This copy has been modified, please read the correction at the end
The Securities and Exchange Board of India Chairman U K Sinha’s concerns about consistent underperformers in the mutual fund industry should encourage investors to relook at their portfolios.
Sinha’s views have already found some takers. “If a fund is under-performing for five years, then the simple option is to exit it. The minimum expectation is that a fund would beat the benchmark,” says Surajit Mishra, executive vice-president and national head (mutual funds), Bajaj Capital.
But there is a problem. With the Bombay Stock Exchange Sensitive Index, or Sensex being range-bound in the last three years, it would be difficult for investors to decide whether to exit at a loss or not. And should they wait for a non-performer for five years? Since August 2011, the Sensex has been between 15,000 and 18,000 points. Also, since 2009, the index has moved between 15,000 and 21,000.
The bigger problem is that some of the outperformers during the boom period of 2006-2008, for instance many JM Mutual Fund schemes, are among the worst performers in the past three years. JM Mutual Fund’s JM Core 11, JM Equity, JM Multistrategy, JM Tax Gain, L&T Infrastructure, LIC Nomura MF Equity and Sahara REAL are some schemes which have consistently given lower returns than their respective benchmarks.
Some of these schemes give high returns, doubling or trebling, during boom times, which make up for investors’ losses in the lean period.
The call, as a result, is a tough one. First, investors have to cross the psychological barrier of booking losses. Most refuse to exit mutual funds or investment-oriented insurance plans because they want to, at least, get back the principal amount.
However, before entering any scheme, investors need to look at the scheme’s performance, ideally over five to seven years because it will give an idea on how the scheme has performed in bull as well as bear cycles.
Then, the assets under management (AUM) are another good indicator, especially for risk-averse investors. For one, a bigger AUM indicates the scheme has been attracting funds.
Finally, look at the current performance, in terms of net asset value (NAV) of the scheme and compare it with peers and the benchmark index. If there has been a sharp change in strategy, one needs to enquire with the distributor or fund house if the fund manager has quit or the fund house has changed its strategy.
For instance, Franklin Templeton Equity Income, which manages over Rs 1,000 crore, was launched in 2006. The scheme's one-year returns are -4.34 per cent are almost in line with its benchmark BSE 200’s fall of 4.40 per cent (June 22), according to data from Value Research. However, the scheme has returned 7 per cent per annum in five years whereas the benchmark index has returned 3.26 per cent. Over the same period, it is better than category average of 5.55 per cent. Since launch, it has returned 11 per cent.
In other words, though its performance is just marginally lower than the benchmark index in recent times, overtime, it has outperformed the index substantially.
If you are already invested, look at the NAV of the scheme and see how much it has fallen below their initial investment. If the NAV is close to the invested amount then it might make sense to wait for a while before exiting. But if the NAV is very low compared to the investment, they could book losses.“If the money loss is beyond the comfort level of the investor and if the fund is not in the best performing category then investors should exit,” says Mishra.
“In case 50 per cent of a fund's schemes are under-performing, then investors can look at exiting from these schemes and moving to other schemes of the same fund house,” suggests Suresh Sadagopan, a certified financial planner. He argues that at a given point in time, it is possible that some schemes are under performing even for the best performing AMCs. It is suggested that investors go through their portfolios once a quarter.
Most importantly, if you are looking at safety and do not want to consistently compare you scheme’s performance with peers and benchmark, choose index funds. This will help keep the returns in line with broader indices, plus or minus five per cent.
Franklin Templeton Equity Income scheme's five-year performance was mistakenly compared with absolute returns of its benchmark BSE-200. The scheme has returned 7 per cent vs the benchmark's returns of 3.26 per cent. The error is regretted.