The right equity mutual fund

The process of selecting mutual funds has been skewed towards evaluating the historical performance of the scheme, assuming that past performance will be replicated in future results. This is a common approach among investors when it comes to making investments.

This approach does not hold good in the current environment given the multitude of inter-linked global and domestic factors influencing stock performance. The first step for any investor is to decide on the objective of the investment in terms of returns expected and the time at hand. Once this is determined, one needs to gauge the risk taking appetite since investments in stock markets and therefore equity funds may go through ups and downs in the short term. Having worked out one’s own investment goals, choosing a scheme becomes a relatively easy task. Here are some parameters that can help you decide on your mutual fund investment in a more scientific manner:

Investment Objective

Like your own investment objective, every fund has an investment mandate or boundaries within which the fund manager can create his portfolio. One needs to ensure that the two objectives are aligned. Suppose one is not comfortable with having a volatile portfolio from the returns objective. It will then be prudent to avoid a small-cap fund that tends to be volatile in the short to medium term.

Portfolio composition

There is also a need to consider one's current portfolio to ensure that it is well-diversified to shield from any downfall if the underlying sector/ category (that the fund is invested in) were to undergo a correction suddenly. As such, if your portfolio is skewed towards thematic or sector funds such as IT, pharmaceuticals etc. one should consider adding diversified funds.

Risk-adjusted returns

Historical data gives an indication of the fund manager’s ability to deliver additional risk-adjusted returns compared to the benchmark. This indicates risk taken to generate extra return. When you align this parameter with your risk taking ability, it gives you a clear idea whether or not to pursue such investments.

Track record

When it comes to new funds on offer, one cannot analyse the past performance of the scheme. In such instances, you should look at the performance of other funds managed by the asset manager to get a sense of his/her credentials. Even in case of an existing fund, it pays to follow this approach to avoid performance aberrations wherein only a single scheme is doing well in the recent past, thereby reducing the probability of consistent performance.

Fund Corpus

Most investors focus on large corpus funds and think that the large size is an advantage. This is not always the case, and large funds may sometimes be a disadvantage. Consider this example: a large sized mid-cap fund would find it difficult to sell a stock of a small company since there may not be enough liquidity in the market. Similarly, such a fund placing an order for a mid-size stock with limited liquidity will find it difficult as compared to a relatively smaller size fund.

Fund Ratings

Among the recent developments in mutual fund evaluation is the availability of comprehensive fund performance ratings wherein reputed agencies (domestic and international) conduct a comprehensive performance analysis of funds on critical parameters like risk adjusted returns, portfolio composition, asset concentration, liquidity etc. The agency then assigns a specific rating (e.g. 5 star for high performing funds to 1 for poor performing funds). One can look at ratings conducted by agencies like CRISIL, Value Research, Morningstar, Lipper, ICRA.

Source: http://www.indianexpress.com/news/the-right-equity-mutual-fund/815593/0

Real estate PE funds not for retail investors

If you had invested in one of builder projects in Greater Noida that are in a jeopardy after the Supreme Court judgement establishing the farmers’ rights on the disputed land, your entire money may be at risk. Real estate funds are vehicles that give you exposure to the sector without the risk of one property going bad.

In the absence of real estate investment trusts (Reits) or real estate mutual funds (REMF), what we have in this space is privately sold products, known as real estate private equity (PE) funds, that are not listed on any exchange.

But in the absence of a physical property, will you be comfortable investing in these? While the price of your property may increase the next year itself, investments in a private equity fund may not give any returns in the first two years. And that’s why these are not meant for everybody. These are meant for high networth individuals (HNIs) who want to enter the real estate market but are not willing to go through the regular buying-selling process.

We tell you what these funds are and given the absence of data and regulation in the sector, whether it makes sense to invest in them.

What are these

To start with, let’s differentiate these funds with Reits and REMFs. Reits, a popular form of investment in developed markets, are listed on stock exchanges and are governed by transparent norms. REMFs, on the other hand, own commercial properties and make gains by renting our or selling their holdings; they work like mutual funds and share profits with investors. Both are not available in India at present.

Real estate PE funds are different. These funds invest in real estate projects by tying up with the developer, wherein the developer sells a portion of the project to the fund. Some funds tie up with companies also.

Most funds operating in India have a lock-in period of three to seven years. At the end of this period, the fund exits the holding by selling it in the secondary market. If the investment is in a commercial property, the fund may rent it out within the lock-in period and exit later.

