The Hindu Business Line : Read the risk profile of funds before investing

Have you ever wondered why fund managers are so uniformly bullish, despite stretched valuations and risks that range from inflationary pressures to the end of zero-interest rate regime in Japan? You do not need Kautilya's intelligence to grasp the reason: Most fund managers would rather sell their wares first; if they are excessively bearish, investors may defer their decision to buy.

Never before in the annals of India's equity market was this issue raised so often as now. At 13,500 points, this does not come as a surprise - mutual funds have to pack their rhetoric with lots of extras - ideas that will ultimately help in boosting AUMs.

It may not be quite right to debunk all this straightaway, not even when the indices stand where they do. Commentators of various hues are doing it all the same, attributing the trend to the runaway stock market. Instead, it may be worthwhile to probe a bit deeper, and actually check out the props on which fund managers are building their high pedestal.

Allow us, for instance, take a look at what a fairly well-known fund manager - no names here, okay? - had to say the other day. The occasion, as you have probably guessed, was the launch of his equity fund. GDP growth, he started by saying, is at 8 per cent or so, thanks partly to sustainable trends in services and manufacturing. Also, corporate earnings are expected to grow between 15-20 per cent for 2006-07. And, while it is true that equities are rather fairly valued, these two principal factors will combine with other lesser ones to propel the tendency a little farther.

"What is possibly wrong in this reasoning?", you may well ask. Nothing, except the fact that many specialists are urging people to read the list of risks a trifle more closely. And, believe us, that list is not a small one.

How will the funds react if there is a sudden drop in commodity prices? How will they perform if a crisis forces oil prices to vault? Will there still be an overall bullishness if demand growth tapers because of a relentless rise in inflation? (Remember, credit growth, at 30 per cent or so, means we need a constant vigil on inflation numbers).

Let us also tell you here that the NFO scene (dominated in recent days by fixed maturity plans) seems to be perking up once again on the equity side. While no high-decibel launches are expected, a few tax-savers and one or two close-end equity funds will keep the tempo alive in the next few weeks. Others are reportedly in the pipeline.

The true believer will, despite all this and more, keep his faith intact. He will tell you that consumption patterns are conducive, population statistics are getting positive, institutional inflows are decent. The point is analysts have often erred on the side of caution. They have sometimes (deliberately?) under-estimated the market's potential. This time, too, many of them are not taking chances. If you are listening to their advice, you may find merit in playing it safe and booking profits. If you are not, go ahead with your shopping list and buy the funds of your choice. Indolence is not an option.

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

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