The Hindu Business Line : `Churning for short-term hits long-term investors'

IT is not every day that the head of an insurance company, despite the seemingly competing unit-linked products that he offers, assesses mutual funds in a constructive manner. So when Mr Stuart Purdy, MD of Aviva, argues that MFs actually have a positive role to play in the "Indian savings revolution", one is compelled to sit up and listen.

His message, in fact, may well force you to listen even more intently, especially when it underscores the importance of separating retail and corporate investors, putting an end to churning and adopting a long-term view.

But quite understandably, there are lots of caveats too. Moving large chunks of money in and out of a market is a nightmare for fund managers and compounding this is the pressure they face when a portfolio is churned several times a year (with the aid of distributors), he notes.

"The short-term horizon sees managers catering to the needs of this "hot money' chasing short-term returns", he says, adding that the result is a portfolio that trades rather than one that invests for the long term - the real goal of the retail investor.

The Aviva chief goes a step further when he claims that even equity MFs can suffer from such short-termism, particularly with churn levels as high as the corporate dominated funds. And the consequences are directly at the expense of long-term investors.

"This mindset means that redemptions are often at their highest when markets have fallen", while fund managers are put into forced sale positions to meet large-scale redemptions.

Conversely, inflows are often highest into funds close to their peaks. As investors will agree, the reference is clearly to the tech boom in 2000 and its aftermath.

Mr Purdy also talks about "the one key differentiator" with regard to fund managers working for an MF and those engaged by a life insurer. As he suggests, ask any Aviva fund manager and he will tell you that it is not having constant redemption pressure hanging over his head and clouding every investment decision!

At the end, let's come to a few basics, recently reiterated by a popular Web site. One really liked the simple but telling way these were listed and elucidated, and so, here they are for your reference:

* Realise the truth about `par value', a fund is not really cheap if its IPO is priced at Rs 10.

* Units are not issued at a discount to the market. Instead, they are marked to market.

* Comparing IPOs of MFs and capital issues by companies can be dangerous.

* Most funds with fancy names are essentially diversified funds; they just have smart, new labels.

After reading that, do you still feel the need to exit right after investing in IPOs? Or, do you wish to fall for clever-sounding names, knowing well that it's an old thing in a new garb?

If the answer is yes, think again before you come to other conclusions, the right ones this time.

Tailpiece: A senior executive employed by a well-known fund house is known to have said the following about initial offers: Collection drives mounted by MFs remind me of conversation commonly heard in men's locker rooms. Today, people proudly say `My IPO is bigger than yours'.

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

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Addressing ground realities of budget air-travel

Textile exporters may lose out on EU preferential rates

`Churning for short-term hits long-term investors'

Pre-VAT jitters: Drug cos work out plans to allay trade fears

Champions Trophy: ICC's plan to shift venue shocks sponsors

Delay in report on computerisation — EPFO meet postponed

Imports under advance licence — Proposal to exempt sugar mills from 7.5 pc customs duty