In a falling market, shouldn't it be the fund manager who is caught wrong-footed instead of the investment advisor? The fund manager maybe, but the investment advisor certainly not.
After all, the fund manager is only doing his job by managing your money, it's hardly his fault if the stock market crashes. But the investment advisor isn't doing his job if he is promoting fairly tales of 'Sensex 15,000 points by Diwali' and advising you to make lump sum investments when markets are at all time highs.
This was one of the rougher weeks for equity markets. The BSE Sensex plummeted by 6.14% to close at 9,810 points, while the S&P CNX Nifty ended the week at 2,866 points (down by 7.28%). The CNX Midcap collapsed by 12.51% to close at 3,727 points. If the markets had not posted record gains on the last day of the week, the numbers would have looked even more dismal.
The role of investment advisors in the misfortune that has visited the investing community is well-documented. To begin with, the investment advisor has single handedly manipulated the Asset Management Companies (AMCs) into launching mutual fund schemes that suit him, as opposed to the investor.
The investor advisor is the sole reason why you have unimaginative NFOs (New Fund Offers) being launched by AMCs. He is also the sole reason why you only have close-ended fund NFOs being promoted today, because SEBI (Securities and Exchange Board of India) has clamped down on the obscene commissions that were pocketed by large investment agents/advisors like banks, for instance.
So now, no more open-ended NFOs; not one long-term, open-ended NFO has been launched since the SEBI directive on commissions a couple of months ago. Instead you have a host of lacklustre close-ended NFOs that are low on innovation, but high on promises of 'maximising growth and minimising risk'.
We have nothing against close-ended funds, in fact we exhort our risk-taking clients to look at equity funds with the same patience as a 3-year fixed deposit. But launching close-ended funds just to pay mutual fund agents 4%-5% commission because you can't do that in an open-ended fund is not done.
One rather 'strange' NFO -- Tata Equity Management Fund was covered by the Personalfn Research Team this week and expectedly we were not enthused by the quality of the offering. This is probably the first time we have come across an 18-month close-ended equity fund.
Don't be surprised if the AMC launched an 18-month close-ended equity fund because the investment advisor/agent had a problem making a pitch for a 3/5 year close-ended fund to the investor. At Personalfn, we may recommend MIPs (monthly income plans) with an 18-month horizon, but never equity funds.
Another odd feature of the NFO is the lure of using derivatives (futures and options) actively to maximise returns and minimise risk. While using derivatives for hedging the portfolio and minimising risk gets our thumbs up, using it to make speculative calls (which could lead to losses if the fund manager is caught wrong-footed) to maximise gains is not the best way to build investor wealth.
Derivatives are a double-edged sword and we have our reasons when we say -- derivates are not for you.
Equity Funds: Biggest Losers
| Diversified Equity Funds | NAV (Rs) | 1-Wk | 1-month | 6-month | 1-year | SD | SR |
| UTI THEMATIC MID CAP | 18.24 | -15.20% | -31.14% | -6.80% | 25.02% | 9.15% | 0.32% |
| STANCHART PREMIER EQUITY | 9.24 | -15.15% | -32.90% | -5.42% | - | 15.04% | -0.03% |
| DISCOVERY STOCK | 10.86 | -15.02% | -35.09% | -22.15% | -1.18% | 11.30% | 0.26% |
| HSBC MIDCAP | 13.90 | -14.49% | -31.01% | -5.99% | 30.94% | 12.57% | 0.16% |
| KOTAK MID-CAP | 14.67 | -14.22% | -30.10% | -1.50% | 32.71% | 11.00% | 0.20% |
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)
Given the 12.51% fall in the mid cap segment it is not surprising to find mid cap funds emerging as the biggest losers. UTI Thematic Mid Cap (-15.20%) and Stanchart Premier Equity (-15.15%) caused maximum grief to investors. The other three losers were also from the mid cap fund segment.
Leading Debt Funds
| Debt Funds | NAV (Rs) | 1-Wk | 1-month | 6-month | 1-year | SD | SR |
| PRUICICI FLEXIBLE INC. |
12.94 | 0.14% | 0.60% | 2.24% | 5.00% | 0.52% | -0.61% |
| ABN AMRO FLEXI DEBT | 10.77 | 0.13% | 0.56% | 2.89% | 5.21% | 0.35% | -0.54% |
| PRUICICI LONGTERM | 14.78 | 0.13% | 0.61% | 2.63% | 5.45% | 0.64% | 0.30% |
| KOTAK FLEXI DEBT | 10.97 | 0.13% | 0.57% | 3.20% | 6.19% | 0.06% | -0.81% |
| KOTAK BOND | 18.54 | 0.12% | 0.36% | 1.86% | 4.09% | 0.49% | -0.44% |
Bond yields and prices are inversely related. Falling yields translate into higher bond prices and consequently higher net asset values (NAVs) of debt funds.
Once again it was the flexi debt fund category dominating the rankings. These funds can invest freely across corporate bonds and government securities (gsecs) and across maturities with the objective of maximising gains and minimising risk. PruICICI Flexible (0.14%) and ABN Amro Flexi (0.13%) led the rankings.
Balanced Funds: Biggest Losers
| Balanced Funds | NAV (Rs) | 1-Wk | 1-month | 1-year | 3-year | SD | SR |
| PRINCIPAL BALANCED | 17.97 | -9.20% | -21.32% | 20.69% | 36.99% | 6.24% | 0.29% |
| MAGNUM BALANCED | 20.05 | -7.52% | -19.77% | 36.21% | 53.43% | 7.41% | 0.26% |
| ING BALANCE | 14.66 | -7.45% | -20.24% | 19.38% | 31.21% | 6.00% | 0.28% |
| TATA BALANCED | 38.34 | -7.42% | -20.41% | 23.62% | 41.25% | 6.39% | 0.35% |
| KOTAK BALANCE | 20.42 | -7.17% | -19.71% | 40.05% | 42.81% | 6.16% | 0.44% |
Balanced funds with their high equity allocations (usually more than 65% of net assets) could not stem the fall in their NAVs. The biggest losers slumped even harder than the BSE Sensex. Principal Balanced Fund (-9.20%) fell particularly hard followed by Magnum Balanced (-7.52%) and ING Balanced (-7.45%).
Clearly, the range of offerings/products on display is just what the investor does not need. This reinforces a stand we have taken since the time the investor has been a victim of the NFO deluge; conventional, well-managed diversified equity funds with established track records stand a better chance of building wealth over the long term (3-5 years).
Most NFOs dabble in themes and at present, in speculative trading through derivatives. These funds are more likely to prove detrimental to the investor's interests over the long term and are worthy candidates of the investor's thumbs down.
For a Free download of the latest issue of Money Simplified - The Youth Special Guide to Financial Planning, click here.
Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Discussion Group.
