funds with good track record and the Star Value Fund.
