The Hindu Business Line : Fund Talk

I would like to know why during market volatility and meltdown thereafter, the NAVs of reputed mutual funds decline by 20-30 per cent. Fund managers select stocks after careful research on financials and management of the company, business model etc. Then why is the fund manager of a particular scheme not able to factor in all the anticipated risks? I am specifically referring to Franklin Templeton Smaller Companies Fund, growth option, whose current NAV is Rs 8.82.

Subramaniam Natraj

Trichy

Mutual funds neither assure capital protection nor guarantee returns. For conservative investors who seek an exposure to equity, mutual funds offer the benefits of diversification and informed and efficient investing. Investing in a fund, however, carries the same risks as investing in equity. In an across-the-board sharp market correction as witnessed recently, even the best of funds tend to suffer declines.

If you invest in equity, you must be prepared to lose a significant amount of your capital in certain phases as the market movement is punctuated with high volatility. Invest only that portion of your assets that you are unlikely to require over a three-five year period in equity funds with a good track record. Monitor your equity allocation — as and when it swells above a level you are comfortable with, book profits partially and sweep it into safer investment havens. Try not to time the market but instead stay invested in equity through its ups and downs. Invest your money in phases. These are a few ground rules to help you cope with volatility.

Fund managers, on their part, focus on beating the market by weeding out under-performers in the indices from their portfolio or by picking stocks outside the benchmark indices. Research-backed, selective stock-picking by funds has paid off over the years and paid handsomely in the three-year bull rally.

Steep corrections are, however, swift and triggered by surprise elements. Even though they are difficult to predict, experienced fund-houses do sometimes anticipate market corrections; the recent correction was widely expected given the relentless rise in stock prices. However, funds are divided on how they should deal with market corrections. For instance, funds like Franklin Templeton tend to remain invested in equity, irrespective of the market levels. Whereas Sundaram Mutual or Quantum Mutual Fund have held on to significant cash levels in anticipation of the market decline.

Both strategies have their merits. The former believes that there is no point in trying to time the market and that superior stock selection will deliver returns over the long term.

Those who switch to cash as a defensive measure do succeed in containing declines better than the market during a bear phase. However, they have to time their re-entry into the market well. If the market recovers faster than expected, holding more cash will result in an opportunity loss.

Either way, do not go by short-term performance. Hold on to funds with an established track record. On the performance of Franklin India Smaller Companies, the following points are worth noting. One, the fund invests in mid-cap and small-cap stocks, which are by nature riskier and more volatile. The sharp decline in its NAV is only to be expected. Such a fund is suitable only for an investor with an appetite for risk.

Second, the fund is close-ended. If you choose to invest in a close-ended fund, you must have a long-term view — a five-year horizon in most cases. It is too early to judge its performance. If its performance is particularly distressing in the years ahead, you will have the option to redeem your units with the fund at six-month intervals, but at a discount to the NAV.

In the current context, the fund has not performed too badly. It has declined about 18 per cent from the market peak, while its benchmark, the CNX Midcap, has fallen 22 per cent. The fund appears to have some risk-coping measures in place, given that it has the mandate to invest a portion of assets in large-cap stocks. If you stay with the fund through the five-year period, you may be compensated adequately for the higher risk.

Queries may be e-mailed to mf@thehindu.co.in,

or sent by post to Business Line,

859- 860, Anna Salai, Chennai 600002.

Shanthi Venkataraman

More Stories on : Mutual Funds | Mutual Funds

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