Mutual funds with unique investing strategies give good returns but are high risk
Struggling to catch attention, Indian fund houses have come out with a
number of unique products. While uniqueness captures attention, can it
ensure higher returns as well?
In order to stand out in a market where hundreds of funds, many similar, struggle to catch attention, Indian fund houses have come out with a number of unique products. While uniqueness captures attention, can it ensure higher returns as well?
HIGH ON RISK
While equity mutual funds are considered safer than direct exposure to stocks, unique equity funds have innate risks. One, there is no comparable fund to get an idea about how the planned investment or strategy is likely to work. Second, in case of funds which invest abroad, it's difficult to predict how factors such as currency risk will impact investments.
"Investing in unique ideas can be a good strategy. However, one first needs to be sure about the pedigree of the fund house and the ability of the fund manager," says Renu Pothen, head of research, Fundsupermart.
THINGS TO KNOW
Investment universe:
Before Investing, Check...
To make their funds seem unique, some asset management companies come up with concepts which are very broad, for instance, 'infrastructure fund'.
"Some thematic funds have a vague definition. They should have a well-defined universe so that the investor knows what he is getting into," says Dhruva Chatterji, senior research analyst at Morningstar, an investment research firm that compiles and analyses fund, stock and general market data.
For instance, many infrastructure funds invest in banks and fast moving consumer goods (FMCG) companies as well.
"Due to their narrow universe, they are riskier than the traditional diversified equity funds," says Chatterji.
Benchmark:
Unique funds must have appropriate indices as benchmark. For example, a fund with focus on a special sector cannot have a benchmark such as the BSE 100. An index benchmark that is not a perfect fit will not show the fund's actual performance. A lot of unique funds have this problem.
"Some unique funds invest in a lot of asset classes and hence track multiple indices. A few benchmark their performance against a single index that may be inappropriate. Also, some may not have a matching index and hence may have to benchmark their performance with a not-so-relevant index. The idea may be to just outperform this index," says Vivek Chaurasia,senior research analyst at Personal FN, a fund research and financial planning firm.
DEFINE YOUR GOALS
Be sure about your investment objectives. Just being unique does not guarantee good returns. Many such schemes expose investors to high risk, say experts. "If investors want protection, something like the dividend-yield concept will work fine. In adverse times, these funds fall less than others," says Chatterji of Morningstar.
LIMITED EXPOSURE
Thematic funds, with a clearlydefined narrow investment universe, may be risky. This is because if their sector underperforms the market, they will also perform poorly.
"It is tough for retail investors to time the entry and exit for particular sector.s They would be better off investing in diversified equity funds and leave that call to fund managers. Fund managers may be in a better position to identify sectors/themes that are likely to perform well," says Chatterji.
ADVICE TO INVESTORS
Unique funds can be a good option for those willing to take more risk.
"If a fund has a unique strategy or a different investment universe, it will be good. We have never seen unique funds not performing well. However, those that do well are quickly copied by other industry players," says Renu Pothen of Fundspermart.
However, some suggest caution. "Retail investors looking for decent gains from equity markets over the long term should not fall for unique funds. They can opt for a consistently-performing diversified fund from a process-driven fund house that has strong investment systems," says Chaurasia of Personal FN.
Let's take a look at some unique funds.
SINGLE ON INDICES
Index-tracking funds are mostly exchange-traded funds (ETFs) and are passively managed. While many ETFs track gold, Nifty and Junior Nifty, a few have tried to be different.
Motilal Oswal Most Shares Nasdaq-100 ETF -
This passively managed fund aims to match returns from the Nasdaq 100 index.
It has beaten its benchmark and given good returns in the last one year. It can be a good way to diversify into the US market but carries currency risk.
"It may underperform if there is slowdown in the US or the dollar depreciates. Those looking for diversification in the US can continue to hold the fund and see if it delivers better returns than the benchmark and take a call accordingly. But such a fund should not comprise more than 10-15 per cent of the portfolio," says Chaurasia of Personal FN.
Goldman Sachs Hang Seng Bees -
This ETF invests in stocks comprising the Hang Seng index. No other fund in India tracks the Hang Seng. However, there are many funds which invest in China. "Those looking to diversify can continue to hold the fund for some more time. However, one must avoid over-exposure," says Chaurasia.
IIFL Dividend Opportunities Index Fund -
It's the only ETF which invests in stocks comprising the CNX Dividend Opportunities Index.
"It suits investors who have a moderate to high risk appetite and want to gain from dividend-paying stocks in the CNX Dividend Opportunities index. Those who have already invested can hold on for one year and then take a call. However, if one wants to bet on the fund manager's ability to pick the best dividend-paying stocks, actively-managed dividend-yield funds are a better choice," says Chaurasia.
