While everyone looks at borrowing costs, expenses are also involved when one has to invest in different investment products. For instance, in new fund offerings (NFOs), asset management companies were allowed to charge up to 6 per cent of the corpus collected as marketing expenses for open- ended schemes till last year. This was amortised over five years. The guidelines have been changed and now open-ended schemes are not allowed to charge this amount.

However, this restriction is not applicable to closed- ended funds. No wonder, there has been a spurt in closed-ended NFOs. Most of this charge is passed on to the distributors. They end up making as much as 4 per cent to 6 per cent during the NFO period. Now you know why your agent or distributor calls on you each time a new fund is being launched.

Another cost that you have to incur is the entry and exit load. Most of the equity funds charge 2.25 per cent as entry load. Entry load is charged every time you commit new money to a fund. This includes each Systematic Investment Plan (SIP) instalment, as well. This charge is deducted from your investments by reducing the number of units allotted to you.

And of course, there are costs like portfolio turnover cost. That is, the higher the turnover of the fund assets, the more brokerage and securities transaction tax (STT) charge, they will be paying. All this is at the cost of your returns.

What should you do? Simply put, don't invest in NFOs. In fact, try to avoid open-ended funds that are not more than five years old. If they were launched before July 2006, their NFO expenses are still being amortised and you will have to pay for them. Invest in good funds with low expense ratios. Some of the other criterion to look for include:

• Does the AMC absorb some of the expenses rather than passing them to investors?
• Do they have low portfolio turnover?
• Do they charge reasonable fund management fees and not the maximum allowed?

Of course, with the insurance companies wanting to position themselves as investment as well as insurance products, there are a large number of costs like in policies like moneyback, ULIPs and other investment-linked products.

These expenses include policy charges like mortality, fund management, administration, fund switching and partial withdrawal, among others. After that there are premium allocation charges and policy administration charges.What should you do? Opt for a pure insurance product like a term plan to bring down your cost. And invest through mutual funds.

Investors can retain their exposures in ICICI Pru Dynamic Plan, given the fund’s reasonable track record within the universe of diversified equity funds. It has delivered a 61 per cent annualised return over three years against a 42 per cent return on the Nifty.

The fund has also outperformed its benchmark (the Nifty) as well as the category average over a one as well as three-year time frame. These returns have to be seen in light of its significant cash/debt position. This is in keeping with the fund’s objectives of moderating its equity exposures if it believes the markets are over-valued.

Suitability: The fund’s flexicap mandate allows investors to benefit from stock price performance across large, mid and small-cap stocks. Given the fund’s objective of switching into cash to protect against downside ri sks, the fund would theoretically carry lower risks than the normal equity fund. However, in practice, this objective may result in the fund’s underperforming fully-invested peers.

Switching between cash and equities is a difficult call to make and demands a keen sense of timing on the part of the fund manager. A move into cash can also backfire and reduce relative returns for investors, if stock prices continue to rise despite high valuations.

Performance: The fund has outperformed its benchmark as well as the diversified equity category average over one and three-year time frames, and since its inception. This performance is in spite of the fund consistently allocating a si gnificant proportion of its portfolio to cash and debt equivalents. The fund’s equity portfolio has adhered to the flexicap mandate, featuring a mix of large and mid-cap stocks. The latest portfolio carried a distinct large-cap bias with only 20 per cent allocated to stocks with a sub-Rs 5,000-crore market cap.

Though the fund has the mandate to shift up to 100 per cent of its assets to cash, based on its perception of market valuations, in practice, the fund has capped its cash holdings to the 15-25 per cent range. The fund has not always been right in switching between equity and cash either. For instance, it had a fairly high equity exposure of over 90 per cent in end April 2006, just prior to the May/June crash.

On the other hand, the equity allocation by end-June (after the sharp fall in the markets) was at 86 per cent, lower than the preceding month. In the recent months, again, the fund has moved a larger proportion of its assets into cash/debt in April 2007 (probably wary of stretched valuations).

But with the markets continuing their upward journey, this has probably resulted in the fund missing out on some of the upside over this period. Allocations to cash/debt, which were at nearly 25 per cent of the portfolio in April 2007, have declined to about 15 per cent of assets by end June.

Fund facts: The fund, an open end diversified equity fund, was launched in October 2002. The NAV is Rs 71.90.

How is a dividend scheme different from a growth scheme?
Mutual funds generally provide their investors an option to invest their money either in a growth scheme or a dividend scheme. Dividend schemes are further classified as dividend payout and dividend reinvestment schemes. However, investing in dividend schemes does not imply that the mutual fund would distribute its share of profit as dividends. Getting a share of the profit has always been the privilege of shareholders. In case of mutual funds, those investing in the units are mere buyers of a financial product sold by the fund house. Investors gain only if the value of the stocks held by the fund appreciates over a period of time.

Dividend payout & dividend re-investment scheme
Since mutual fund dividend is nothing but the part payment of the investor’s money back to him, its NAV deflates to the same extent as and when the fund pays dividend. That is the reason why the NAV of the dividend scheme is always lower compared with the NAV of the growth scheme of the same fund.

Dividend payout scheme
Say you have invested Rs 10,000 in a fund where a unit of face value Rs 10 is currently quoting at a NAV of Rs 40. This would give you 250 units in the fund. Let’s say in six months, the NAV becomes Rs 50 and your investment is now worth Rs 12,500. Now, if the fund declares a dividend of 20% on face value, you would end up getting Rs 500 (250 units * Rs 2) as dividend. But post-dividend, the NAV will decline proportionately to Rs 48/- per unit. If you sell all your units now, you will receive Rs 12,000 (250 units * Rs 48). Thus, the total return in your hands would add up to same sum of Rs 12,500/- (Rs 12,000 + Rs 500).

