The Hindu Business Line : Birla MF plans new scheme for long-term growth

BIRLA Mutual Fund has worked out a scheme aimed at investing in stocks comprising the S&P CNX Nifty and outperforming the benchmark by using derivatives.

The proposed Birla Enhanced Index Fund will try to generate long-term growth by allocating to almost all the 50 Nifty stocks in approximately the same weightage that they are represented in the index.

Tracking errors, as the offer document filed with SEBI has mentioned, may result in returns that are not exactly in line with Nifty's performance or with one or more stocks included in it.

Such errors can arise due to various reasons. For instance, a delay in the purchase or sale of shares due to lack of liquidity in the market can lead to errors. A 4-5 per cent tracking error may be expected, it is pointed out. However, this is just an indicative range.

In normal circumstances, a 50-100 per cent exposure to the Nifty constituents is possible, while cash and cash equivalents can account for up to 50 per cent of the portfolio. The maximum derivative position will not exceed 50 per cent. The scheme may invest up to 25 per cent in ADRs/GDRs issued by Indian companies, subject to prescribed limits.

Birla MF has named Mr Navneet Munot as the fund manager. He will have to use a portfolio balancing derivative strategy to ensure the outperformance (over Nifty).

"Theoretically, there is a carrying cost attached to futures that should result into future derivatives quoting at a premium to the underlying prices, but the market forces frequently change this equilibrium so that at many instances, futures start quoting at a discount to the underlying prices," the offer document said.

Index-plus schemes, a growing tribe

`Index enhancers' are a growing tribe in the asset management space, thanks to recent efforts by some players to introduce such funds. So far, these have been launched by like players such as UTI, HDFC, LIC and ING Vysya.

The total assets under their management have remained quite small.

Each of these funds has provided over 50 per cent in the past year. HDFC Index Sensex Plus, among the very first schemes in this genre, has given 59 per cent, followed by LIC MF Sensex Advantage with 56 per cent.

ING Vysya's Nifty Plus has in comparison given 46 per cent or so. The mother of all such schemes — UTI Index Select Equity (with 53 per cent) — is positioned as an actively managed index fund, one that invests at least 90 per cent of its assets in stocks drawn from Nifty and Sensex.

Earlier known as Index Equity Fund, this became open-ended in October 2000.

HDFC Index Sensex aims to invest 80-90 per cent of its assets in companies that form the Sensex and between 10-20 per cent in others.

It may be mentioned that HDFC, LIC and UTI have passively-managed index funds of their own.

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