Comprehending Mutual Funds in India

Mutual fund is an institution which pools money from different entities, which share common financial objectives, and invest the accumulated sum into asset classes that are suited to their stated financial objective of the scheme. One important factor which differentiates mutual funds from any other investment option is that the fund under any circumstances cannot deviate from the stated objective. This precisely forms the basis on which an investor invests his/her money in a given scheme.

All mutual funds are managed by a fund manager who is an expert in investment management. The fund manager does his necessary research and using his investment management skills makes sure that the return which he gains out of the fund is a tad more if, the investor would have managed the fund on his own. The incomes earned and the capital appreciation on the investment is trickled down to the investors, sometimes known as unit holders, in the proportion of their units held. This means that whenever an investor subscribes for units of any types of mutual funds, he/she becomes part owner of the fund in exactly the same proportion; as their contribution amount invested in the total amount of the fund.  Mutual fund holders in India are also sometimes called as unit holder or mutual fund shareholder.

Some of the advantages of investing in a mutual fund

·         It provides a well-diversified portfolio of equities which facilitates the investor in his/her quest to maintain a diversified investment portfolio in order to mitigate the risk of market fluctuations.

·         The fund is managed by experts who undertake various research works and have superior investment skills in comparison to an ordinary investor. This results into a better rate of return for the investor.

·         The risk is significantly less when you have a diversified portfolio as against a portfolio which is undiversified.

·         Due to the sheer economies of scale, the fee which the investor has to pay for his/her fund management services is minimal.

·         The liquidity which the mutual funds have is far more than any securities.

Some of the disadvantages of investing in a mutual fund

·         The investor does not have any say when it comes to payment of maintenance fee regardless of the performance of the fund.

·         There is no such option as customized portfolios. The decision to invest in a particular venue is solely at the discretion of the fund manager and the investor has no right to intervene in the decision making.

·         Lack of sufficient knowledge makes it very confusing and often time leads to bad decision while choosing a particular mutual fund out of the plethora of such schemes.

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High Returns on Well Diversified Portfolis

ICICI Prudential Tax Plan was launched in August 1999 as an Equity-linked Savings Scheme (ELSS). In this, investments are eligible for a deduction (up to Rs 1 lakh) under Section 80 C of the Income Tax Act. The fund has been ranked Crisil Mutual Fund Rank 1 consecutively for the quarters ended December 2010 and March 2011. Further, the fund has remained in the top-30 percentile of the ranking for seven quarters in a row, highlighting consistency in performance. Chintan Haria has taken over as the fund manager since May 2011. The total assets under management of the fund are Rs 1,251 crore as of quarter ended March.

To avail of tax benefits in ELSS, investors need to have a lock-in period of 3 years, the lowest among all comparable tax-saving investments. An ideal way to invest in ELSS is to start an SIP (systematic investment plan) from the beginning of the financial year, ie April, rather than investing a lump sum amount towards the end of the year. SIPs help spread the market volatility over a 12-month period. Investors must, however, note that the New Direct Taxes Code, expected to be implemented from April 1, 2012, may not provide tax benefits to ELSS. Investors can, therefore, consider ELSS for the current financial year.

PERFORMANCE

In absolute terms, an investment of Rs 1,000 in the fund at the time of its launch in August 1999 would have grown to Rs 12,534 as of April 28, 2011, vis-à-vis its peer set and benchmark (S&P CNX Nifty), which would have appreciated to Rs 7,710 and Rs 4,259, respectively, during the same period. The fund has returned 63 per cent higher than the peer set and close to 3 times the sum returned by the benchmark index.

The fund’s two-year return in terms of a compounded annual growth rate is 41 per cent vis-à-vis 29 per cent and 22 per cent by its peers and benchmark, respectively. The fund has also outperformed both its peers and benchmark on a 1-year and 3-year basis.

RISK

The fund has demonstrated its performance over the last five years with slightly higher standard deviation (31 per cent) vis-à-vis its peer set (29 per cent) and benchmark index (26 per cent) clearly providing higher risk-adjusted returns.

PORTFOLIO, DIVERSIFICATION

The fund is well diversified across market capitalisations. The exposure to Crisil-defined largecap stocks has been 49 per cent over the last three years. The rest of the exposure has been in small and midcap stocks. The fund has had a 38 per cent exposure to the S&P CNX Nifty stocks over the last three years and 20 per cent to the CNX Midcap stocks over the same period.

Portfolio concentration is a measure of the relative proportions of different securities in a portfolio. CRISIL’s assessment of industry and company concentration of equity funds is critical to assess risk mitigation in portfolio construction.

The fund is well diversified in terms of its exposure per stock. The fund’s portfolio held an average of 58 stocks over a three-year period. The fund is moderately concentrated in terms of industries. The average three-year exposure in the top-three sectors amounts to nearly 30 per cent.

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