• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Aarati Krishnan

IT HAS certainly taken a long time for Fidelity Investments, one of the largest money managers in the world, to flag off mutual fund operations in India. But Fidelity, which manages $1 trillion in global assets, has the reputation of assessing the depth of a market carefully before dipping its toes in it.

Keeping it simple

Fidelity's investment philosophy, as outlined during the launch of its first offering this week, certainly appears to be in line with what has worked best in the Indian markets. The fund house says it believes in active investing through bottom-up stock selection. India is certainly a stock selector's haven, with little-known companies notching up a stellar performance in recent years. Most funds in India invest actively in stocks outside of the broad market indices.

Fidelity has also set store by a simple investment strategy, which will focus on selecting the best stocks, without bias towards any specific market capitalisation or investment style. Investors should wait to see if Fidelity manages to match the performance of fund houses such as Franklin Templeton and HDFC, whose equity funds have delivered impressive returns over the past five, in a few cases, even ten years.

Beyond fund management

But a fund house the size of Fidelity is expected to bring more to the market than just good fund management skills. In the US, over the past year, the fund has been at the forefront of a relentless drive to bring down fund costs. It has sharply pruned the expense ratios for its index funds, to levels even lower than those offered by Vanguard, the pioneer of low-cost funds. Several of Fidelity's actively managed equity funds today sport expense ratios of 1 per cent or less.

In India, costs are not yet a big issue with actively managed equity funds, given their breathtaking double-digit returns and their ability to outperform the index by a convincing margin. But index funds could certainly do with a better cost structure, as many of them sport an expense ratio of well over 1 per cent and charge an entry load to boot. Ruthless competition on costs would certainly be welcome for debt funds, where expense ratios are burning a hole into the already anaemic returns, especially for retail investors.

More on distribution

One also hopes that the entry of funds such as Fidelity would help streamline the distribution side of the business.

At present, Indian investors do not have extensive access to full-service brokers or financial advisers, who can handhold them through the investment process. Instead, the focus is too much on selling products on a one-off basis. The compensation structure for distributors is also inefficient. Fund houses pay for the distributor's commission from the entry and exit loads collected from the investors.

As entry and exit loads are levied only when investors transact on funds, the commission structure encourages investor churn.

The result has been a very short-term approach to mutual fund investing, where investors buy equity funds when the markets are peaking and try to cash out on signs of a correction. A review of the cost structure of funds and the compensation structure for distributors, in consultation with SEBI, appears to be in order; funds with extensive international experience can probably provide significant inputs to this process. Fidelity, with its fund of experience in running no-load products, can certainly make a big contribution here.

Walking a tightrope

On these scores, Fidelity's first offering — the Fidelity Equity Fund — appears to tread a fine line. Its investment objectives are more clearly laid out in its offer document than has been the case with quite a few funds so far. The fund has specified that it will hold about 75 stocks in its portfolio, limit its individual stock exposures to 4 per cent and set a cap of 25 per cent on holdings in each sector. It has also stated that it will impose no restraints on its fund manager with regard to market cap or investment style.

In a welcome move, the fund also offers its investors a systematic investment option right from the time of the Initial Public Offering. Usually, fund IPOs tend to solicit lumpsum investments, with the systematic investment option being made available only when the fund re-opens on an ongoing basis.

However, in designing the load structure and expense ratio for its first offering, Fidelity appears to have stuck largely to the book — the Indian one, that is. The fund too has adopted a differential load structure for small and large investors. Investments of less than Rs 5 crore in Fidelity Equity Fund will attract an entry load of 2.25 per cent, while those beyond this limit will enjoy an entry load waiver.

The fund's decision to waive entry loads on systematic investments of up to Rs 1 lakh per cheque is small-investor friendly. But this is not out of the ordinary, as most fund houses now offer waivers on entry load for systematic investments.

The expense ratios mentioned in the offer document, at a maximum of 2.5 per cent a year, are also no lower than those offered by most other equity funds.

But to be fair, it is early days to pass judgement on Fidelity's cost structure or disclosure policies for the Indian market. For this, we probably need to wait and see how the fund manages its performance and costs, in actual practice. We also have to wait for the fund to expand its product basket to include debt or index offerings.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Come, let's shop for a mobile

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line