Mid-cap funds come with tough choices

If you want to buy mid-cap funds, keep these points in mind

Investors are exposed to a lot of discussion about small- and mid-cap mutual fund (MF) schemes. They are advised to invest in mid-cap schemes as they think small- and mid-sized companies tend to be under-researched. Mid-cap schemes present an opportunity to invest in companies that are yet to be identified by the market and such companies offer higher growth potential. If the mid-cap schemes do their job properly, you would benefit from higher returns. Valuation of such small- and mid-sized companies also tends to be lower which compounds the future returns. Mid-cap companies have the potential to join the league of large-cap companies and, as the market ‘discovers’ that, they fetch higher valuation. Such companies are supposed to be nimble, flexible and can adapt faster to changes.

Mid-cap stocks and small-cap stocks rise the fastest when the economy is in a growth mode. They are the blue-chips of tomorrow. That has made mid-cap stocks the darlings of the Indian bull market. However, they are volatile. They fall as quickly as they rise and, therefore, wrong timing can decimate your returns. Wrong timing can happen because you have chosen to buy mid-cap schemes before a crash or the funds have chosen to buy mid-cap stocks as they are about to face a difficult period. Morgan Stanley launched its first Indian MF scheme in 1994 which carried a lot of small- and mid-cap stocks. The scheme suffered severe value erosion of 35% over the next seven years.

Mid-cap schemes are also supposed to be a good option for investors who want to add some diversity to their portfolio. We disagree. There are several reasons why Moneylife prefers equity diversified schemes to small- and mid-cap schemes.

No Long-term Record: Firstly, mid- and small-cap schemes have no long-term track record. Mid-cap schemes have a past of less than 10 years. The first such scheme was Sundaram Select Mid-cap, launched in mid-2002. Apart from Sundaram, one more scheme was launched in 2002—Birla Sun Life Mid-cap Fund—which gave returns of 31% since inception. And, of the five funds that came in 2004, the best performer was UTI Mid-cap that has given a return of 18% since launch. It outperformed its benchmark, BSE Small Cap, for the same period by 24%.

Timing: If you were not one of the early buyers of mid-cap schemes, you have missed the mid-cap rally. The bulk of them came in the 2005-08 period, following a once-in-a-lifetime rally. Of the total 33 schemes that exist now, 23 came in this period (see chart Herd Instinct). The average return from these 23 funds is 10%; only 13 schemes gave above-average returns. Of these, the best performers were Principal Emerging Bluechip, launched in November 2008 (timed wonderfully with a market bottom), which has given a return of 46% since inception and Religare Mid N Small Cap, launched in March 2008 (timed badly), which has still given a superb return of 13% since inception.

Unclear Strategy: Many mid-cap schemes don’t buy just mid-cap stocks and stray from their objective. There are many examples of mid-cap schemes that have ended up investing in large-cap stocks. For example, Axis Mid-cap Fund has invested in Infosys and Petronet LNG; Birla Sun Life Mid-cap Fund has invested in stocks like GlaxoSmithKline Consumer, Cadila Healthcare and Cummins India; and BNP Paribas Mid-cap Fund has NTPC, Lupin and UltraTech Cement in its portfolio. Clearly, MFs are quick to stray from the investment objective when it suits them.

No Better: Have the best mid-cap schemes done significantly better than equity diversified schemes? We compared the performance of the mid-cap schemes with equity diversified schemes since 2002 when the first mid-cap scheme was launched. The top five equity diversified schemes have given the same returns as Sundaram and Birla Sun Life Mid-cap schemes, that is, between 30% and 36%. The top five equity diversified schemes giving a return in this range include Reliance Growth, HDFC Equity, Reliance Vision, DSP BlackRock Opportunities and HDFC Growth. The average return of these schemes from 2002-2011 is 32%. So why go for mid-cap schemes?

When you are getting the same returns with a diversified portfolio, why should you take the risk of investing in a mid-cap scheme which brings added risk? In other words, an equity diversified scheme allows an investor to diversify into several stocks and sectors for a nominal investment. This diversification allows investors to reduce the risk of one particular stock or sector, as well as has more potential for higher reward by offering a broader exposure to various stocks and sectors.

The key rationale for diversification is: “…so that a failure in or an economic slump affecting one of them will not be disastrous.” In other words, don’t put all your eggs in one basket. Secondly, equity diversified schemes are the oldest ones; so they have a reasonable track record to compare the performance before investing.

If you are hell-bent on buying a small- or mid-cap scheme, go for the ones which have a reasonable past record and have seen some major market swings at least. Both Sundaram and Birla Sun Life Mid-cap schemes have proven themselves well over different market cycles. Also remember, although not comparable with 1994, the economy faces a lot of headwinds now. So, any investment, even in these excellent schemes, must be through a systematic plan and not a lump-sum investment.

