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Aarati Krishnan

HOW do big ticket investments affect you as an investor? The impact of big-ticket investments on a fund is neither easily quantifiable nor readily visible, but it can influence returns significantly over the long term.

A large proportion of big-ticket investments creates three key risks for retail investors.

More churn: The treasury manager in a bank or a company would typically manage his portfolio more actively than a retail investor.

He is more likely to pull out his funds if he fears a deterioration in performance, or shift to greener pastures if he perceives better opportunities elsewhere.

Therefore, a mutual fund that plays host to a large number of big-ticket investors is likely to face a higher frequency of portfolio turnover.

A more actively managed portfolio per se, may not be bad for retail investors. But higher activity usually comes with higher transaction costs. And activity at the wrong times can definitely dent performance.

For instance, pullouts by institutional investors from an equity fund in a bear market, can force a fund manager to sell a prime portion of his portfolio at unattractive prices.

The wild swings in the asset bases of short-term and floating rate funds, typically patronised by large investors, over the past year, provide some pointers to how big-ticket investments can influence fund management.

For instance, the corpus of the PruICICI Floating Rate Fund has shrunk from Rs.527 crore to Rs.47 crore between March and September 2003, as big-ticket investors flocked from floating rate products to plain debt funds.

Larger liquid portion: A large proportion of big-ticket investments in a fund may also force a manager to hold a larger portion of his assets in cash or in liquid instruments to meet redemption requirements at short notice.

There is for instance, a pattern of mutual funds stepping up their allocation to cash and near-cash instruments towards the end of March each year, in anticipation of heightened redemption activity from high net worth investors, companies and banks. If the fund's switch to cash leads to its missing out on some big moves in equity values or in bond prices, this could certainly pull down its performance, relative to its peers.

Since it is seldom possible to foresee the contingencies that may force an institution to pull out from a mutual fund, big-ticket investments add a big dose of unpredictability to a fund's asset base.

For instance, the recent RBI diktat requiring banks to cap the unlisted debt investments in their non-SLR investments at 20 per cent, has created some uncertainty about whether banks will withdraw their sizeable investments in the short term debt products managed by mutual funds.

These pullouts may or may not materialise. But this incident definitely illustrates how investment patterns of institutional investors can be influenced by changes in extraneous variables.

Concentration of holdings: Big-ticket investments can also lead to the concentration of a fund's assets in few hands. When over a quarter of a fund's net assets is held by just one or two investors, its performance leans rather heavily on whether these major investors plan to stay on with the fund or pull out at some time.

In this context, investors should probably take note of some disturbing trends revealed by the disclosure of large holdings that accompany the half-yearly financial statements of mutual funds (see Table).

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