November 02, 2006

Capital Safety Fund - Surely !!

Mutual Fund industry is a 'funny' industry. The best part is the near cartel formation in the products delivered by most of these fund houses. Not that they are not coming with the right products. It is just that most of these funds raise money on schemes that are too similar to one another and launched within a span of few months each and then forgotten forever. How many of us talk of dividend yield or fund of funds anymore? We are still comfortable with Reliance Growth, Franklin India Prima etc etc, the ones that have withstood time and have held themselves high!

Capital 'Safety' looks to be the new buzzword in Mutual Funds. Interestingly I looked at the offers coming from one of the Mutual Funds. Below is one of the schemes that is currently in offer. The scheme allows investor an option to invest in a 3 year or a 5 year scheme. I have just taken the 3 year for discussion. The investment in equity is a maximum of 20%. I have taken a conservative estimate on the debt side at 7%. At a minimum exposure in the debt side at 80%, the profit earned in the form of interest for the investor is Rs. 18000 or it covers most of the equity exposure that the investor is taking on the equity side of a maximum of Rs. 20,000. If the investor has to lose money on the scheme, then the equity market has to lose 90% of its value or the sensex value. Whoa! that is one pessimistic view of the markets.

I do not understand having such a scheme in the first place. Even if debt funds give 12% in the three years of investment, that gives about Rs. 9600 in profits. Unless the equity markets fall about 50%, this fund will not lose money.

Even in 2001 crash of equity markets, it took 3 years for the equity markets to fall. No fund manager would be that foolish to keep his money in the equity markets. If a change happens from equity markets to debt markets, he is bound to earn more, with fall in interest rates, giving capital appreciation on his debt portfolio, and reducing his chances of losing money.

I would have liked funds that sticks its neck out and is willing to take the risk on behalf of the investor. These funds will not lose money unless he makes something drastic on both the markets that he has to lose money to his unit-holders. A serious let-down to me! I guess SEBI is not willing to experiment as these are fund houses with awesome track records.


Anonymous said...

lol. nice work.....

Anonymous said...

that was me again ......... deepak

M B Mahesh said...

Thanks !