Fewer schemes, less confusion

A sharp decline in the number of equity new fund offers (NFOs) is good news for retail investors. Fund houses have launched just nine schemes since January, shows data from the Association of Mutual Funds in India (Amfi).

When the stock market is doing well, fund houses make a rush to introduce the themes in vogue. For instance, the late 90s saw a number of information technology schemes. More recently, fund houses were bullish on infrastructure and public sector units.

From a personal finance perspective, the advice is that one should always invest in schemes with a historical record. The retail investor should be happy because of two main reasons. One, since there aren’t many NFOs around, distributors will not lure them with the old pitch: ‘Units are being sold at Rs 10 only.’ Typically, distributors tell potential investors that since the units are cheap, unlike old schemes where net asset value (NAV) were higher, they will get more units.

However, this is quite unfounded, as returns are independent of whether the unit is being sold at Rs 10 or Rs 100. Say, you invested Rs 10,000 in two schemes, one with an NAV of Rs 10 and another with Rs 100. You would get 1,000 and 100 units of the two schemes.

If both schemes perform equally well and rise 10 per cent in a year, the NAVs would rise to Rs 11 and Rs 110, respectively. The Rs 10,000 invested in both the schemes would return Rs 11,000 each. In other words, cheap units do not translate into higher returns.

More important, since one is purchasing an old scheme, there is a historical record. DSP Black Rock Equity was launched in 1997. The scheme has given annualised returns of 24.13 per cent since the launch. Similarly, there are a number of top equity schemes such as HDFC Top 100 and Kotak 30, which have given good returns over the years.

No wonder, then, the Securities and Exchange Board of India, the market regulator, has been consistent in its view that fund houses reduce the number of schemes. Its argument: Fewer funds would reduce the confusion in the minds of the investor.

Some leading fund houses such as ICICI Prudential and Birla SunLife Mutual Fund are already in the process of doing so. It’s true that new fund houses would want to launch equity schemes, as they would like to offer an entire bouquet to the investor. But, existing fund houses can refrain from doing so. By the looks of it, they have already started doing the same.