Goldman Sachs Shariah Bees (Goldman Sachs S&P CNX Nifty Shariah Exchange Traded Scheme) -
Shariah is an Islamic law which also applies to investments. Under this law, certain businesses, products and services are considered unacceptable. Examples include businesses related to gambling, alcohol and those lending on interest. An investor looking for a fund that is Shariahcompliant can invest in the fund, but if there is no such need, one can look at a diversified equity fund, say experts.
THEME-SPECIFIC FUNDS
UTI Transportation and Logistics Fund -
It's the only fund which focuses on auto and auto ancillary sector. The fund had about 71 per cent exposure to the automobile sector in August and is volatile due to its sensitivity to interest rates. It is for investors with a high risk appetite, say experts.
SBI Magnum Comma -
It's the only fund which invests in companies engaged in commodity businesses in oil & gas, metal and agriculture sectors. The fund can also invest in companies that provide inputs to commodity companies.
As on August 31, the fund had 44 per cent assets in energy, 20 per cent in metal and 10 per cent each in construction and chemical companies. "The fund has shown inconsistency in performance and is hence suitable for investors with a high risk appetite," says Chaurasia.
Sundaram Rural India -
The fund invests in companies with focus on rural areas. These include FMCG, fertiliser, chemical and automobile companies. In August, it had 23 per cent exposure to FMCG, 20 per cent to chemical, 10 per cent to automobile and 8 per cent to construction companies. "The fund has been an average performer and has disappointed many investors over the long term. Due to focus on consumption and agricultural products, it can underperform when these sectors are out of favour. The thematic approach may not suit those looking to benefit from the broader market movement," says Chaurasia.
UNIQUE STRATEGY
JM 11 Core Fund -
The fund invests in 11 stocks with each stock getting a weight of up to 9.09 per cent. In August, it had exposure to Dr Reddy's Laboratories, ICICI Bank, IDFC, Infosys, Larsen & Toubro, Tata Steel, Maruti Suzuki India, Bajaj Auto, Yes Bank, Power Finance Corporation and Tata Motors. The fund prefers large-cap stocks. What makes it unique is its objective to achieve capital appreciation from only 11 stocks. "Being a highly-concentrated fund, it has failed on all parameters. Investors will be better off shifting to a diversified and well-managed fund with a consistent track record," says Chaurasia.
Edelweiss Absolute Return Fund -
"The fund follows three strategies - low risk, trading on the basis of corporate actions and hedged equity investing," says Pothen of Fundsupermart.
There are other arbitrage funds in the industry but this one combines different strategies. It makes use of arbitrage between spot and cash markets, corporate actions and derivatives strategies. "It has lagged its peers in the arbitrage category. It may not be worth holding," says Chaurasia.
HIGH ON RISK
While equity mutual funds are considered safer than direct exposure to stocks, unique equity funds have innate risks. One, there is no comparable fund to get an idea about how the planned investment or strategy is likely to work. Second, in case of funds which invest abroad, it's difficult to predict how factors such as currency risk will impact investments.
"Investing in unique ideas can be a good strategy. However, one first needs to be sure about the pedigree of the fund house and the ability of the fund manager," says Renu Pothen, head of research, Fundsupermart.
THINGS TO KNOW
Investment universe:
Before Investing, Check...
>> FUND'S INVESTMENT UNIVERSE.
>> YOUR OBJECTIVE OF INVESTMENT.
>> BENCHMARK OF THE FUND.
>> FUND'S SECTORAL EXPOSURE.
"Some thematic funds have a vague definition. They should have a well-defined universe so that the investor knows what he is getting into," says Dhruva Chatterji, senior research analyst at Morningstar, an investment research firm that compiles and analyses fund, stock and general market data.
For instance, many infrastructure funds invest in banks and fast moving consumer goods (FMCG) companies as well.
"Due to their narrow universe, they are riskier than the traditional diversified equity funds," says Chatterji.
Benchmark:
Unique funds must have appropriate indices as benchmark. For example, a fund with focus on a special sector cannot have a benchmark such as the BSE 100. An index benchmark that is not a perfect fit will not show the fund's actual performance. A lot of unique funds have this problem.
"Some unique funds invest in a lot of asset classes and hence track multiple indices. A few benchmark their performance against a single index that may be inappropriate. Also, some may not have a matching index and hence may have to benchmark their performance with a not-so-relevant index. The idea may be to just outperform this index," says Vivek Chaurasia,senior research analyst at Personal FN, a fund research and financial planning firm.
