The Securities and Exchange Board of India Chairman U K
Sinha’s concerns about consistent underperformers in the mutual fund industry
should encourage investors to relook at their portfolios.
Sinha’s views have already found some takers. “If a fund is under-performing
for five years, then the simple option is to exit it. The minimum expectation
is that a fund would beat the benchmark,” says Surajit Mishra, executive
vice-president and national head (mutual funds), Bajaj Capital.
But there is a problem. With the Bombay Stock Exchange
Sensitive Index, or Sensex being range-bound in the last three years, it would
be difficult for investors to decide whether to exit at a loss or not. And
should they wait for a non-performer for five years? Since August 2011, the
Sensex has been between 15,000 and 18,000 points. Also, since 2009, the index
has moved between 15,000 and 21,000.
The bigger problem is that some of the outperformers during
the boom period of 2006-2008, for instance many JM Mutual Fund schemes, are
among the worst performers in the past three years. JM Mutual Fund’s JM Core
11, JM Equity, JM Multistrategy, JM Tax Gain, L&T Infrastructure, LIC
Nomura MF Equity and Sahara REAL are some schemes which have consistently given
lower returns than their respective benchmarks.
Some of these schemes give high returns, doubling or
trebling, during boom times, which make up for investors’ losses in the lean
period.
The call, as a result, is a tough one. First, investors have
to cross the psychological barrier of booking losses. Most refuse to exit
mutual funds or investment-oriented insurance plans because they want to, at
least, get back the principal amount.
However, before entering any scheme, investors need to look
at the scheme’s performance, ideally over five to seven years because it will
give an idea on how the scheme has performed in bull as well as bear cycles.
Then, the assets under management (AUM) are another good
indicator, especially for risk-averse investors. For one, a bigger AUM
indicates the scheme has been attracting funds.
Finally, look at the current performance, in terms of net
asset value (NAV) of the scheme and compare it with peers and the benchmark
index. If there has been a sharp change in strategy, one needs to enquire with
the distributor or fund house if the fund manager has quit or the fund house
has changed its strategy.
For instance, Franklin Templeton Equity Income, which
manages Rs 1,000 crore, was launched in 2006. The scheme's one-year returns are
-4.34 per cent, almost in line with its benchmark BSE 200’s fall of 4.40 per
cent (June 22), according to data from Value Research. However, the scheme has
returned seven per cent per annum in five years whereas the benchmark index has
returned 17.42 per cent. But over the same period, it is better than category
average of 5.55 per cent. Since launch, it has returned 11 per cent.
In other words, while over time, it has not beaten the
benchmark, it is more or less in line as far as recent performance goes. Taking
a call on such funds is quite difficult unless one speaks to the
distributor/fund house for changes that could have taken place.
If you are already invested, look at the NAV of the scheme
and see how much it has fallen below their initial investment. If the NAV is
close to the invested amount then it might make sense to wait for a while
before exiting. But if the NAV is very low compared to the investment, they
could book losses.“If the money loss is beyond the comfort level of the
investor and if the fund is not in the best performing category then investors
should exit,” says Mishra.
“In case 50 per cent of a fund's schemes are
under-performing, then investors can look at exiting from these schemes and
moving to other schemes of the same fund house,” suggests Suresh Sadagopan, a
certified financial planner. He argues that at a given point in time, it is
possible that some schemes are under performing even for the best performing
AMCs. It is suggested that investors go through their portfolios once a
quarter.
Most importantly, if you are looking at safety and do not
want to consistently compare you scheme’s performance with peers and benchmark,
choose index funds. This will help keep the returns in line with broader
indices, plus or minus five per cent.
Source: http://www.business-standard.com/india/news/exit-consistent-underperformers/478486/
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