Most funds invest in residential projects and those commercial projects that are nearing completion. While residential projects move faster in the market, there is a rental yield attached to commercial projects. Says Sanjeev Dasgupta, president (real estate), ICICI Venture Funds Management Co. Ltd, “Because of the improved demand for housing and low capital requirement, these funds are now focusing on residential and income-generating commercial projects.” A few funds invest in projects that are still in the initial stages of construction, based on saleability and track record.

Options in the market: There are enough options available. According to data from VCCEdge, the financial research platform of VCCircle, the Indian market has 44 domestic real estate PE funds in total having a collective size of $11,226.8 million (Rs. 49,813 crore). Since June 2010, these funds have invested around $717.95 million across the country.

Recently, ICICI Venture Funds Management Co. Ltd, a subsidiary of the ICICI Group, announced that it will raise up to Rs. 1,000 crore to launch its second real estate focused fund in the country.

Whom they are meant for

As mentioned earlier, these are primarily meant for HNIs. Though the ticket size has come down a bit, it’s still not for the retail investor. You should have at least Rs. 10 lakh to enter this product.

“Buoyed by high returns for earlier exits in the past, fund houses have started offering smaller minimum capital limit for retail investors and not just HNIs,” says Ujwala Rao, head (West India capital markets), Jones Lang LaSalle India (JLL India), a property consultant firm. For example, the minimum investment in a new fund managed by Milestone Capital Advisors Pvt. Ltd is Rs. 10 lakh. The fund house has invested in projects in Mumbai, Chennai and Noida, among others.

The returns

It is difficult to put a clear number on the returns since real estate PE funds are non-transparent. There is no data to fall back on and returns are not guaranteed.

Says Sanjeev Dasgupta, president (real estate), ICICI Venture Funds Management Co. Ltd, “Regular returns from an early stage and lower downside risk has enabled yield-based funds (real estate PE funds) to generate interest among HNIs. Most funds promise a return between 23% and 25%.”

At the time of investing, the manager will give you an estimated return figure, but that may not be exactly what you get at the end of the lock-in.

The costs

In the absence of clear regulation, there is no fixed fee that all funds charge. Usually, there is a one-time entry fee of 2% of the investment amount. “In some funds there is an entry fee or the set-up fee. For some others there are no such charges. However, there is an annual maintenance fee of 2%. In rare cases this is slightly higher than 2%,” says Rao. For example, the entry fee for the fund from Milestone Capital is around 2.5% of the total investment. But some funds give certain discounts depending on the investment size. In some large-ticket deals of at least Rs. 1 crore, the fund house may waive off the set-up fee or reduce the annual charges.

Then there is a performance fee that you have to pay by sharing your profit with the manager; this is usually a predetermined number. This is linked to the fund’s hurdle rate, which is usually 10-12%. Only if your money gives a return higher than the hurdle rate, the manager would share the profit.

The performance

In the recent past, some domestic funds have given annualized returns of 20-25%, according to JLL India. According to data available with them, Kotak Realty Fund and Indiareit Fund have exited some of the projects. Exit would mean the fund made gains; these gains get transferred to the investor. Currently, Indiareit has four funds in the country and Kotak has three.

HDFC Property Ventures, the real estate fund of India’s largest mortgage finance company, has also started exiting a part of its investment portfolio, says JLL India. South-based real estate firm Nitesh Estates has bought back the fund’s stake in a retail project in Bangalore. “Compared with international (real estate PE) funds that are operating in India, domestic funds have done well because they were not bound by the rule meant for foreign direct investment (FDI). So they had the advantage of investing in projects of different scales with different completion time,” says Rao. Those bound with FDI policy cannot invest in projects that have area less than 50,000 sq. ft and also need an Indian partner.

The risks

Though domestic real estate PE funds in India are registered with the Securities and Exchange Board of India, there is no clear regulation on the disclosures. So the manager may promise you return but can’t make a commitment. “Because of the absence of any definition on the operation of the real estate fund and its structure in India most do not commit or guarantee any fixed returns. Some may give you a lump sum at the end of your lock-in-period; some others may give you annualized return,” says Om Chaudhary, chief executive officer, FIRE Capital Fund Pvt. Ltd, an India-focused real estate fund.

Then there aren’t any regular returns as such. Until the fund sells its holdings, there is no gain to be passed on. “You will generally not get any return in the first year of the investment because it takes two-three years to complete a real estate project,” says Chaudhary.

While you can sell your property next year, selling your share of investment in a fund may not be that easy. “You can only sell your papers in the secondary market to another person,” says a sales head of a well-known real estate fund on condition of anonymity. The firm closed its first fund in 2009.

Source: http://www.livemint.com/2011/07/11211300/Real-estate-PE-funds-not-for-r.html?h=B