A Growth Scheme By Any Other Name

T hinking small seems to have become beautiful once again. At least for fund managers. Quite a few niche funds have been lined up for practically all industries and indices. Of course, some of them have appeared only in print.

Leading the bandwagon is none other than the Unit Trust of India (UTI), the countrys premier mutual fund, with yet another plan being added to its ever growing list. This one is called the index equity fund (IEF).

The appearance of this scheme was no real surprise. The day ICICI added a fancy equity-linked warrant to its deep discount bond issue and trumpeted aloud the wisdom behind the move, one knew equity funds were something worth betting on. After all, there is proof enough that only stock markets beat inflation consistently. So an equity fund is the place to put your money.

 

Buying index-based funds is a still better way to do it. For one, it is cost effective. And someone else will do the tracking for you.

Consider the hypothetical scenario that you were to buy Sensex shares in minimum market lots. It would cost you Rs 5.5 lakh. That figure would swell to Rs 23 lakh if you also provided for the accurate weightage. Could anyone ask for a better deal?

But to call UTIs scheme an index equity fund is a misnomer. Earlier, a power fund that actually invested funds in the core sector went by the name of a sectoral fund. And now you have an index fund from the oldest mutual fund in the country that is not really an index fund at all!

IEF is nothing but a growth scheme. The trust will invest the corpus of the scheme in a basket of securities at the National Stock Exchange-50 share index (Nifty) and the Bombay Stock Exchange sensitive index (Sensex). And, note, the intention is to outperform the indices, not to replicate them. That is, the weightage of the portfolio will not be based on the indices, it will be decided by the Trust.

The plan: This seven year close-ended scheme calls for a minimum investment of Rs 2,000. That means you have to invest in a minimum of 200 units at Rs 10 each. All additional investment have to be made in multiples of the basic 100 units.

However, if you are so enthused that you want to put in more than Rs 50,000, you must also furnish your permanent account number (PAN) and the address of your income tax circle. The payments can be made in cash, cheque or draft.

The plan has a safety net that guarantees capital protection to you after one year from the date of allotment. This allows the original investor to sell his investment of upto Rs 5,000 units at par if the net asset value (NAV) of the scheme is below par at the time of sale. However, you can use the option only once.

There is a three-year lock-in period, the only exception being for death claims. The repurchase price of the units will be based on their NAV. The NAV will be declared on a weekly basis after six months from the time the subscriptions are closed.

You must be prepared to pay an exit load of five per cent of the NAV in the event that you want to exit from the scheme.

You can also, if you want,

opt for a partial repurchase

facility provided you have a

minimum balance of 200 units. The units will be listed on the National Stock Exchange (NSE) within six months afterthe

date of closure of subscription.

Tax incentives: Upto Rs 15,000 of the dividend accruing under this scheme will qualify for deduction from income under Section 80L of the Income Tax Act. You can also claim long term capital gains tax (indexation benefit as well as a lower rate of tax at 20 per cent) under Sections 48 and 112 of the IT Act.

The investment is also exempted from wealth tax. You can also seek exemption from capital gains tax under Sections 54EA (transfer of long term capital assets for three years) and 54EB (investment of capital gains arising out of transfer of long term capital assets for a period of seven years).

Summing up: All in all, the IEF is nothing but a mutual fund scheme answering to a different name. The only difference is that 90 per cent of the portfolio will be invested exclusively in index scrips, the rest going to the money market and fixed income securities. But the weightage of each scrip in the index is not considered while constituting the portfolio. In short, IEF is not an index fund at all.

Unlike a true-blooded sensex fund, here the investment decision will be the prerogative of the Trust rather than the index.

The bottomline: Make no mistake outperforming the index is rather too ambitious a target. A look at the mutual fund industry would bring home the point. Forget beating the sensex, keeping pace with it has itself been an enviable task for managers. And this is exactly what contributed to the emergence of index funds in the first place.

As a private mutual fund manager puts it: UTI with its Mastershares and Mastergains managed to position MFs on par with equity. And we are still paying for that. With the new offering, it is earning a bad name for index funds too.

It is also worth keeping in mind the fact that neither the Sensex nor Nifty have provided any sizeable returns over the last one year. Returns, in fact, have stood at less than three per cent.

Now, should you go for it? Well, you should, if all you are interested in is capital appreciation over a long period of time.

Those who would prefer a regular income or would rather cash in on sudden spurts in prices should definitely steer clear of the plan For the prices of these scrips are already very high and, at least for some time, permanent big leaps are simply out of the question.