The Hindu Business Line : MFs must ensure investors’ confidence while selecting stocks

What will you do if you dislike a certain sector and find, to your surprise that the fund manager you have trusted so much has stepped up exposure to that very sector? Will you pull out in a huff or will you let the fund in question do whatever it wants to do?

For most of us, the answer will come pat. The fund manager is supreme. He can do to what he intends to – subject to limits, of course – and simply mention it in the monthly fact-sheet.

In such circumstances, you can do little if your favourite fund has picked up more real estate or liquor companies, regardless of your fiery, judgmental views on these sectors. Or, you can only sulk in private if that fund has sold all the retail stocks that you thought will soon move ahead at scorching speed.

The more discerning and wealthier sections will perhaps not be bothered at all by this. They may simply opt for a portfolio management scheme, one that takes special care of their money. However, not everybody can afford such a thing, given the high costs that must be incurred.

Investment circles will probably tell you that the average investor need not be worried unnecessarily. “The fund manager knows best”, is the argument that will be put forth. Trust him with your money, make regular investments and sleep well at night. That will no doubt be the crux of their logic.

That is absolutely all right. After all, you have entered a fund because you have enough faith in the fund manager’s skills (and not, hopefully, because your friendly, neighbourhood distributor requested you to). One also hopes that your belief is firmly rooted in wisdom and analysis.

Buying & Selling

That said let us turn to the fact that fund houses are constantly buying and selling securities. To put things in general terms, fund managers add stocks to portfolios because they see attractive valuations. And they offload them when price targets have been reached.

Between the two simplistic scenarios (buying and selling) is a huge cauldron of activity – believe us, there is plenty in it, considering the sheer number of products that are being managed by the country’s asset management industry.

And, talking of products, the scenario has changed considerably over the past couple of years. Witness the many styles (small cap funds, mid cap funds, global funds… ) that have been made available and you will know what we are talking about.

Let’s check out an example, courtesy what Principal MF has done in recent weeks. The fund house has acquired or added a whole range of stocks to its positions. ICICI Bank, L&T, Reliance Communications, Tata Power, Ashapura Minechem, HCC, Jaiprakash Associates and Lanco Infra, among others. At the other end, it has curtailed its positions in or has exited from Bharti, Bhel, M&M, Reliance Indsustries, Ranbaxy, Sun Pharma and Wipro, among others.

Did you notice that presence of relatively smaller cap stocks in this list, which is otherwise made up of jumbo-sized names?

There must have been several other smaller companies that the explanatory foreword (in the fact-sheet) did not mention.

The short point here is that fund managers have to consider a lot of variables before they take buy/sell decisions. Investors who have come into the products they manage need to trust their judgments.

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

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