BOMBAY, 27 September 2004 — There is quite a lot happening in the Indian mutual fund industry. With the stock markets having been so choppy over the past few days, there are some changes which are taking place in the overall equation on the industry.
To begin with, from June 2004 till August 2004, within a span of three months, mutual funds have sold to the tune of Rs. 830 crores. Now once again the markets have turned bullish, so the fund manages who manage domestic mutual funds, have quietly changed their investment strategy in September.
Due to this incessant selling, what has happened now is that mutual funds are flush with money. It is estimated that mutual funds are sitting pretty on a kitty of over Rs. 1000 crores. Fund managers are waiting for the “right time” to once again re-enter the market and that is expected to come once there is a major correction.
Mutual funds have been selling as most of their investments had seen appreciation to the tune of 50-100% during the last two months.
Moreover, there was the Tata Consultancy Services (TCS) IPO allocation also. It is only in September that mutual funds have started buying into stocks heavily in September, mainly due to fresh schemes launched by several leading fund houses.
In the past three months, domestic fund houses have mobilized Rs. 8,500 crores through the launch of new schemes. Since July, most of the leading domestic fund houses have come out with new schemes. There were about 25 new product launches during the period, of which seven were equity schemes. Mutual fund IPOs have become a big hit with investors.
The equity scheme has collected over Rs. 1,500 crores, while the remaining amount has come into debt products like floating rate funds and fixed maturity plans. Also the retail participation in these schemes were quite good with each schemes getting over 20,000-30,000 investors.
Debt funds had added attractions like floating rate funds and dynamic schemes to deal with a rising interest rate regime. While the equity schemes focused on the momentum in the mid-cap and small-cap stocks.
Among the largest of IPOs: ABN Amro MF mobilized over Rs. 2,000 crores through its maiden issue of four schemes; HDFC raised Rs. 1,000 crores through two schemes and StanChart MF raised Rs. 1,000 crores through three schemes.
While most of the schemes have done well, one has to understand the new products thoroughly before venturing to invest. There have been quite a few equity schemes which offered investment in mid-cap stocks. It is imperative to understand that mid-cap stocks are indeed like shooting stars. They appreciate faster in a bullish market but also fall the fastest when the market takes a tumble. So such schemes have a higher risk factor.
Also it is important to understand that there are now industry or sector specific funds like power, telecom, IT, etc.
This does not mean that the fund invests only in the specified sector alone, the sector mentioned in the offer documents are just indicative and the fund might also invest in other sectors.
Another category of schemes includes those where a small part of the portfolio gives big returns. For example: HDFC Core and Satellite fund. A major part of its portfolio is in large-cap stocks while the balance of the portfolio is expected to provide a boost to overall fund returns through trading in small and mid-sized companies.
There are also funds which call themselves as “ dividend yield” fund. As the name suggests, it plans to invest in dividend yielding stocks. It is important to note that the risk-free rates of bank Fixed Deposits are far higher than an average dividend yield figure.
Then there is also the floating rate mutual fund. Floating rate funds provide returns by way of maximum coupon income and very limited capital appreciation or depreciation.
These funds will continue to deliver market rate of returns at all points of time but will not be able to provide capital appreciation or depreciation as in the case of income funds. In a rising interest rate scenario, it makes sense to invest in floating rate funds.
The dampener was when Reserve Bank of India clamped down on global deposit and mutual fund products, which banks had launched with great fanfare soon after the central bank allowed resident individuals to remit up to $25,000 a year. A host of banks including Citibank, ICICI Bank, HSBC and Bank of Baroda had come out with deposit products where customers could deposit up to $25,000 for three months in dollars, euro, pounds or Australian dollars. Standard Chartered Bank had launched GlobeInvest, where customers could pick from an array of mutual funds.
RBI has said that it is working on the guidelines and will soon relaunch the scheme but with lesser loopholes.
The shift, at present in the mutual fund industry is towards equity schemes. In fact, returns from debt funds have been disappointing to the investors during the current year, after almost five years of satisfactory performance.
Analysts say that hybrid funds like Monthly Income Plans and balanced fund will provide an excellent risk-return combination for the investors.
The conservative nature of the debt portfolio in hybrid funds will ensure a steady return, even in a market where the interest rates are rising. The equity portfolio will provide the long-term capital appreciation.
A prudent investor should try and have the right mix of debt and equity. A conservative /low risk investor can lower the equity allocation, while an aggressive investor can increase the equity allocation. But it is essential that investors realign their portfolio once every quarter.
