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Of 'guaranteed returns' and more! - Views on News from Equitymaster
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  • Dec 4, 2006

    Of 'guaranteed returns' and more!

    The Indian stock markets have basked in the glory of a strong growth momentum that the Indian economy has recorded over the past 3 years and the due attraction that Indian capital markets have garnered on the back of the same. This has also seen the domestic mutual fund industry rake in the moolah, both on the back of increased assets under management (AUMs) for existing schemes and new 'assets' created through new fund offers (NFOs). As a matter of fact, the AUMs of the Indian mutual fund industry have increased by 66% during the last 12 months, wherein the markets (represented by the Sensex) has gained a lower 56%.

    In this backdrop, we had conducted two polls on our website -

    1. Has your confidence increased/decreased/remained stable in Indian mutual fund industry over the past few years?

    2. Was your fund manager able to protect you from the recent market volatility?

    While the first poll was conducted in January 2006, when the markets were on a roll, the second poll was conducted in September 2006, post the crash and volatility of May to June 2006 period. And the results are an eye opener. Take a look at the responses through the graphs below.

    Amazing! Isn't it? While the voters were confident with respect to their faith in mutual fund managers when everything seemed hunky dory and NFOs from across fund houses and schemes garnered billions of rupees, their 'roof crashed over their head' when the markets turned jittery! Simply, their mutual fund managers were not able to protect them from the volatility that was seen in equities during the months of May and June 2006.

    Now, coming to the present, with the markets again on the boil, and NFOs again gaining the 'lost' charm, one can again hear billion dollar gobble-ups from the fund houses in their existing schemes and through launch of the 'hottest' NFO around! We have ourselves received calls from sales people of a well-known mutual fund who have 'guaranteed' (guaranteed!) us a 40% plus return in a 12-month period from here on. And the sales pitch that these so-called 'financial planners' are giving is - 'history says so'! They say, "If x and y schemes have given 50% plus compounded returns over the past 3 years, on a conservative basis, you can 'definitely' get a 40% plus return in the next 12 months'!

    One wonders if such an offer were given to a middle-aged, almost-near-retirement guy, he would have been lured by it and would have 'bequeathed' his hard-earned savings to a financial planner who was 'guaranteeing' him a dream, though not sure whether he'll be there at the job (fired or not) at the end of this 12-month tenure!

    In our various interactions with retail investors over the past two months, we have come to believe that the entire blame shall not be put on these 'financial planners' or mutual fund houses for the ruin that has been created. A large part of the responsibility heads on the shoulders of investors themselves, who avoid taking that extra pain to research well on their investment plans. Rather, when everything seems 'bright and beautiful' (in terms of flashy schemes and their equally flashy managers), more often than not, some investors get into a herd mentality of trying to earn that extra buck than their neighbour, friend's friend, distant relative, ex-colleague or even the next-door paanwalaah!

    "Regardless of the fact that similar NFOs are being launched, distributed and bought, we believe there must be regulations in place to put a stop to this wholesale production of NFOs. While SEBI has issued edicts to curb this malpractice, we hope it is taken in the right spirit by fund houses to launch truly innovative and path breaking funds and not ones with minor adjustments to existing funds." Source: Personalfn.com

    As an investor, however, the way for you to go is independent - whether it is through your own research skills or through advice from an independent financial counselor. Make sure that your financial planner has 'your' financial needs on his mind, not his'!

    Back to the present
    Like it happens near the close of each financial year, a flurry of tax-saving funds (also referred as equity linked saving scheme/ELSS), have been launched by several fund houses. In fact, three tax-saving funds - HSBC Tax Saver Equity Fund (HTSF), Lotus India Tax Plan (LITP) and DSP ML Tax Saver Fund (DMTSF) - have already been launched this year. The Personalfn Research Team has covered all the three funds, and has advised a 'Not to Apply' to each one of them.



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