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Three funds that have several lessons for retail investors
We bring you three funds that follow unique strategies and lessons investors can learn from them.
Three funds that offer various lessons for investors

Three funds that offer various lessons for investors

At a time when almost all fund houses are in the race to take advantage of investors' renewed interest in equities and launch new funds, this fund house holds annual general meetings (AGMs) of investors, where it makes it a point to reiterate that it will have one equity fund.

Another fund house says that at current valuations it will not accept lump-sum investments in one of its flagship schemes. Yet another persists with its long-held direct-to-investor approach despite knowing that distributors can help it collect more funds.

In spite of the fact that inflows into mutual funds had almost dried up for a good part of the past five years, a few fund houses have managed to avoid the temptation of going all out to get more business.

These fund houses have several lessons for retail investors. We talked to CEOs of these fund houses to find out their strategies and what investors can learn from them.

Motto

Motto and lessons




PPFAS MUTUAL FUND: MINIMUM CLUTTER, MAXIMUM TIME

The fund house, which launched its only scheme, PPFAS Long Term Value Fund, in May 2013, believes "too many choices lead to decision paralysis and confuse investors." Hence, it intends to have only one "general value equity scheme."

"We do not believe in having multiple schemes and will take advantage of investment opportunities available in this scheme itself," says a letter from Parag Parikh, CEO, PPFAS Mutual Fund.

Parikh, says having too many schemes defeats the purpose of investing in equities through mutual funds.

"If the investor had the expertise to choose from hundreds of differently structured schemes, he/she would also probably have the expertise for direct equity investment. Also, when one is promoting sector funds or funds based on themes or market capitalisation, one is taking away the benefits of having a diversified equity portfolio," says Parikh.

Parikh is perhaps not off the mark when he says that too many new fund offers, or NFOs, are being launched. Since January 2014, mutual funds have launched 61 (41 of which are close-ended) equity funds, which have collected Rs 10,000 crore.

New

New fund offers in 2014


At the end of November, there were 362 open-ended equity funds (including tax saving and exchange-traded funds) with over Rs 3 lakh crore assets under management, or AUM, and 61 close-ended funds with AUM of Rs 15,000 crore.

PPFAS Long Term Value Fund invests at least 65% money in domestic equities and the rest in bonds, money market securities and foreign equity markets. At the end of November, it had invested 67% funds in domestic shares, 27% in foreign ones and held the rest in deposits and cash.

"Our belief is that in today's globalised world the country of listing does not matter much. Some of the best-known Indian groups have huge global operations. Many companies listed overseas also earn a lot of revenue in India and other emerging markets. Our research team is structured on sector lines and analysts look at companies in their sectors across geographies," says Parikh.

The emphasis is on investing for the long term so much so that the Scheme Information Document (SID) says the fund is not suitable for those with an investment horizon of less than five years.

"Our investment philosophy is adhering to the time-tested principle of long-term investing. Our communications are clear that only investors with a long time horizon should invest. We give no illusions that we are good at making a fast buck. This has helped us attract serious long-term investors," says Parikh.

In an effort to communicate directly with investors, the fund house held AGMs of unit holders in Chennai, Bengaluru and Mumbai in November.

Parikh says they are trustees of the funds and offer themselves to investor scrutiny through AGMs. The AGMs discussed the fund house's plans, ability to meet the high net worth criterion set by the Securities and Exchange Board of India (Sebi), investment strategies and other operational issues. Sebi has increased the minimum net worth requirement for mutual funds from Rs 10 crore to Rs 50 crore.

Srikanth Meenakshi, founder and chief operating officer, fundsindia.com, says directly interacting with investors, especially when the scheme has not done as well as others in the category, is a bold move. He further says that unlike shareholder AGMs, which are held at one place once a year, the fund has held three AGMs in separate places.

However, Meenakshi, whose fundsindia.com is an online distributor of financial products, says he is ambivalent about the single fund strategy.

"I believe there should be different strokes for different folks. There are investors who want to invest in pure mid-cap or pure large-cap funds. There could be investors who do not want to invest 40% funds in foreign stock markets. Investors should have all options," he says.