Source: http://www.moneylife.in/article/mid-cap-funds-come-with-tough-choices/19834.html

Dump old Ulips if charges, returns are not similar to mutual fund's

Ulips issued after September 1, 2010, are far more consumer-friendly than the older ones in terms of the overall charge structure and the limits up to which charges can be front-loaded. While the debate on whether it is a good idea to combine your insurance and investment needs continues, not much has been written on whether consumers who bought Ulips prior to September 1, 2010, should continue with the policies or stop paying premium on them or even surrender them.

Conventional wisdom is that if you have had the Ulip for three or more years, then you have already incurred the high upfront charges that were prevalent with the older Ulips. Therefore, it makes sense to continue with the plan since the charges in future will be reasonable.

Of course, the base assumption is that the returns on the funds will be equivalent to a comparable mutual fund, but the overall charge structure going forward will be lower than that of a mutual fund. Hence, as an investment option, it will make a lot of sense. This conventional wisdom, however, can be challenged on the following grounds:

Firstly, in case of Ulips issued prior to September 1, 2010, (when Insurance Regulatory and Development Authority, or Irda, first brought in the restrictions on the overall charges), there are quite a few Ulips whose continue are stiff even 4-5 years after the policy being issued. Now, that is not true in all the cases, but you should check your policy documents for details about the charges. A dead giveaway is if the fund management charges are in excess of 2% (for equity fund options) and the plan continues to have policy allocation charges and policy administration charges. This makes it relatively unattractive as an investment option, more so since the mutual fund industry has been required to drop fund management charges to around 1.75% to 2 % due to Securities and Exchange Board of India, or Sebi, regulations. Thus, the assumption that in future the charges on old Ulips will be lower than a comparable mutual fund may not necessarily hold true in the case of old Ulips.

Secondly, even the base assumption that the Ulip fund will earn a return comparable to an equivalent mutual fund may not be true in all the cases. So, you should check the returns for a three-year or a five-year period for the Ulip fund and compare it with how the benchmark index has returned over the same period as well as some of the top performing mutual funds in that category. Now, while a number of websites are available to check the returns of a specific mutual fund scheme (sites such valueresearchonline, moneycontrol and mutualfundsindia, etc) only a few websites, such as moneycontrol.com, provide details about the returns of Ulip schemes. Now, point-to-point 3- or 5-year return is not exactly the best way to check the relative performance of any fund scheme (whether Ulip or mutual fund), but if such return for any Ulip plan is starkly lower than its benchmark or the top-performing comparable mutual fund scheme, then clearly it cannot be a great long-term investment option.

Lastly for type II Ulips (where death benefit is the fund value plus the sum insured, and therefore mortality charges are payable for the entire duration of the policy) and type I Ulips (where death benefit is the higher of the sum insured or fund value) that have a large component of insurance (meaning that despite the build-up of funds over the last few years, there would still be mortality charges being deducted on account of the sum insured), the mortality charges would be quite high since these would have been fixed quite a few years ago and completely ignore the substantial drop in mortality charges in the past few years. In fact, quite a few Ulips ignore this drop in mortality charges for new plans also since mortality charges are not covered by the Irda guidelines.

In short, it may not pay to follow conventional wisdom as far as your old Ulips are concerned. Check the current charges to be sure that they are in line with a comparable mutual fund. Check their returns over the last three or five years in relation to the benchmark as well as a comparable mutual fund and also check on the mortality charges should it still be a relevant factor for your policy. If the policy is unfavorable on any parameter, it might be a good idea for you to surrender the policy after it acquires a surrender value at a reasonable surrender cost. Of course, make sure you have adequate term insurance before you surrender any insurance plan. If this sounds like too much work for you to do, just consult a financial planning professional firm to review all your existing insurance policies for you. The fee you pay for such advice will more than pay for itself in terms of the enhanced investment returns and appropriate insurance coverage.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/compare/dump-old-ulips-if-charges-returns-are-not-similar-to-mutual-funds/articleshow/10060510.cms?curpg=2

Global mutual funds put up a mixed show

Global mutual funds offered to Indian investors are touted as a tool to spread the risk of investment and to benefit from any upturn the global markets may witness when the Indian equity markets may be down. The great attraction of global funds is that they offer an opportunity to own, albeit indirectly through the MFs, great shares such as GE, Microsoft, JP Morgan, Wal-Mart etc., to name just a few.

With many of the global funds in India being commodity-related, particularly investing in gold and gold mining companies, the dream of owning international blue chips is not served by all. Except a few global funds now in India, others suffer from a very low corpus despite the fact that they have been in existence for a while now. Another factor to be borne in mind is that some of the most formidable players in the MF space – HDFC MF and Reliance MF – have stayed away from this product.

Of the 28 global funds, only three (as per Value Research data) have offered returns over one year period that are in double digits. While 10 others have shown sub-10 per cent returns over one year, 11 have offered negative returns during this period. Data relating to four other schemes were not available for the minimum one-year period since they have not completed one year since launch.