Dividend reinvestment
Under this option, the fund does not repay the dividend to investors. Instead, the dividend is used to purchase additional units of the fund at the NAV arrived at after the declaration of dividend. To continue with the above example, the NAV of the fund declines to Rs 48 post-dividend. However, since you have opted for reinvestment of dividend, the dividend amount of Rs 500/- shall be used by the fund to allocate additional 10.42 units (Rs 500 divided by Rs 48) to you. The total number of units that you would now have would be 260.42 (250 units+10.42 units). Redemption of these units at the revised NAV of Rs 48/- would again end up giving the same returns of Rs 12,500 (260.42 units * Rs 48).

What is a growth option?
In this case, the earnings are ploughed back into the fund rather than distributing it to the investors. You can encash the profits only at the time of redemption. Unlike the dividend reinvestment option, the number of units will also remain constant throughout the period of investment. However, the NAV of the fund would always be higher vis-à-vis the other two options, thereby ensuring that you get the same returns as your peers from the other two options. In this example, as the NAV went up from Rs 40 to Rs 50 per unit, you would get Rs 12,500 (250 units * Rs 50) if redeemed at this price, thereby booking a profit of Rs 2,500. If you stay invested, the NAV would either increase or decrease from the level of Rs 50/-.

So when do I opt for a growth scheme and when for a dividend?
If you are sitting on idle cash and looking for a long-term investment option, then go for a growth scheme. But if you are looking for a steady cash flow and cannot afford to tie up your money for long, dividend payout is the one to opt for.

It has been proven empirically that in the long run, markets don’t disappoint despite the fluctuations in the short run. This, however, is for investors who are willing to stay invested for at least five years.

However, if you are looking for a steady cash flow and cannot afford to tie up your money for a long time, the dividend payout is the one to opt for. Just remember though that declaring dividends is always the prerogative of the fund house and investment in mutual funds does not carry a guarantee card for periodic dividends.

When was the last time you had bought a new cell phone, without checking all the models available in the market? Some even spend days on end — going through the features, accessories and guarantees in various products. Why should buying a mutual fund be any different? After all, it’s your hard earned money.

Next time when your broker or banker advises you to buy a particular product, don’t take his advice blindly. A simple analysis of funds will help you choose a fund that fits your financial needs. One of the most important tools in this process is looking at the benchmarks.

What is a benchmark and what is its use?

A fund’s benchmark is an index that is chosen by a fund company to serve as a standard for its returns. Thus, while comparing, one should only compare funds with similar benchmarks. For example, Reliance Growth, which has BSE 100 as its benchmark, cannot be compared with Reliance Equity that has BSE Sensex as its benchmark. But it can be compared with UTI Mastershare, which also shares the same benchmark.

Besides, the fund is saying that the benchmark’s returns are its target and a fund should be deemed to have done well if it manages to beat the benchmark.

Another philosophy behind the benchmark is that the company gives you a rough indication as to what kind of stocks the fund is likely to invest in. Say, if Franklin India Blue Chip has BSE Sensex as its benchmark, then it should ideally invest in blue-chip (large-cap) companies.

So are benchmarks gold standards in investment?
Of course not. Fund managers often take liberties with their benchmarks. Year 2006 saw large-cap stocks rallying the most. This led to many funds, with mid-cap indices as their benchmark, investing in such blue-chip companies wantonly. Additionally, in the past couple of months, since mid-cap stocks have started rallying again, fund managers are looking at them aggressively, forgetting their funds’ benchmarks for the time being. Have a look at the table. We have compiled a few prominent funds with investments not in line with their benchmarks. While their benchmark is a large-cap index (Sensex or Nifty), they have invested substantially in mid-caps.

So why is this harmful?
Fund managers are not gods. They too are accountable to their employers and more importantly — the investing public. One cannot — and should not — swim against the tide forever. Befriending the trend is one of the ways by which he can deliver good returns for his investors. However, if the composition of the portfolio changes so much that an investor’s investment objective is hurt, then there’s a problem. After all, you put your money in a large-cap fund because you wanted to put a specific part of your portfolio in large-caps (and not mid-caps).

What if benchmarks themselves are wrong?
As the number of schemes in the market increases, fund houses have been coming out with creatively-designed ‘thematic’ schemes to attract investors. For example, if infrastructure stocks are outperforming, you see fund houses launching infrastructure funds (often with Sensex, Nifty or even BSE 100 as their benchmarks). When you compare their returns with the large-cap indices, they often deliver superlative returns. But when you compare them with a more appropriate index like say BSE Capital Goods, they have to bite the dust. Thus, the measurement of performance is sacrificed in a rush to launch schemes.

Last but not the least; keep monitoring your funds’ performance at regular intervals. And if your fund is lagging its benchmark for large period, its time to exit. You don’t use an outdated cell phone for long, do you?

The assets under management mutual funds juggernaut keeps on adding to its collections month after month and Reliance MF has shown that it does the job of convincing people to invest in its schemes the best, retaining its number one slot in the industry with ease.

The industry has itself grown by a whopping 21.5% in July, although in the month before that there was a fall.

From Rs 40033299.4 lakh (Rs 4,00,333 crore) in June (see table 2) the mutual funds total assets under management (AUM) has increased to Rs 48651371.4 (Rs 4,86,513 crore) (check table 1), says the Association of Mutual Funds in India.

The reason ascribed by analysts for this is the ramped up collections through new fund offers, especially by Reliance MF, and also because of the rising stock markets, which have increased the value of shares held by mutual funds to new highs, in spite of the two crashes that the markets saw in recent days.

