The Hindu Business Line : Laggards suffer due to poor management strategies

FOR once, let's take the road less travelled and talk about the equity funds that have not been doing well, the ones that been relegated by investors to the backwaters. "Why on earth should we do that?" you might ask, pointing to the funds that have been at the other end of the spectrum, those that are performing well to the satisfaction of the unit holders. The answer would be simple: The bad-performers, nobody's children that they have become, need to be discussed once in a while - just to find out what went wrong with them.

Poor fund management strategies can be cited as the single-most important reason for their failure. Investors do get to understand - often after suffering a lot of pain - this fact at the end and pull out of what have obviously become bad deals.

For the uninitiated, here's a list of the relatively poor performers, as worked out by Value Research on the basis of their one-year returns (as on October 31, 2004): Bonanza Exclusive Growth, LIC MF Sensex Advantage, GIC D'Mat, Prudential ICICI growth and LIC MF Equity. The returns in their cases range from 7.95 per cent to 14.48 per cent.

It is not that these funds were doomed from the very beginning. But it can be safely assumed that mistakes were made somewhere on the way. And, as the latest performance figures indicate, these mistakes did prove to be very costly. However, there is no reason to believe that errors such as these cannot be corrected in due course.

Some of the others have obviously done much better, thanks to the strategies that their fund managers have followed. I am referring to the superior stock selection system, the profit booking process and risk management mechanism that were put in place. Incidentally, some of the top-end performers (also on a one-year basis) are SBI Magnum Contra, HDFC Capital Builder, SBI Magnum Global, Franklin India Prima and Reliance Growth. The returns here range from 51.97 per cent to 63.10 per cent.

An investor cannot hold on to his or her bad investments for eternity, waiting for corrective steps to come about. If a situation is particularly hopeless, there might be a fit case for an exit too. Take, for instance, a declining NAV of Fund X, which has been purchased on January 1, 2004. If on January 1, 2007, the NAV is in a worse shape, there is no apparent reason why the units should still be held even beyond the three-year span. Three years, you will have to admit, make a decent waiting period.

Investors need to watch out for funds that have fared poorly on a continuous basis, draining their capital and patience. The market needs to identify these right at this moment and ask the fund managers concerned why the scenario has remained so bleak.

For all you know, there may be a genuine explanation or two. With regard to all the others, a quick pull-out may be considered necessary. And without major regrets; after all, these are merely deals that have gone sour. The money lost should be recouped from elsewhere.

Feedback may be sent to nilanjan@thehindu.co.in

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