QUANTUM MUTUAL FUND: THE DIRECT WAY

Even before Sebi banned entry load, an upfront commission paid to distributors, in 2009 or allowed direct investing in 2012, Quantum had allowed people to directly invest in its schemes, eliminating the need to pay distributors.

"The direct route has helped us get a step closer to our investors and understand their pulse. By doing so we can take extra care of our investors, which gives us a loyal customer base," says Chief Executive Officer Jimmy Patel.

No distribution cost means investors are charged less, which in the long term can result in a significant difference in the corpus.

Low-cost

Low-cost approach


While the average expense ratio (annual charges deducted by funds from the net asset value of the scheme) of large-cap diversified equity funds as on October 31 was 2.5%, that of Quantum Long Term Equity was 1.25%. Similarly, Quantum Tax Saving's expense ratio is 1.25%, as against the category average of 2.5%.

This (1.25%) is lower than the average expense ratio (1.6%) of direct plans. In direct plans, investors can buy units directly, without involving an intermediary.

But opting for a direct model comes with a price. Many fund houses that launched much later have surpassed Quantum in terms of AUM. At the end of the September quarter, Quantum had an AUM of Rs 509 crore compared to Rs 479 crore of PPFAS Mutual Fund, which began operations only last year.

This despite the fact that Quantum Long Term Equity Fund is one of the best performing funds in its category. Its AUM was Rs 360 crore on September 30.

"The only challenge is to maximise your reach. The distribution model may let you reach every corner of the country without a physical branch. However, to compensate, we have an interactive and quality website that allows one to invest without paperwork. Also, we have a strong sales team that reaches out to investors via phone or personally and helps them," says Patel.

The fund house has eight schemes. All of them are for retail investors. It has only one debt scheme--a liquid fund. This is another reason for lower assets. Debt and money market funds account for 67% of the industry's total AUM (Rs 9.6 lakh crore as on September 30). Quantum's liquid fund accounts for only Rs 70 crore, or 13%, AUM.

Though the direct strategy is welcomed by some, many believe that Quantum's approach can work in a market where investors are highly aware and savvy.

"In India, where only 4% household savings go into mutual funds, and there is a deep-seated fear of investing in equities, investors need hand-holding and advisory services. A direct approach, therefore, will not work in the long term," says Tanwir Alam, founder and CEO, Fincart, a financial planning company.

IDFC PREMIER EQUITY: VALUATIONS MATTER, SIP'S THE WAY

IDFC Premier Equity fund, a mid- and small-cap fund, restricts lump-sum investing (though there's no restriction on systematic investment). This has worked well for the fund.

The idea behind accepting lump-sum money for specific periods is to ensure that the new money is invested in stocks only when they are available at 'reasonable valuations'.

Getting

Getting the valuations right


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The SID of the fund clearly mentions this. "The fund will close subscription once it has collected a predetermined 'manageable' corpus, which will be decided by the fund manager depending on the investment opportunities in the stock market or if the fund manager is of the opinion that investment opportunities have diminished," reads the document.

Kalpen Parekh, CEO, IDFC Mutual Fund, was more than eager to elaborate the idea. He pulled out a sheet called 'Traffic Light', a line chart of Sensex levels since 1999. The area in the chart between the trend line and the X-axis was divided into red, green and yellow zones.

The green zones were periods during which the Sensex was trading below the 12-month trailing P/E of 16, the yellow zone was the period during which the P/E was in the 16-19 range and the red zone was when the P/E crossed 19.

The green zone signifies low valuations, yellow shows fair/moderate valuations and red zone signifies that the market is expensive. "What we have seen is that investments come mostly when the P/E is in the red zone and redemptions happen when the P/E is in the green zone. Ideally, the reverse should happen," says Parekh, adding that the fund accepts lump-sum investments only when the market P/E is in the green or yellow zone.

This year the scheme started accepting lump-sum money on 27 May. It was closed in September 2014.

There is another reason for the strategy. Since it is small- and mid-cap fund, a large inflow may not get allocated in the right stocks at right valuations. This will force the scheme to dilute its mandate and invest in large-cap stocks. It anyway had close to 21% funds in large-cap stocks at October-end.

The scheme had an AUM of Rs 6,400 crore on October 31.

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