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Mutuals, myths and more

While going through the mutual fund data for 2011-12, I noticed that no new equity-oriented schemes were launched during the fiscal that just went by.

This can be primarily attributed to market regulator Sebi restricting fund houses from launching schemes which had investment mandates similar to some of the existing schemes in their portfolio. This restriction makes a lot of sense as some fund houses, even today, have the propensity to disown their non-performing schemes and move on to pitch an alternative.

Missing the warning

During my lectures at B-schools, I often challenge my students to question market myths. I am using the term myth because the caveats that should accompany sweeping claims are almost never mentioned.

Some of the popular myths are : Equities are the best performing long-term asset class. To buttress this claim, a graph is presented by the fund managers with the starting point invariably being the lowest point of the BSE Sensex, quite often even before the Harshad Mehta scam period.

The caveat that is conveniently overlooked is that the Sensex components and their weightage have changed beyond recognition and more pertinently, most retail investors jump on the equity bandwagon at the worst possible moment. More often than not, they invest when the market is at its peak and they also sell in distress when the bourses hit the bottom. Hence, as far as the retail investor is concerned, the real picture is an inverse of the chart presented.

I must reiterate here that while I agree that investing in equities holds the potential to be adequately rewarded, it is the sweeping statements minus the necessary caveats that I disagree with.

On the right track

It was, thus, with fair interest that I took note of Sebiís diktat to mutual funds a year ago which says that the risks associated with such investments should be highlighted clearly.

Not too long ago, Sebi had directed mutual funds to spend a minimum of five seconds of air time for their advertisements to highlight the risks associated with investing in mutual funds.

This, too, made immense sense as many of these advertisements painted an extremely rosy picture about the future prospects of a young family that invested in their funds, or about an old couple who laughed their way to the bank post-retirement.

Let me narrate an experience that reinforced my belief that just as Sebi is getting its act together on the primary market front, its mutual fund reforms are also on the right track.

At a mutual fund presentation I attended several years ago, I watched with amazement how a fund manager, whose fundís net asset value had dipped from its face value of Rs 10 to a paltry Rs 3, made a strong case for further investments on the basis of the rupee cost averaging theory.

His pitch was ó you may have invested Rs 10 but at Rs 3 there is an even stronger case for you to reinvest and average your cost. While there must have been gluttons for punishment who probably fell for that drivel, I noticed several wise but angry investors demanding an explanation why the schemes did not fetch good returns as claimed by the distributors.

Call for transparency

While the scenario has undoubtedly improved over the years and some AMCs are now extremely professional and progressive, there still exists the need to bring about better accountability.

Having said that, it must be admitted that transparency and accountability are two words that exist merely in the lexicon of most professions in India and the mutual fund industry is no exception.

Hence, one must expect better vigilance by Sebi that has had to occasionally crack the whip to ensure that retail investors do not get short-changed while investing in mutual funds.

All said and done, mutual funds, if selected prudently and monitored periodically, still remain an optimal investment vehicle for retail investors.

The author is founder-promoter of Lotus Knowlwealth and Gurukshetra.com. He can be contacted at info@gurukshetra.com

 
 
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