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Wednesday, April 3, 2013

Have some logic in choosing mutual funds

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TAKING an equity exposure through a handful, or more, of equity diversified schemes of mutual funds entails an investor to choose among a couple of hundred of schemes from about 40 asset management companies (AMCs). There could be reasons beyond past performance behind any investor's selection of one or more schemes out of these wide variety of options for investment.

Some of these significant drivers in your choice making could be the AMC whose reputation convinces you about its various scheme offering, or a fund manager whose performance record or reputation attracts an investor to invest in a scheme managed by him or her. Or it could be the size of a scheme's corpus that could be the determining factor.

An investor may even have scientific basis behind his scheme choice, such as lower portfolio concentration, lower churning of a scheme's portfolio, or consistency in performance, where the scheme is neither in top outperformers or underperformers in any past period.


When new developments affect original factor: So, what should investors do when the main factor behind their choice changes afterwards?


For instance, there have been over 20 changes, involving takeovers or mergers, among AMCs itself.

Investors of a scheme whose AMC gets taken over or merged with another AMC should definitely review their investment decision. It is for that very purpose that Sebi, the securities market regulator, provides a compulsory exit option to the unit holders of the AMC that is seeing a ownership change. There are reasonable grounds for getting out if the earlier AMC's performance track record and reputation was the reason why an investor got in, provided he/she can find another AMC as a replacement which the investor considers as a better bet than the new AMC that takes over her earlier schemes.

Fancied fund manager-related changes: Similar reasoning holds valid for an investor if a fund manager leaves a scheme he/she is invested in with the fund manager's reputation being the driving force behind the decision. However, if the

performance track record was a bigger factor, then even if the fund manager stays on the job, the investor should call it quits if the manager under performers for a couple of years. There is no dearth of live examples of fund manager performance swinging wildly from stupendous outperformance to severe underperformance, and an investor relying primarily on fund manager name should be continuously cautious.


Hold your faith in original investment factors: In short, investors should sustain their faith in their original reasons behind an investment choice in a mutual fund and quit if those factors undergo significant change later on. This even applies to investors of passively-managed schemes, such as index funds or index exchange-traded funds (ETFs). For instance, Benchmark Funds, an AMC specialising solely on index products, got taken over by Goldman Sachs two years ago. Now, if an investor chose the AMC's index funds or index ETFs for its specialist focus, he/she would be right in being wary of whether the new AMC, known more to be an active investment manager and launching actively-managed equity schemes, would continue to give the same intensity of attention to passively managed products as the earlier AMC was giving.

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