Size does matter, sometimes

All offer documents of fund houses run a mandatory declaration: “Mutual funds are subject to market risk. Read the offer document carefully before investing.” But ‘market risk’ per se is not all that the investor should be worrying about, especially those who are investing in an existing fund.

Experts advise one should look at past performance, choice of stocks and the Sharpe ratio (returns to risk per unit), among others.

Other factors such as liquidity, corpus size, average maturity, turnover rates, low expense ratio, load structure should also be kept in mind before finally zeroing in on a scheme. Schemes with higher liquidity, lower average maturity and low turnover rate are preferred.

It is always advisable to select a scheme with a well-diversified portfolio rather than a concentrated portfolio, as it carries lesser risk. Portfolios can be judged on the basis of a company and sector/ industry concentration.

However, there are a lot of equity diversified funds with large corpuses. The question is – does a large corpus limit the fund manager’s ability to give better returns and, therefore, should an investor look at a fund with say, a corpus of less than Rs 1,000 crore?

Though a large corpus denotes investors’ confidence in the scheme, there is a flip-side to it as well. Experts say a huge corpus may not be easy to manage and a fund manager is likely to run out of investment avenues to deploy cash. For example, sometimes arbitrage funds refuse to take more money because they lack investment opportunities.

“If the corpus size is huge, funds tend to underperform the index, and since such schemes invest in more number of stocks, it becomes difficult for the fund manager to track stocks,” said D Sundarajan, chief executive officer, Trendy Investments.

Fund managers, however, feel that a large corpus may limit the performance of a fund, but only in some cases. Sanjay Sinha, chief executive officer, DBS Chola Asset Management Company, said, “The corpus size should not be a material factor for selecting a scheme. Track record and the portfolio of the scheme are important factors."

In case of a large-cap fund or an index fund, experts say, the corpus size is of little importance because large-cap stocks have more liquidity. For instance, the average daily turnover of Reliance Industries and Infosys has been Rs 961 crore and Rs 312 crore (in the last one month), respectively.

But for mid- or small-cap funds, a very big corpus may create problems for the fund manager. For example, the fund manager of a mid-cap scheme with a corpus size of Rs 250 crore would find it easier to invest this money. But if the corpus shoots up to, say Rs 1,000 crore, the fund manager is likely to get stuck because his mandate is to invest in mid- and small-cap companies. And these stocks are quite illiquid.

For example, the average daily turnover of Torrent Power (mid-cap) and South Indian Bank (small-cap) was Rs 22.27 crore and 6.89 crore in the last one month.

Add to it the strict regulation that the scheme cannot invest more than a certain percentage in a single stock can make things more difficult. Rajat Jain, chief investment officer (equity), Principal Mutual Fund, said, “In the mid-cap space, hardly 3-4 per cent of stocks can give really good returns. And, for those schemes with large corpus, it may become difficult to invest in such space.”

Source: http://www.business-standard.com/india/storypage.php?autono=377626

Sundaram BNP Paribas MF's PSU NFO

Sundaram BNP Paribas Select Thematic Funds PSU Opportunities, an open ended equity scheme, is the first fund by Sundaram BNP Paribas Mutual Fund that will invest in the companies falling under the public sector, which straddle segments as diverse as banking, insurance, oil, power, mining, defense, engineering and transportation infrastructure & services. The scheme seeks to provide a dedicated way to tapping wealth creation in this space.

The fund house is looking to profit from the central position that PSUs have again acquired in India to drive future economic growth. >For the industry as a whole, this is the second such thematic fund after Religare’s PSU Equity Fund. These two funds will actively invest in PSUs, though there are other passively managed funds investing in this segment, but not on an exclusive basis.

The fund would invest at least 65 per cent in equity and equity-related securities of PSU, but looks to hedge some bets by stating that it may invest up to 35 per cent of its assets in stocks other than the targeted theme or even in fixed income/money market instruments. The fund can also invest up to 35 per cent in overseas securities related to the theme. It can also invest in bonds and other fixed income instruments issued by public sector entities.

The fund has been benchmarked to the CNX PSE Index.

Fund Family
Sundaram BNP Paribas AMC was founded in 1996. At present, the total assets under management (AUM) as on October, 2009 is Rs 13,505.82 crore. Out of the total of 39 funds, 12 are open-end equity funds and the total assets in equities, as on October, 2009, stands at Rs 6,874.92 crore.