For the month of July, here is the list of the various mutual funds:

Reliance MF is still No. 1: Rs 66,420.03 crore (earlier, Rs 59,857.01)

ICICI Pru MF at 2^nd spot: Rs 48,688.55 (Rs 43,613.75)

UTI MF at 3^rd spot: Rs 42,547.60 (Rs 39,031.87)

HDFC MF at 4^th spot: Rs 40,153.47 (Rs 35,629.81)

The recent upswing in the stock market appears to have reiterated the underlying optimism prevalent among India-dedicated offshore funds that have registered 60-70% returns over the past one year.

A recent S&P rating report (on offshore funds) reveals that most India-dedicated equity funds have been doing well over the past couple of years. Experts reason that this may well be on account of fact that the market rally has been led by liquid large-cap stocks for the past one year.

Offshore funds specialise in investing in foreign companies or corporations. These funds have non-residential investors (often high net worth investors and institutions) and are regulated by the provisions of foreign countries where they are registered. Most of these funds are launched from tax havens like Mauritius or Cayman Islands. Overseas funds have been active in India, investing in all sectors of the equity market.

“Offshore funds could typically be investing in large-cap stocks as investors are more comfortable investing in large-cap companies with higher liquidity,” said Sai Krishna Tampi, head-PMS, HSBC AMC.

According to S&P data, I-Merge, a dollar-denominated fund, was ranked ‘the best performing fund’ with over 70% returns as on June 28. Franklin India fund clinched the second spot with 69%, while Kotak Indian Mid-cap Fund logged 68% returns to clinch the third spot.

“Long-term investors invest in offshore funds. Foreign investors, over the past 3-4 years, have been very steadfast while investing in Indian equities. Though, they may not be buying when the market is bad, they are not basket-selling their portfolio either,” said Bharat Shah of ASK Investment Managers, which advises three India-dedicated offshore funds — I-Merge, India Value Investments (INVIL) and I-Gain. “The value of Indian market is large and still growing; it is capital-efficient and there is immense opportunity for long term compounding,” Mr Shah added.

While the AUM of the entire mutual fund industry stands at nearly $100 billion, total assets in growth funds, comprising funds that invest in equities with a medium or long-term investment horizon, is nearly $30 billion.

Experts say the AUM of India-dedicated offshore funds is nearly $35 billion. The remaining $70 billion is invested in cash and liquid funds that invest in short-term instruments.

“India equity funds have been doing exceedingly well due to buoyant capital markets and an appreciating rupee. Most offshore funds have returned 10-12% more than the pervious years as a result of rupee appreciation,” said Dhirendra Kumar, CEO, Value Research.

“Though inflows into India, by way of offshore funds, have been going on for some time, it has taken off in a big way recently. As of now, there are around 70 offshore funds (with about 230 variants/plans or themes) investing in India — the biggest being the $6 billion HSBC GIF Indian Equity fund (with about 11 variants/themes),” Mr Kumar added.

Hedge funds are borrowing too much to finance their investments in credit derivatives, contracts based on debt, which may magnify volatility in a market downturn, according to a Fitch Ratings survey of 65 banks, insurers and money managers.

Hedge funds’ influence on credit derivatives and debt markets has continued to grow at a ‘dramatic pace,’ Fitch said in the report Tuesday. The funds are responsible for 60% of all trading in credit-default swaps and about 33% of collateralised debt obligations, securities that package debt, the ratings company said, citing data from Greenwich Associates.

US corporate bond risk premiums reached the highest in almost two years last week, as hedge funds bought credit-default swaps to offset potential losses from the subprime mortgage rout. Bear Stearns was forced to provide $1.6 billion for one of two funds that made wrong-way bets on subprime debt. The New York-based firm didn’t bail out lenders to the other fund, which borrowed against its investors’ capital to take bigger risks.

In a market slump, large deals financed with borrowed money, or leverage, may “result in a number of hedge funds and banks attempting to close out positions with no potential takers of credit risk on the other side,” analysts led by Ian Linnell in London wrote in the report for the 2006 survey.

Banks and money managers bought and sold about $50 trillion of credit derivatives in 2006, more than twice the total in the previous year, Fitch said. The market has grown 15-fold since Fitch started the survey in 2003, the ratings company said.

“Until all of this recent volatility, investors had been forced down the credit quality ladder, and up in leverage to meet investment targets,” said Matt King, head of credit products strategy at Citigroup in London.

“Now it appears hedge funds are deleveraging” to meet demands from their lenders. Morgan Stanley was cited as the most frequent trader of the contracts, followed by Deutsche Bank, Goldman Sachs Group and JPMorgan Chase, Fitch said.

The top 10 firms accounted for 89% of credit derivatives bought and sold in 2006, up from 86% in the previous year, Fitch said. “For better or worse, counterparty concentration appears to remain a feature of this market,” Fitch analysts wrote.

Contracts based on the debt of General Motors, the largest US automaker, were the most frequently traded single-name credit-default swaps last year, Fitch said, followed by DaimlerChrysler, the world’s second-largest maker of luxury cars.

Investors put the most money into contracts on GM and the government of Brazil, Fitch said. Banks and hedge funds say it’s cheaper and easier to use credit-default swaps to speculate on the ability of companies to repay debt than trading the underlying securities.

In a credit-default swap, the buyer pays a premium to guard against a borrower failing to pay its debts. In the event of default, the buyer gets paid the full amount insured, and hands over defaulted loans or bonds to the swap seller. Swap prices decline when creditworthiness improves, and rise when it worsens.

