Helping retail investors take informed decisions

MFs should declare monthly number of folios in each scheme, as well as the net realisable value of assets

Even a market-savvy retail investor is often confused about which scheme to invest in. The mutual fund sector has a bouquet of products that are peddled at different stages. According to the flavour of the season, fund houses push products—equities when stock markets are up, debt schemes when interest rates are rising and gold exchange-traded funds during times of boom. In fact, themes such as ‘volatility’ and ‘life cycle’ are pushed when all else is dull.

A little more disclosure will help them make informed decisions; for instance about the number of investors in a scheme on a monthly basis. This is especially true of equity schemes. “While the number of investors per se might not give much indication on whether the scheme is suited for you or not, it gives an indication on whether the scheme focuses on retail investors or not,” says Hemant Rustagi, chief executive, Wise Invest. If a scheme of Rs 200-300 crore has only 100-150 investors, the scheme clearly focuses on high net worth individuals or firms and might not be suited for retail investors.

Dhirendra Kumar, chief executive of Value Research, says another important aspect investors need to consider is the number of investors holding more than five per cent in a scheme. “This is because the redemption by a large investor can have a significant bearing on the residual portfolio,” he says.

What is the net realisable value of the assets in the scheme vis-a-vis the net asset value? This is important when investing in long-term debt funds because to improve returns, the fund manager invests in long-term debt products that are actually sold at a discount in the existing market. “If the investor knows he/she will earn the proposed rate of return only by staying in the scheme for the entire tenure, there will be less panic if some investor pulls out in the interim,” says an official.

Recently, the difference between gold exchange-traded funds (ETFs) and savings schemes of the same fund house was as high as eight per cent in some cases. Some schemes still see this difference---returns of Axis Gold and Axis Gold ETF are -4.51 and -7.29, respectively, a difference of 2.88 per cent.

That ETFs are faring worse than savings funds is peculiar because the latter’s underlying asset is the ETF. This difference emerges because valuation norms for savings and ETFs are different. In case of ETFs, the investor gets the net asset value of the scheme, while in savings schemes, the net asset value is the ‘traded value’ (not sold or bought) of the ETF. This rose when the government put restrictions on gold imports.

While fund house has to pay investors higher returns on savings schemes, the net realisable value of ETFs, if sold, is less.

Though fund houses have often complained the number of disclosures has been increasing, a little more effort would help retail investors make better choices and, perhaps, help investors stick to schemes longer.