The Little Acorn
Around mid February, the Sensex had hit a high of 6150. Since then, it has come off almost a third, dropping to a calendar low of 4109. This is how volatile our market has become.
The market comprises basically of three kinds of investors _ the much maligned FIIs, Mutual Funds (MFs) and of course the retail investor. Popular perception makes FIIs the rogues. FII money is hot money, they say. However, reality is slightly different. FIIs invested as much as Rs 2500 crore net (purchases minus sales) in the month of April. The first week of May saw an inflow of Rs 500 crore.
Who then was to blame? Apart from banks who liquidated the collateral pledged with them as the market dipped, it was the MFs and the retail investors who were pulling out of the market. In the case of the MFs, it was the retail investor who forced their hand by making large scale redemptions.
I wonder what causes this hysteria. Markets, by definition, would swing either way and one of the prerequisites of investing in equity is a long-term outlook. However, for the typical investor, this philosophy remains just a platitude. The moment prices dip, the panic button is pressed.
MFs also can do little. Though their raison d'etre is to promote and foster long-term investment habits among people, as most are open-ended, investors can exit anytime. The investor has to realise that for investments to fructify, funds need to be invested over a longer time horizon.
With precisely this object in mind, Sun F&C Mutual Fund has launched its latest product, The Resurgent India Equity Fund (RIEF). What is so special about this launch? Well, amongst other things, the minimum investible amount is Rs 5,00,000 and the entry load is four per cent! Both these factors are meant to dissuade short-termers. For the long-term investor, the load gets spread over the length of his investment and eventually the returns more than make up for the load. This product is not meant for somebody looking to make a frivolous quick buck in the market. It is aimed at the serious investor who is willing to commit serious money to the serious business of equity investing.
Scheme Details
RIEF is an open-ended equity scheme. The focus of the fund manager is to cherry pick opportunities thrown up by the upheavals and transformations taking place in the Indian industry in the next 10 to 15 years. There are basically four areas where the fund managers are convinced that value can be found.
n Turnaround cases: Companies revamping operations and trying to make themselves profitable again, fall in this category. The key is to distinguish companies in permanent decline from those having temporary setbacks.
n Restructuring cases: Companies rethinking corporate strategy, reviewing the capitalisation structure, selling subsidiaries or businesses and streamlining operations form the target sample here.
n Acquisition led opportunities: Fast growing companies need to expand inorganically also. The fund manager needs to analyse which alliances lead to an ultimate synergy. Acquiring and those being acquired, both groups are potential investibles here.
n Privatisation of government controlled organisations is long overdue now. Some of the companies undergoing privatisation may offer significant capital appreciation opportunities.
Investors would realise that time and patience is of essence for this strategy to manifest into profits. Hence the unusual structure of the scheme.
RIEF is open for subscription till May 25, 2000. Continuous repurchase and sale will commence not later than 30 days from the closure of the initial offer. Units are available at par during the initial offer, albeit with a load of four per cent.
Investors have a choice of two investment plans, Dividend and Growth. It is the intention of the fund managers to distribute dividend bi-annually. However, there is no guarantee or assurance regarding the same. Under the dividend plan, investors are offered a Dividend Reinvestment Facility (DRF). Here, investors can choose to reinvest their entire dividend by way of additional units in the scheme instead of receiving dividends in cash. Such units don't have an entry load.
I do not like the dividend reinvestment option. Some analysts claim that fiscally it works best in the case of equity funds. There is no tax incidence as dividends from schemes having over 50 per cent equity exposure don't have to pay dividend tax. Eventually when the investment is sold, the capital gains would be lower than what they would have been on the same amount had the growth option been chosen. All this is true.
A regular dividend paying scheme is essentially cast in the same mould and gives identical advantage mentioned above. There is an added flexibility of the option to reinvest the dividend in the same scheme or use the money for any other purpose. I would like to retain the option with me instead of compulsorily reinvesting the dividend.
The scheme offers a systematic investment facility where the minimum investible amount is Rs 100,000. Similarly, there is a systematic withdrawal facility where investors may withdraw a minimum of Rs 50,000 and in multiples of Rs 10,000 thereafter.
A minimum of Rs 100,000 and in multiples of Rs 100,000 may be redeemed at anytime subject to the investor maintaining a minimum of Rs 500,000 in his account.
Past Performance
Sun F&C MF is a relatively new player in the MF industry. Already it has around Rs 1000 crore of assets under management. Post the current selloff, the performance of SUN F&C's equity based schemes have been a mixed bag. The diversified Value Fund has posted an impressive performance by yielding a return of 34.79 per cent annualised, since inception. The sectoral Emerging Technology Fund, due to the adverse conditions prevailing in the sector is ruling at an NAV of Rs 7.78 while the Balanced fund has an NAV of Rs 8.85.
Most MF schemes, even the diversified ones, were heavily loaded in favour of ICE stocks. With the recent selloff, all these schemes would have their work cut out for them in terms of having to restructure their respective portfolios. Here perhaps, lies the advantage of new schemes like RIEF who have had the serendipity of coming in at the rock bottom.
The concept of the scheme seems good, now everything depends upon execution.