‘Humpty Dumpty sat on a wall; Humpty Dumpty had a great fall’. It’s a nursery line that could well be the motto of mutual fund (MF) houses these days.

An inspection of corpuses of various MF schemes shows a drastic fall in their current assets under management (AUMs) vis-a-vis their initial collections. Of the nearly 300 equity schemes that were studied, more than 100 schemes witnessed a fall in AUMs, with nearly 53% of them witnessing over 50% drop.

Self-congratulatory ads at the end of every new fund offerings (NFO) notwithstanding, the fact remains that AUMs of many schemes have taken a sharp tumble. Sandesh Kirkire, CEO, Kotak Asset Management, states, “While NFOs have seen collections, net sales of equity funds for Q1 have not been impressive mainly because more than the fresh influx of funds, there has been a transfer of funds from the existing schemes to NFOs.”

While AUMs do not reflect the performance of a fund, it is often prominently cited in promotional materials to demonstrate the size of the fund and thereby lure new customers into the fold. Given the role that AUMs play in attracting new investors, ETIG specifically tracked the performance of all NFOs in the past three years. And no surprises for guessing that these are far worse off than their older siblings.

These new schemes are the ones that have the most fickle investors of all. Nearly 75% of the new schemes, which had commendable collections at the time of launch, have seen their corpuses fall like a pack of cards. So much so that, around 52% of them have shed over 50% of their weight (AUM) since inception. And if you think that most of the funds losing their AUM are probably those belonging to lesser known fund houses, then you are in for a surprise. (For the complete list, log on to www.etintelligence.com .)

What this indicates is that every time a new scheme is launched by a fund house, a section of investors dump some of their holdings in older schemes in which they are invested and reinvest the money in the new NFO. According to Dhirendra Kumar, CEO, Value Research Online, “A reasonable part of the NFO collections is new money, but about a third of it is the money moving from existing funds.” While this churn is often attributed to investors’ attitude for booking profits, what is often ignored is the fact that their decisions are mostly influenced by MF distributors, who are keen on pocketing heavy commissions, which they earn by selling NFOs.

Thus, one can conclude that while it may appear that the latest fund offerings have garnered a lot of money, in reality it is some other fund that may have lost almost the same sum through redemptions. In the light of these findings, it would seem that investors would be well advised to use performance rather than AUM as a criteria while choosing MFs.

FUND COMPARISON: Franklin India Prima & Reliance Growth

If we believe that tomorrow will be better, we can bear a hardship today.

There’s something affirming in a cliché. And investors in Franklin India Prima will empathise with this one. Right now, they are flooding us with queries on whether it makes sense to stay put or get out because tomorrow may not be better.

In case you have not noticed, Prima has taken a beating on the performance front. From being the best performer it has slipped to abysmal levels. And its investors are a worried lot.

What’s causing eyebrows to be raised is that its peer – Reliance Growth – is going great guns. This clearly indicates that the issue is not so much whether mid-caps as a whole are floundering but rather a fund-specific problem.

If you feel that a comparison between Franklin India Prima and Reliance Growth is a dubious approach, consider this.

The two funds have an identical bent- diversified equity with a mid-cap bias.

They are strikingly similar in terms of tenure – both have been around for more than a decade and grapple with a huge amount of assets. They are the largest mid-cap funds. And the clinching factor is that they shared virtually identical NAVs in January 2005 – a difference of just 1.7. But that did not last for long. Since then, growth has soared on the performance and ranking front and Prima has not been able to keep pace. Despite sharing much common ground, they have followed very divergent paths.

When both these funds jostled for the top slot a few years ago, they managed to garner plenty of assets. With mid-cap funds, size is an issue. The bigger the size, the more difficult it is for the fund manager to take aggressive positions in small stocks. His ability to speedily get in and out gets diluted with increasing size.

Prima and Growth have had to contend with this issue and both fund managers must be commended for their handling.

Unlike other funds, they have not held phenomenally high positions in cash. Neither have they taken diversification to the extreme by flooding the portfolios with stocks. Since January 2005, Growth has had an average of 40 stocks in its portfolio while the corresponding figure for Prima is 55.

What’s interesting is that Growth, with a larger asset base, not only managed to hold fewer stocks than Prima but also delivered superior results. But the key differentiating factor between the two is not in the assets or number of stocks held but rather in their strategy and stock picking.

The Franklin Templeton group tends to portray itself as style agnostic. So t refrain from being classified as aggressive or conservative or growth-oriented investor. It likes to keep it simple - buy on sound fundamentals and sell when the target price is achieved.

The perception of Reliance, on the other hand, is that of opportunistic investors who have no qualms about getting out of a stock, booking profits and re-entering at a later date. While this might have been the case earlier, it does not necessarily hold true now.

A look at the portfolios between January 2005 and May 2007 revealed that Prima held on to 18 stocks for a period of more than 24 months while Growth was not too far behind at 13.

Where Growth tends to score is in its ability to adapt to market movements. In a rapid bull run, they will look at growth stocks, not value. In a slower market, they will change their stance. This flexibility is extended even in the preference for market cap.

If the need be, Growth will increase its large-cap substantially. For instance, in February 2006, 39.2 per cent of the equity allocation was in large-caps. Prima, by-and-large, has refrained from having too high an allocation to large caps and has touched 19.66 per cent (November 2005).

Reliance Growth is known as a pro-active fund that regularly churns out fresh ideas - a benefit from having their in-house research team. In January 2005, when the two funds’ NAV was almost overlapping, they had six common stocks. Come May 2007 and the common stock is just one – Jai Prakash Associates.

