The Hindu Business Line : Bloating AUMs & funds dilemma

LAST week, investors in mutual funds woke up to what may soon emerge as a more marked trend in India: temporary suspension of fresh sales of schemes that are becoming far too bloated for the well-being of existing unitholders.

The latest episode revolves around Franklin India Prima, a fund that has a long history insofar as private sector funds go. For the record, Franklin Templeton Investments has suspended its sales for six months, beginning early February.

The idea is simple - Prima's size and the market conditions are not quite good for those who are more keen to stay put, especially when lots of investors are interested in putting in large amounts and simply pulling out at the earliest opportunity.

Reliance sets precedent: Let us remind you that Reliance Mutual Fund too, sometime last year, did the same with Reliance Growth, citing a similar increase in its size as being detrimental to existing investors.

The suspension then was for three months, and Reliance MF indicated that it did not wish to see the scheme's size move beyond Rs 1,700 crore. There is, however, no such criterion set by FT.

Prima, which is invested small/mid-cap stocks, has lately seen significant inflows, FT has pointed out, adding that its size has increased to over Rs 2,200 crore in December. Not a bad show, considering that it was at about Rs 630 crore two years ago.

Obviously, investors came to it to benefit from its small/mid-cap orientation.

The large corpus led FT to stop fresh sales, a move that we hope will be re-considered once the fund house is convinced about the stability of small/mid-cap stocks. Its view on the "longer term potential" of such stocks has not undergone a change, FT has pointed out.

Close-ended schemes: On another front, more investors are taking a closer look at close-ended funds, which seem to be staging a comeback of sorts.

The question is, can a close-ended fund, say a 5-year product, truly make sense when its open-ended counterpart has so many obvious plus points? Will the fund manager concerned really have an added flexibility to pick stocks with a longer-term perspective?

While the answers to these queries are probably quite long-winded, it is necessary to consider the basics of these schemes.

HDFC's diversified portfolio: A close-ended vehicle like the one recently mooted by HDFC MF will ultimately try to create a diversified portfolio, all of it with the objective of securing capital appreciation.

At the cost of repetition, let us go by what is conventional wisdom: a close-ended structure allows fund managers to take longer-term calls on company fundamentals without worrying too much about AUMs.

HDFC MF claims it will follow a buy-and-hold strategy; the scheme's portfolio will reflect a "cross-section of the growth areas of the economy". Fair enough, you will say.

Yet at the other end of the spectrum is the nagging fear that a close-ended structure may not be the ultimate panacea.

What will happen if at the end of those five years the market plummets? What if gains recorded early on are eroded when unit holders are mentally ready to move out?

Let's consider these questions in another column. At the end of the day it will be your money that will go into finds of your choice. If you must choose close-end schemes, do so carefully. Let no glib sales talk or colourfully printed literature influence your decision.

Fund Speak

We expect the drivers of economic growth to be consumption, infrastructure investments and corporate capex supported by a buoyant outsourcing market during the year ahead.

Sundaram Mutual Fund

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

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