Fund Managers
47-year-old J. Venkatesan, fund manager-equity, would manage the fund. He holds an M.Com degree and Grad CWA and CAIIB. He has more than 24 years’ experience (13 years at Canara Mutual Fund and 7 years at Canara Bank).

29-year-old S. Bharath has been designated Fund Manager - Overseas Securities. He holds a B.Com, MBA degrees and is an ICWA. He has a total of 7.5 years' experience of which 2.2 years was with Navia Markets Ltd.

Basic Details

Type: Open Ended Equity Scheme

NFO Opens: November 25, 2009

NFO Closes: December 23, 2009

Plan / Options: Dividend and Growth

Minimum Application Amount: Rs 5,000 SIP Investment: Rs 750 (Quarterly) and Rs 250 (Monthly)

Minimum Additional Application/Redemption: Rs 500

Benchmark: CNX PSE Index

Exit Load Structure: One per cent if redeemed within 12 months. Nil if redeemed on or after 12 months

Annual Recurring Expense (maximum): 2.25 per cent (including investment management fee of 1.25 per cent)

Source: http://new.valueresearchonline.com/story/h2_storyView.asp?str=101031

SIP investors beat equity MF peers in returns race

Whoever said volatility is bad for equity investments? Those who invested in mutual funds through the systematic investment plan (SIP) route have benefited the most from fluctuating share prices over the past 2-3 years. While top equity diversified funds have returned 16-18% in three years, SIP investors have earned returns in the range of 25-28% (investing into the same funds) during the same period.

Supposing an investor has invested Rs 1,000 every month (between November 23, 2006 and November 23, 2009), he would have pocketed a 31% return on his Sundaram BNP SMILE Fund, 29% each on ICICI Prudential Discovery Fund and Birla Sunlife Dividend Yield Fund and 28% on his HDFC Equity Fund.

The investor would have made more ‘risk adjusted’ money than investing directly into stocks (Sensex three-year return being 25% on a compounded basis). In all cases, the investor would have made more money than any high networth individual (HNI) who had invested lumpsum into any of the above funds, unless the HNI managed to enter at the lowest level.

“SIP portfolios have yielding better returns because of the deep-market correction in mid-2008. Volatility provides a perfect setting for high-return SIP investments,” said Gopal Agarwal, equities head, Mirae Asset Investment.

According to fund managers, though there will be a slight erosion in net asset value (NAV), a market crash will not have much of an impact on the overall performance of the SIP. In fact, investors get more units for the same amount of money in falling markets. The units bought at lower price-levels will appreciate when the market turns around, adding to the overall portfolio value.

Lumpsum investors can only invest at one level of the market (in this case at 13,680 levels, Sensex as on November 23, 2006). Their investments went through a cycle of dips and surges, but they could not buy fresh units at lower market levels.

“The variance in the performance of SIP and lumpsum investments is mainly due to the fact that SIP investors would have picked up additional units during the downturn. SIPs route is ideal for small investors as it makes market fluctuations work for them,” said Jaya Prakash K, head-products, Franklin Templeton Investments.

Though one cannot make a direct comparison of benefits (between SIP and lumpsum MF investment), SIP is usually considered a sound investment strategy in range-bound as well as volatile markets, as you would not be locking your capital at one go. Performance of SIPs in the short term, however, depends on the extent of liquidity in the market, liquid cash position (non-invested part of the fund) and portfolio composition.

“Lumpsum investments (in MFs) look good in a constantly rising market; SIPs are better in falling and volatile markets,” said Anand Shah, head-equities, Canara Robeco Asset Management.

“Over a longer term (10 years and more), both investment styles yield decent return pattern for investors. For instance, if you had made two investments at the peak level and at the trough level in a given month, the difference in return at the end of 10 years would be hardly 1%,” Mr Shah added.

It is in this context that wealth managers are asking affluent investors to adopt value averaging strategies while making lumpsum investments. In value averaging investment (VAI), the investor sets a target growth rate or amount for his portfolio each month, and then adjusts the next month’s contribution according to the relative gain or shortfall made on the original asset base.

Though VAI has no historical references, returns (asset growth) could well be very close (or a bit high) to those offered by investments through SIPs, say experts.

Source: http://economictimes.indiatimes.com/articleshow/5265557.cms?flstry=1