Prima once known for its smart stock picking has tended to lag behind. Prima missed out on the sugar sector where short-term trading opportunities were available. But stocks like Balrampur Chini, Dhampur Sugar Mills, Mawana Sugars and Oudh Sugar Mills featured in the 2005 and early 2006 monthly portfolios of Growth.

Reliance Growth picked up steel stocks more than two years ago - JSW Steel, Jindal Saw, and Jindal Steel & Power – and that has paid off well.

Reliance Growth has avoided real estate stocks but invested in Bombay Dyeing (indirect exposure to real estate) and Jai Prakash. While the latter is also owned by Prima, Ansal Properties & Infrastruture was bought when it was quoting at a steep rate in January 2007 and since then the price of that stock has fallen.

Don’t give up on Prima just yet. The fund house is making changes that should help boost performance What holds Prima in good stead is a fine fund manager.

Despite hitting a low, there is nothing stopping him from bouncing back. Looking at the pedigree of both fund managers, it is probably right to say that one is not better than the other.

Just that one has made fewer mistakes and better picks. Though ultimately, that is what fund management is all about.



UTI Infrastructure - A strong performance since inception makes this fund a worthy choice

UTI Infrastructure has performed exceedingly well in the first three years of its existence. The first of the infrastructure funds to be launched, it has generated phenomenal returns, riding upon the big ticket capital spends happening in the country. In that sense, UTI spotted the opportunity at the right time to come out with such a fund, and many others followed suit.

The fund ranked in the top quartile of the category in 2005, generating 57 per cent returns to better an average peer by a margin of more than 10 per cent. Calendar year 2006 was even better, when the fund added to its glory by taking the top slot. Its returns of 61.48 per cent ranked it first in the category. This year as well, the fund has so far managed to stay slightly ahead of the category, despite hitting a rough patch in the first quarter, when industries like real estate and cement corrected sharply.

As a result of its superior performance, the fund has attracted a lot of investor attention, and its asset size has shot up from under Rs 60 crore at the time of its launch in April 2004 to Rs 1,000 crore at present.

Though the fund has spread its assets across stocks of different market capitalisation, it has developed a bias for large-caps in recent times. At the end of May 2007, stocks of large companies accounted for 57 per cent of its assets. It invests in a reasonably diversified portfolio of around 40 stocks.

Reliance Industries is the top holding of the fund (7.03 per cent) followed by Larsen and Toubro (6.03 per cent), BHEL (5.6 per cent), ONGC (3.69 per cent) and Reliance Communications (3.54 per cent). Among the sectors, the likes of engineering, construction and energy obviously dominate the portfolio, but the fund also has significant exposure to metals and technology. These five sectors account for over three-fourth of the fund’s investments.

If you want to take a bet on the capital expenditure wave sweeping across the country, then this fund could be a worthy choice considering its strong performance since inception.




DSP Merrill Lynch Tiger - This predominantly large-cap fund has earned great returns for investors

An acronym for The Infrastructure Growth and Economic Reforms, DSPML TIGER. focuses on sectors that are likely to prosper from growth related to economic reforms and infrastructure development. With this as a starting point, the fund manager follows a top-down approach (for sector selection) before resorting to bottom-up stock picking.

Despite platitudes about how you can never time the market, a perfect launch timing does wonders for the perception of a mutual fund. And T.I.G.E.R is a prime example. Launched three years ago, the fund capitalised on the infrastructure run. But unlike other infrastructure offerings, its broader mandate has enabled it to tap into sectors that core infrastructure funds do not – healthcare, FMCG, textiles, consumer non-durables.

The portfolio is, probably, too well diversified and this year averaged at around 66 stocks. RIL, the largest holding, is currently at less than 6 per cent and the rest are all below 4 per cent. One can expect such diversification from a mid-cap fund, but this is surprising from a predominantly large-cap offering. Nevertheless, its tilt towards growth investing has enabled it to deliver superior returns.

Looking at the fund’s three-year tenure, its most prominent holding – RIL – has been there since inception, while around 20 stocks have been held continuously for at least 30 months. But when looked in perspective of the 60-odd stocks in the portfolio, it is not significant enough to conclude that the manager adheres to a buy-and-hold strategy. In fact, on the other end of the spectrum are 48 stocks that have stayed on for six months or less. Jet Airways was one stock that played hide-and-seek with the portfolio by appearing, disappearing and appearing again before making an exit. A look at the rankings, as on June 15, 2007, shows the fund in a very favourable light. It has been the best performing diversified equity fund in the two-year category over the past three weeks’ ranking and a top quartile performer in the one- and three-year category. And considering its broad and well-timed investment mandate, it won’t run out of good ideas.

The requirement of having a Permanent Account Number, or PAN, for investing in a mutual fund may have been deferred till December. But the mutual fund industry fears losing out to unit linked insurance plans, or ULIPs, reports CNBC-TV18.

Just when the Indian mutual funds were hoping to grow their investment portfolios, they face a bigger challenge. While market regulator Sebi has made it mandatory for mutual funds to allow only those investors who have a PAN card to invest, come December, insurance ULIPs have no such requirement. And since ULIPs almost mirror mutual funds in their structure, funds fear big money flowing away from them to the ULIPs.

“On the one hand, it is good to know your customers and to take all the precautions. But at the same time, it should be made applicable across financial service industries, because the challenges are the same,” said Mukul Gupta, CEO, Birla Sun Life MF.

With Sebi's rule on PAN card requirements for investments in mutual funds, fund managers fear ULIPs may now attract more equity from their potential lower-income customers. Out of the total customers buying ULIPs, only 20% submit a PAN card for identification. But insurance companies say that 40% of their customers come from small towns compared to 2-3% for mutual funds. But those fund houses launching micro systematic investment plans, or SIPs, and wanting to penetrate deep into the lower income groups in smaller cities, may get hit hard.

