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Single investor funds can destabilise unitholders

Aabhas Pandya

You gloss over the Asset Management Company, portfolio, fund manager, expenses, etc while investing in a fund, right? Now, ponder over another crucial point- the number of investors in your chosen fund.

It's a concentration of a different kind. For the first time, asset management companies have disclosed the number of investors, who hold over 25 per cent of a fund's assets. Thus, big collection in a fund may not necessarily mean a large investor base.

The disclosure is particularly startling where a few investors hold a large chunk of assets in an equity or bond fund. The good: There is only a handful of such funds. The bad: Concentrated investments could be dangerous since redemption by a single big-ticket investor may destabilise the fund, especially in a bearish market.

Take for instance, the diversified equity fund from IL&FS Asset Management. A single investor holds a whopping 59 per cent in IL&FS Growth & Value Fund on March 31, 2001. In other words, the unit holder owns Rs 49 crore in the Rs 82 crore fund.

Or, consider Zurich India Taxsaver from Zurich AMC. Here, a couple of unitholders own 65 per cent or Rs 24.3 crore. While a tax saver provides tax break of only up to Rs 2,000 on an investment of Rs 10,000, these investors seem to have invested here to earn the 200 per cent tax-free dividend in April last year. However, the money is likely to move out after the three-year lock-in is over.

Ditto is the case for Prudential-ICICI Tax Plan, where a single investor owns 80 per cent or Rs 55 crore of the portfolio. The fund had also paid a 60 per cent dividend last year.

On the other hand, there are a few funds, which were always believed to have an institutional base. In the case of JM Basic, the petrochemical fund from JM Mutual Fund, two investors still have a 76 per cent share in the Rs 15 crore fund. This is even after the fund dramatically shrunk in size from Rs 675 crore in February this year to current levels after other high net worth investors decided to redeem.

Then, there are funds managed as portfolio management schemes. A sole investor entirely owns the Rs 338 crore Magnum growth Fund from SBI Mutual Fund! For IDBI Principal tracking NSE-50, a single investor has 97 per cent of the of the fund's assets of Rs 215 crore.

There are also a few AMCs, where liquid, serial and gilt funds have concentrated investments. However, these funds are highly liquid and meant for short-term investments.

For example, Dundee Liquidity Fund (366 day sub plan) has just one investor. Or, a single investor owns 44 per cent of DSP Merrill Lynch Liquidity Fund while in IDBI Principal Money Market Fund; a single investor has a 96 per cent share in the total asset base.

While liquid and gilt funds are unlikely to be impacted by sudden large redemption, it is equity and bond schemes where the real danger lies. If one of the big investors were to redeem in Tata Income Fund, it is bound to impact other investors in the fund. Distress selling in an illiquid debt market means selling at throwaway prices and pulling down net asset value. The story will be no different if equity funds were to resort to desperate selling in a falling market.

However, most fund sources say that investors with concentrated investments are here to stay. "We also have an informal understanding that they would communicate to us in case they plan to pull out,'' says the Delhi-head of a mutual fund. "This helps us to liquidate our holdings and plan for redemption accordingly,'' he adds. Yet, such arrangements may not always click and the fund would have no option but to offload in bulk in the event of unexpected redemption.

Sure, investors would be better off by staying away from funds, whose fate is linked to a couple of unitholders. For if big investors pull out, you will be left holding only a junk portfolio and a depleted NAV in your dream fund!

The Concentrated Family
Funds	No of Unit holders	Size (in Rs Cr)*	% of Assets held	in Rs crore
IL&FS Growth and Value	1	82.42	59.15	48.75
PNB Balanced	1	0.93	88.00	0.82
IDBI PRINCIPAL Growth Fund - Div	1	21.85	72.21	15.78
IDBI PRINCIPAL Index Fund	1	215.17	96.80	208.28
Franklin India Index Tax Fund	1	1.30	67.40	0.88
Libra Leap	1	15.36	32.50	4.99
Magnum Growth	1	338.17	100.00	338.17
Magnum Monthly Income Plan - Annual	1	7.36	71.12	5.23
Pru ICICI Tax Plan	1	55.13	80.07	44.14
IDBI PRINCIPAL Deposit Bond - Growth	1	13.28	39.83	5.29
Zurich India Taxsaver	2	37.42	65.00	24.32
PNB Debt	2	32.00	60.20	19.26
IDBI PRINCIPAL Balanced Fund - Div	2	31.18	80.00	24.94
JM Basic	2	14.97	76.21	11.41
Tata Income Fund (Regular)	2	258.82	54.24	140.38
Libra Tax Shield	3	3.44	87.20	3.00
* As on March 31, 2001

Source: Value Research

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