According to the data available with Value Research, the best returns offered by international funds over a three year (as on Sept 15) period was by AIG World Gold that gave a return of 33.83 per cent followed by DSPBR World Gold Regular that gave a yield of 28.85 per cent. The rest of the eight international funds that figured among the top 10 funds gave returns ranging from -0.48 per cent (HSBC Emerging Markets) to 9.47 per cent (by Franklin Asian Equity), by no means an impressive show.

But none of the Indian mutual funds figuring among the top 10 funds for a three-year period ending on Sept 16 (as per MutualFundsIndia.com, an ICRA affiliate, data) gave a return that was less than 20 per cent. The topper was the IDFC Small & Midcap Equity Fund (Growth) that has given a return of 28.11 per cent and DSPBR Micro Cap Fund-Regular (G) that was at the bottom (10th place) has given a return of 21.23 per cent.

Indian gold etfs

Even the Indian Gold ETFs (open ended) have given stellar returns over a one year and three year period to beat their international counterparts. But the best return by a global gold-related fund over a one year period was by AIG World Gold with a yield of 19.12 per cent (as on Sept 15) and the next best was DSPBR World Gold Regular that offered a yield of 16.33 per cent (as on Sept 16, as per Value Research). In fact it was the global gold funds and not global equity funds that are among the toppers among global funds during this period! This is reflected in the performance of diversified Indian equity funds over one year as well with most of them in the red, confirming the volatility the markets have been witnessing for a year now.

Apart from the performance of the funds, other issues that investors should remember are the high expense ratio and the currency exchange rate risk. According to Value Research, of the 28 global funds open to Indian investors, 7 funds have an expense ratio of the maximum of 2.5 per cent and two others miss it by a fraction.

Expense ratio is what investors pay a fund in percentage terms every year for management of their investment including management fees, agent commission, fees to registrars and marketing expenses. This has a significant bearing when the fund size is large and the net return is impacted by the fee levied.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article2468169.ece

Tata MF Launches Tata SIP Fund Series 3

Tata Mutual Fund has launched a new fund named as Tata SIP Fund Series 3, a 36 month close ended hybrid scheme. It is based on the well-known and widely understood Systematic Investment Plan concept with a convenient difference in the method of investing. The New Fund Offer (NFO) price for the scheme is Rs. 10 per unit. The new issue will be open for subscription from 20 September and will close on 30 September 2011.

Regular SIP plans normally offer investors the facility of postdated cheques or auto debit at time of investment. The Tata SIP Fund on the contrary, invites a lump sum subscription amount during the NFO which will initially be invested in debt and money market instruments. These funds will then be systematically transferred to equities over the close-ended period of 36 months.

Generally Systematic Investment Plans involve writing a number of cheques / payment instructions, storage of multiple account statements, accounting / recording of multiple transactions, computation of tax liability in respect of each installment etc. All these may cause administrative inconvenience to the investors. In Tata SIP Fund, an investor will be making a onetime investment in the fund. This will help investors to reduce the administrative inconvenience.

At the end of the 36 months, investors in the fund have the option of switching to Tata Pure Equity Fund.

Tata SIP Fund is suitable for those who do not wish to invest in equities in one go and for those who wish to cushion themselves against market volatility.

The Primary Investment Objective of the Scheme is to achieve a long term growth. The scheme seeks to achieve investment objective by investing systematically in the Equity /Equity related instruments.

Asset Allocation Pattern: In the first year, the scheme would allocate upto 35% of assets in equity and equity related instruments with high risk profile. On the other side it would allocate 65% to 100% of assets in debt, money market and securitized debt instruments with low to medium risk profile.

In the second year, the scheme would allocate 30% to 70% of assets in equity and equity related instruments with high risk profile. On the other side it would allocate 30% to 70% of assets in debt, money market and securitized debt instruments with low to medium risk profile.

In the third year, the scheme would allocate 65% to 100% of assets in equity and equity related instruments with high risk profile. On the other side it would allocate upto 35% of assets in debt, money market and securitized debt instruments with low to medium risk profile.

The scheme offers growth and dividend option.

The minimum application amount is Rs. 5000 and in multiples of Rs. 1 thereafter.

The fund seeks to collect a minimum subscription (minimum target) amount of Rs. 1 crore under the scheme during the NFO period.

Entry and exit load charge for the scheme will be nil.

The benchmark for the schemes would be taken as the combined value of Crisil Liquid Fund Index and BSE Sensex based on the proportionate weightage of equity and debt in scheme's portfolio

Bhupinder Sethi and Mr. Murthy Nagarajan will be the Fund Managers for the scheme.

Source: http://www.indiainfoline.com/Markets/News/Tata-MF-Launches-Tata-SIP-Fund-Series-3/3941609133