“There is a concern - a situation where there is in a way discriminatory treatment. I hope the government appreciates it and this is harmonized,” said AP Kurian, Chairman, Association of Mutual Funds in India, or AMFI.

Mutual funds say a higher commission structure and the advantage of being able to use celebrities to endorse products, already puts ULIPs at an advantage. And now, PAN could be the latest and perhaps the most potent threat to them in their fight for investor wealth.

Great Offshore
-Vijay Sheth buys 54.9 lakh shares (14.43% stake) @ Rs 869/sh
-Vijay Sheth now holds 18.58% stake after this deal

Pantaloon Retail
-Passport India Inv buys 9.12 lakh shares @ Rs 560/sh
-Goldman Sachs sells 9.12 lakh shares @ Rs 560/sh

TV18
-Passport India Invst buys 9 lakh shares @ Rs 960/sh
-Passport India Invst already holds 2.18%

Gayatri Projects
-Citigroup Global sells 54,000 shares @ Rs 305.50/sh

Eveready Ind
-ABN AMRO MF buys 13.3 lakh shares @ Rs 51.25/sh
-HDFC MF sells 14 lakh shares @ Rs 51.28/sh

Solar Explosives
-HDFC MF buys 3.9 lakh shares @ Rs 155/sh
-Jardine Fleming India Fund sells 3.9 lakh shares @ Rs 155/sh

SB&T Intl
-Morgan Stanley sells 1.5 lakh shares @ Rs 27/sh

GE Shipping
Vijay K Sheth sells 2.8% stake in GE Shipping in last 4 days
Somidevi Enterprises (Ravi, Bharat Sheth co) buys 19.3 lakh shares (1.27% stake) @ Rs 318/sh
Vijay K Sheth sells 19.3 lakh shares @ Rs 318/sh
Earlier, Vijay K Sheth had sold 1.57% stake in GE Shipping for Rs 71.5 cr

Great Offshore
Maltar Trading buys 2.58 lakh shares @ Rs 835/sh
Delta Housing Company buys 4.41 lakh shares @ Rs 835/sh
Vijay Sheth sells 7 lakh shares @ Rs 835/sh

Hindustan Dorr-Oliver
BIRLA MF buys 4.70 lakh shares @ Rs106.3/sh
Sundaram MF buys 1.90 lakh shares @ Rs 106.3/sh
Arion Commercial sells 2 lakh shares @ Rs 106.3/sh

Indo Rama
Deutsche Bank buys 10 lakh shares @ Rs 48.01/sh

Micro Tech
IL&FS buys 2.85 lakh shares @ Rs 244.44/sh
IL &FS India Opportunities buys 1.02 lakh shares @ Rs244.99/sh
Passport India Investments (Mauritius) sells 3.65 lakh shares @ Rs245/sh

Kirloskar Pneumatic
Franklin India Smaller Cos Fund buys 3.65 lakh shares @ Rs 510/sh
Mundhwa Investments sells 2.97 lakh shares @ Rs 510/sh
Reliance MF sells 1.75 lakh shares @ Rs 512.69/sh

Asian Elect
Arising Partners Asia buys 2.04 lakh shares @ Rs 804.9/sh

Fag Bearing
Merrill Lynch Capital Markets sells 2 lakh shares @ Rs 637.01/sh

Heritage Foods
Franklin Templeton MF buys 59.9 thousand shares @ Rs249.9/sh
Emerging Markets South Asian sells 1.44 lakh shares @ Rs 250/sh

IKF Techno
Lotus Global Investments A/C GDR sells 25 lakh shares @ Rs 8.34/sh

JBM Auto
Melchior Indian Opportunities sells 50 thousand shares @ Rs 80.93/sh

Modipon
Mavi Investment Fund buys 48.4 thousand shares @ Rs 77/sh
Lotus Global Investments buys 99.3 thousand shares @ Rs 78.11/sh

OM Metal Infra
Goldman Sachs Investment buys 5 lakh shares @ Rs 61/sh

Gremach Infra
Mavi Investment Fund buys 2.25 lakh shares @ Rs 174.98/sh

Netflier Finco
HDFC MF sells 2.12 lakh shares @ Rs 58.78/sh

Era Constructions
Era Housing & Developers buys 95.6 thousand shares @ Rs 361.27/sh

The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.

The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV.

Value or purchase price of a share of stock in a mutual fund. NAV is calculated each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding.

Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.

Domestic mutual funds (MFs) were net buyers on Thursday, 31 May 2007. They bought shares worth a net Rs 65.20 crore compared to a net inflow of Rs 354.70 crore on 30 May 2007.

MFs made gross purchases worth Rs 1046 crore, while their gross sales aggregated Rs 980.80 crore on that day.

So far for the month (till 30 May), MFs were net buyers of Rs 1783.09 crore in the Indian equity market.

Mutual funds had pumped Rs 9062.34 crore into the Indian equity market in the financial year ended March 2007.

Here we discuss how to sell your mutual funds when you need money.

You have saved and invested wisely towards your financial goals. As you move closer to a particular goal, you need money to fund the same and it is imperative that you have chalked out a strategy of withdrawal or payout.

You will have several options to do this and is largely dependent on the financial goal and whether the payouts are onetime or ongoing.

One Time Payments

1. Sell all investments and move the investments in either a Floating Rate Fund or a Fixed Maturity Plan. It is advisable to move your equity funds into a Fixed Maturity Plan or Floating Rate Funds at least 12 months before you are to incur an expense towards a major goal.

