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Failure of Nfo New Fund Offer

Failure of Nfo New Fund Offer

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Published by kirang gandhi
Failure of NFO New Fund Offer
Failure of NFO New Fund Offer

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Categories:Types, Research
Published by: kirang gandhi on Nov 28, 2011
Copyright:Attribution Non-commercial


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Here's a cracker of an investment idea. Diversify your bets across the length and breadth of thecountry by picking companies from the northern, southern, eastern and western regions. Don'tlaugh. Five years ago, an estimated 18 lakh Indian investors believed in the idea and poured inRs 1,854 crore into the SBI One India fund.The fund invests in companies based in different regions of the country, with each regionallocated an equity exposure of at least 15% and, at the most, 55% of the corpus.The SBI One India fund was launched during the NFO mania of 2006, when fund houses werecoming up with equity schemes almost every week. Nearly Rs 38,036 crore was collected by the45 new equity schemes launched that year.Reliance Equity alone mopped up Rs 5,790 crore in March 2006, making it the biggest NFO of all time. Marketing honchos, desperate to make their offerings stand out in the crowded market,devised innovative product differentiation strategies.The momentum continued well into 2007, when new mutual fund houses started operations inIndia. The industry mopped up Rs 29,214 crore from 53 equity schemes launched in 2007,including six infrastructure funds.While the mobilisation was impressive, the returns have been abysmal. Many of the new fundslaunched in 2006 have either lost money, or underperformed their own benchmark indices (seegraphic). The LIC Nomura India Vision fund has been a wealth destroyer par excellence, losingmore than 5% every year even though its benchmark, the BSE-200, rose 5% every year duringthe period.The geographical straitjacketing has been disastrous for the SBI One India fund. It has lost0.62% every year since its launch in December 2006 (current NAV is Rs 9.70).The market conditions are not at fault. During the same period, the average diversified fund rosearound 5.25% a year. These funds have also failed to match the returns of their own benchmarks.The HSBC Progressive Themes fund (originally called the HSBC India Advantage fund) hasrisen less than 1% a year since its launch in January 2006 even though its benchmark index BSE-100 has shot up by 9.5%.
If someone invested Rs 10,000 in a bank fixed deposit at 8% in March 2006, it would havegrown to more than Rs 15,000 by now. If invested in the DSP BlackRock Top 100 fund, theinvestment would have zoomed to Rs 20,250. Even if it was left to idle in the savings bank account, it would have grown to Rs 12,100. In the HSBC Progressive Themes fund, the value of the investment is floundering at Rs 10,200.This shows that fund managers don't always get it right. Many of them are as prone to makingmistakes as the common investor. At the time of the dotcom bust of 2000, many funds had linedtheir portfolios with dud tech stocks. In 2007, most funds were reducing their exposure to ITC,Infosys and TCS and bingeing on infrastructure stocks, such as L&T, Bhel and RelianceCommunications. While ITC, TCS and Infosys have done very well in the past four years, theinfrastructure sector has got mired in all sorts of problems.
Focus on AUM, not returns
It's also clear that the focus of fund houses was on collecting assets rather than generating goodreturns for investors. Besides the 2.25% entry load on equity funds, the fund houses also earnedfrom the expense ratio they deduct from the NAV of a fund every year. What was the rationaleof launching an equity fund like Reliance Equity when faithful warhorses, such as RelianceGrowth (launched 1995), Reliance Vision (1995) and Reliance Regular Savings Equity (2005),were already at work?Reliance Equity has earned 3.56% annualised returns since its launch, compared to the 7.33%growth in its benchmark index, the Nifty. During the same period, Reliance Vision earned8.46%, Reliance Growth earned 11.44% and Reliance Regular Savings Equity rose 16.08%.When you adjust for inflation, which has been very high in the past 4-5 years, the losses mount.LIC Nomura India Vision has lost more than 13% every year. SBI One India investors have lost

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