The Hindu Business Line : Mutual funds and misclassifications

WHEN ING Vysya Asset Management Company filed an offer document for a WTO Theme Fund, the intention was to have a fund that would primarily focus on pharmaceuticals and textiles. The scheme's moniker was to draw attention to the fact that these sectors are expected to see opportunities post January 1, 2005, when the quota system established by the World Trade Organisation would go.

However, Securities and Exchange Board of India (SEBI) did not think that retail investors would see the connection between the mutual fund scheme's name and its actual nature. ING Vysya subsequently changed the fund to `Pharma and Textile fund'.

Similarly, several new funds launched by asset management companies are leaving investors baffled about the nature of the fund and its investment principles.

Though SEBI has been proactive in striking down misleading fund names, some have managed to slip through. Yet another ING Vysya Fund, the Radiant India fund is now launched as the Domestic Opportunities Fund.

However, funds such as HDFC Mutual Fund's `Core and Satellite' funds have been permitted. The core and satellite fund is mandated to invest in two distinct groups, core and satellite, based on market capitalisation, risk profile and return expectations.

The core group (60-80 per cent of the fund) would comprise large cap stocks of companies with long successful track records. The satellite group will comprise small-or mid-cap stocks, according to the offer document filed with SEBI.

"Distributors spend time with high-net worth individuals to explain the intricacies of these kind of funds. Retail investors do not always understand what the fund is about. Fund houses are lying low on terms like "value", "monthly income plan" etc. after the poor performance of these kind of funds. So now they have realised that investors should be sold new themes," said Mr Sandeep Raichura, Head Of Research & Marketing, Chola Distribution Services, referring to the spate of complex funds that are being launched.

Financial advisors also warn investors to look out for investment philosophies of funds carefully and understand their implications before investing.

The recently launched Kotak Opportunities Fund is marketed as an "aggressive scheme with a flexible investment style. The fund manager can invest a high proportion of the portfolio value in sectors he feels will outperform others over the short-medium term."

The fund will invest across sectors and can invest in both large- and mid-cap stocks, according to the offer document.

Distributors say that the nature of the fund gives powers without boundaries to the fund manager.

"There has to be a definite investment philosophy to the fund. When financial planners asses the suitability of products for investment, we need to know for sure factors like whether stock picking would follow the growth or value style or would it take a contrarian's view. Also, the investment needs and return expectations should be specific and different for large, mid and small cap funds," said Mr Gaurav Mashruwala, a Mumbai-based financial planner.

Retail investors may not ask all these questions and examine these factors minutely, he added.

"In a diversified equity fund, you would not want the fund manager to take a very aggressive call on any particular sector. The investor would rather invest in a sectoral fund. It is pertinent that investments are diversified across philosophies," said Mr Raichura.

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