(eg. Funding your child's education, making down payment for a property). Now this is not a standard and would depend on various factors like whether the market is overvalued or undervalued, is it in a corrective phase or an upward phase, and the prevailing situation at that point of time.

2. Sell investments in a staggered manner depending on the market situation at that point of time. Suppose you need the payout over a period of 5 years for annual vacations. The amount that you require after 5-6 years (i.e. for the 4th or 5th Annual Vacation) can still be in equity and the amount that you need in the next 3 years can be withdrawn and kept in Floating Rate Funds.

Here it will make more sense to start moving the investments gradually. This would again be based on your risk tolerance and your ability to sleep well during market upswings and downswings.

Ongoing Expenses (Monthly Income)

1. If the goal is monthly income on retirement, then besides pension, part time income and other guaranteed income from bonds, Senior Citizens Schemes, Post Office Savings, PPF Withdrawals and Monthly Income Plans, you should take out a certain portion of your equity investments based on your need on a systematic basis every month and leave the rest of the money invested in more conservative equity options such as Balanced Funds, Large Cap Stocks, Diversified Equity Large Cap Funds, High Dividend Yielding Stocks and Dividend Yield Funds or other hybrid options.

This can be achieved with a Systematic Withdrawal Plan. With a Systematic Withdrawal Plan you can withdraw a prefixed amount every month from your mutual fund investments. This amount can be a fixed amount every month like Rs 10,000 or whatever capital appreciation has happened in that month or quarter. (Generally, capital appreciation options are offered every quarter).

So for example if you invest Rs 15 lakh (Rs 1.5 million) and wish to withdraw around Rs 10,000 per month, you have 2 choices either withdraw a fixed amount of Rs 30,000 (or say Rs X) every quarter or whatever appreciation has happened in a quarter.

The appreciation withdrawal option also acts as an automatic profit booking mechanism. If there is no appreciation in a quarter then there is no payout made to you. However if you compulsorily need a payout every month opt for the fixed option.

The tax implications for both options are different and will be based on whether the payout comes from your principal or from capital appreciation.

If the payout comes from capital appreciation, then the payouts that come in the first 12 months will be subject to Short Term Capital Gains Tax of around 10% whereas the payouts that come from capital appreciation after 12 months are tax free as per current tax laws.

An important decision to be made here is the payout ratio so that there is enough money to meet your needs as well as grow the corpus. If you withdraw a huge amount from your payouts initially and if the returns are not high in the initial period or the market tanks, then your corpus will not last a long time.

If your payout rate is 8% and your investments grow at 9% compounded, then you will never run out of money but if your payout ratio is high at around 15% and if you are earning around 8%, then your money will last only 10 years.

Consider an example of a Systematic Withdrawal Plan:

1. Initial Investment: Rs 15 lakh.
2. Date of Investment: April 1, 2002.
3. Amount of Withdrawal: Rs 10,000 (This person receives a pension and income from Bonds. He needs to supplement this income by another Rs 10,000).
4. Date of First Payout: May 1, 2002.
5. Total Amount Withdrawn till date: Rs 120,000 (per year) * 5 years = Rs 6,00,000.

The table below gives the present value of the investment for different schemes after withdrawal of a fixed amount every month:

Scheme	Amount	Amount	Present Value (Rs)	Yield
	Invested (Rs)	Withdrawn (Rs)		(%)
Reliance Growth (G)	1,500,000	600,000	14,645,832	61.41
Reliance Vision (G)	1,500,000	600,000	12,261,256	56.18
SBI Magnum Contra Fund (G)	1,500,000	600,000	11,233,343	53.83
SBI Magnum Global Fund 94 (G)	1,500,000	600,000	10,601,850	52.20
HDFC Equity Fund (G)	1,500,000	600,000	8,063,147	44.74
HDFC Top 200 (G)	1,500,000	600,000	7,985,792	44.49
DSP ML Opportunities Fund (G)	1,500,000	600,000	8,275,409	45.43
Franklin India Bluechip (G)	1,500,000	600,000	6,728,373	40.06
Franklin India Prima Plus (G)	1,500,000	600,000	7,009,048	41.10

You will not get such returns from investments going forward but even if one were to assume a decent rate of return in line with corporate earnings and GDP growth, you will do well during your golden years.

What if the investment was done in April 2006 before the May Crash?

Even if you had done the lump sum investment in April 2006, and withdrawn Rs 10,000 every month, your current value in these schemes would have been as below:

Scheme	Amount	Amount	Present Value (Rs)	Yield
	Invested (Rs)	Withdrawn (Rs)		(%)
Franklin India Bluechip (G)	1,500,000	120,000	1,627,238	15.74
Franklin India Prima Plus (G)	1,500,000	120,000	1,742,659	23.02
HDFC Equity Fund (G)	1,500,000	120,000	1,646,297	16.95
HDFC Prudence Fund (G)	1,500,000	120,000	1,680,568	19.11
HDFC Top 200 (G)	1,500,000	120,000	1,607,055	14.47
Reliance Growth (G)	1,500,000	120,000	1,659,441	17.83
Reliance Vision (G)	1,500,000	120,000	1,632,983	16.15
SBI Magnum Global Fund 94 (G)	1,500,000	120,000	1,693,975	19.95
SBI Magnum Contra Fund (G)	1,500,000	120,000	1,668,583	18.35

Fund managers scour for small firms with sound business models.

Fund managers are now exploring investments in smaller unlisted companies, betting on their attractive business models and growth potential.

Mutual fund investments in unlisted firms have stayed negligible even though regulations permit them to invest up to 5 per cent of an open-ended equity scheme’s corpus in unlisted equity shares or equity-related instruments. Closed-ended funds are allowed to invest up to 10 per cent of their corpus in such companies.

Industry watchers said after the dotcom bust in 2000, which saw fund houses suffering huge losses owing to a huge exposure to technology companies, fund managers kept off unlisted companies.

“With a large number of closed-ended funds being launched, fund houses can examine investing money in unlisted companies, which have a robust business model. Fund managers could bet on growth potential of these firms, as they have a three-year period to nurture the portfolio,” R Swaminathan, national head (mutual funds) of IDBI Capital, said.

Recently, DSP Merrill Lynch launched a closed-ended equity fund aimed at investing in micro firms, whose market capitalisation was less than Rs 1,500 crore. The fund house expects to raise around Rs 500 crore from the scheme and 65 per cent of it would be invested in small-sized young firms.

About investments in unlisted companies, S Nagnath, president and chief investment officer, said the fund house would consider such investments, as per the regulator’s norms.

Sameet Kamdar of Mata Securities said the industry had matured a lot compared with the dotcom period. “At present, there are around 10-15 funds especially dedicated to small- and mid-caps, which means the industry has enough expertise to judge these small companies, which are attracting much attention from global PE players. So, funds could utilise this limit,” he said.

The country’s oldest and third largest fund house, UTI, with a corpus of Rs 35,517 crore, has invested just 0.07 per cent of its corpus in smaller unlisted pharmaceutical, automobile, media and software firms.

“Investing in unlisted firms is both beneficial and risky. It is risky because unlisted companies impact NAV calculations adversely. However, there are unlisted firms in emerging and existing sectors that offer strong growth opportunities in 1-3 years. Funds can look at such companies selectively at an attractive valuation at a pre-IPO stage,” the fund house said in an emailed reply.

An investment can be considered in Magnum Contra. The fund's strategy of
going against the market has delivered a return of about 9 per cent over the
past year. While its performance beats the category average, it may not
appear as impressive as some of the top ranking funds. There are, however,
few funds that have built a track record of beating the market through
contrarian investing in the manner this fund has. Moreover, such strategies
typically take longer periods to pay off and require investors to take a
long-term view. Magnum Contra has witnessed more volatility over the past
year. During this period, stocks that were not in market favour cane under
further pressure during corrective phases. For those who used systematic
investment plans to build their exposure to the fund, however, the returns
are likely to have been far superior.

Assuming a monthly investment of Rs 1,000 was made beginning end of April
2006, investors would have earned a return of 22 per cent (excluding
interest earned from money in the bank)! The fund's performance also appears
to have picked up pace over the past 6 months.

As heightened volatility is expected to be the norm in the markets
henceforth, investing in phases or through SIPs may be an appropriate
strategy for more conservative investors. Magnum Contra has demonstrated an
ability to compensate investors for risk. Its monthly returns over the past
five years have outpaced that of the BSE 200 two-thirds of the time. We
compare its performance to the BSE 200 as it captures some of the action in
the mid-cap space.

The fund was heavily biased towards mid-caps until 2005, after which it
shifted to large-cap stocks. Since then, it has also toned down its
aggressive exposures to stocks and capped investments in any single stock to
about 5 per cent. Such measures do not appear to have affected performance.

*Portfolio overview*: In terms of sector exposure, Magnum Contra resembles
that of several other diversified funds with engineering stocks figuring in
its top holdings. Most of the funds that figure in the top of the
performance charts now sport a tilt towards energy stocks, which again form
a chunk of its holdings.

However, software stocks, which have propped up the returns of most
diversified funds, are conspicuous in their absence from the portfolio. This
could explain some of its underperformance

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The jury is still out on that, but here is the result of charting the recent trend. Banks may just have beaten mutual funds in attracting investors to their products in recent days and weeks.

The risk-averse investors as well as many who are more bold, have not been able to resist the temptation of near-10 per cent interest rates being offered by banks for short-term fixed deposits after the Reserve Bank of India hiked the repo rate and the cash reserve ratio a fortnight ago in an attempt that has taken liquidity out of the system affecting, especially the real estate sector and the corporates at large by making money very expensive to borrow.

Huge collections have been garnered by banks due to the new trend that has been fuelled by inflation and an economy that is regarded by many as ‘hot’, while an equal number say that raising interest rates by the RBI are the wrong steps as it would hurt a galloping economy, even bring it to a sliding stop.

Nevertheless, statistics show that total MF AUM was Rs 339,051 crore in January 2007, it moved to Rs 353,309 crore in February and in March it was Rs 326,388 crore.

According to an investment planner, he has been advising his clients to get rid of many of their MF holdings and push the money into short-term fixed deposits, especially if the MF scheme is not performing well. He says he is still sitting on the wall and has not really made up his mind about it for the near term. “That will be decided after the RBI’s April 24 meet, where the trend may become more clear and then I will decide what to do with MF schemes.” he said.

Compare the above to the 2006 figures: In January 2006, the total AUM of the MF industry was Rs 207,110 crore, in February of that year it climbed to Rs 216,844 crore and in March it was Rs 231,325. Growth was flowing, month after month, yet in the year 2007, post-February, there is a huge blip.

While analysts indicate that it would be hard for them to say exactly why that happened, but off the record, they did indicate that FDs may be the reason and at the same time indicated a host of other reasons too.

However, they hurried to say that since inflation is falling and expectations from the RBI is not to pull out any more rate hikes in the near future and that means investment in equity via mutual funds will again become an attractive option for the retail investors. In fact, they said, since the retail investor does not have too big an amount to play with, the 9-plus per cent guaranteed interest rates on offer for FDs (10 per cent for senior citizens) would have been attractive. Although, the same should apply to big money wielders too, but the analysts were chary about saying so.