Risk Factors
|
DEFINE YOUR GOALS
Be sure about your investment objectives. Just being unique does not guarantee good returns. Many such schemes expose investors to high risk, say experts. "If investors want protection, something like the dividend-yield concept will work fine. In adverse times, these funds fall less than others," says Chatterji of Morningstar.
LIMITED EXPOSURE
Thematic funds, with a clearlydefined narrow investment universe, may be risky. This is because if their sector underperforms the market, they will also perform poorly.
"It is tough for retail investors to time the entry and exit for particular sector.s They would be better off investing in diversified equity funds and leave that call to fund managers. Fund managers may be in a better position to identify sectors/themes that are likely to perform well," says Chatterji.
Unique funds can be a good option for those willing to take more risk.
"If a fund has a unique strategy or a different investment universe, it will be good. We have never seen unique funds not performing well. However, those that do well are quickly copied by other industry players," says Renu Pothen of Fundspermart.
However, some suggest caution. "Retail investors looking for decent gains from equity markets over the long term should not fall for unique funds. They can opt for a consistently-performing diversified fund from a process-driven fund house that has strong investment systems," says Chaurasia of Personal FN.
Let's take a look at some unique funds.
Index-tracking funds are mostly exchange-traded funds (ETFs) and are passively managed. While many ETFs track gold, Nifty and Junior Nifty, a few have tried to be different.
Motilal Oswal Most Shares Nasdaq-100 ETF -
This passively managed fund aims to match returns from the Nasdaq 100 index.
It has beaten its benchmark and given good returns in the last one year. It can be a good way to diversify into the US market but carries currency risk.
"It may underperform if there is slowdown in the US or the dollar depreciates. Those looking for diversification in the US can continue to hold the fund and see if it delivers better returns than the benchmark and take a call accordingly. But such a fund should not comprise more than 10-15 per cent of the portfolio," says Chaurasia of Personal FN.
Goldman Sachs Hang Seng Bees -
This ETF invests in stocks comprising the Hang Seng index. No other fund in India tracks the Hang Seng. However, there are many funds which invest in China. "Those looking to diversify can continue to hold the fund for some more time. However, one must avoid over-exposure," says Chaurasia.
IIFL Dividend Opportunities Index Fund -
It's the only ETF which invests in stocks comprising the CNX Dividend Opportunities Index.
"It suits investors who have a moderate to high risk appetite and want to gain from dividend-paying stocks in the CNX Dividend Opportunities index. Those who have already invested can hold on for one year and then take a call. However, if one wants to bet on the fund manager's ability to pick the best dividend-paying stocks, actively-managed dividend-yield funds are a better choice," says Chaurasia.
Goldman Sachs Shariah Bees (Goldman Sachs S&P CNX Nifty Shariah Exchange Traded Scheme) -
Shariah is an Islamic law which also applies to investments. Under this law, certain businesses, products and services are considered unacceptable. Examples include businesses related to gambling, alcohol and those lending on interest. An investor looking for a fund that is Shariahcompliant can invest in the fund, but if there is no such need, one can look at a diversified equity fund, say experts.
KNOW YOUR FUND UTI Transportation and Logistics Fund >> Invests over 70% money in auto and ancillary sectors >> Rate-sensitive fund SBI Magnum Comma >> High-risk fund with investments in commodity companies >> 44% exposure to energy companies >> 20% to metals >> 10% to construction >> 10% to chemicals Sundaram Rural India >> Invests in firms that have exposure to rural India >> 23% exposure to the FMCG sector >> 20% to chemical firms >> 10% to automobile sector >> 8% to construction firms JM Core 11 >> Invests in just 11 stocks; each stock cannot be more than 9.09% of the corpus >> Highly-concentrated fund Edelweiss Absolute Return >> Plays on corporate action, uses arbitrage between cash and futures markets |
UTI Transportation and Logistics Fund -
It's the only fund which focuses on auto and auto ancillary sector. The fund had about 71 per cent exposure to the automobile sector in August and is volatile due to its sensitivity to interest rates. It is for investors with a high risk appetite, say experts.
SBI Magnum Comma -
It's the only fund which invests in companies engaged in commodity businesses in oil & gas, metal and agriculture sectors. The fund can also invest in companies that provide inputs to commodity companies.
As on August 31, the fund had 44 per cent assets in energy, 20 per cent in metal and 10 per cent each in construction and chemical companies. "The fund has shown inconsistency in performance and is hence suitable for investors with a high risk appetite," says Chaurasia.
Sundaram Rural India -
The fund invests in companies with focus on rural areas. These include FMCG, fertiliser, chemical and automobile companies. In August, it had 23 per cent exposure to FMCG, 20 per cent to chemical, 10 per cent to automobile and 8 per cent to construction companies. "The fund has been an average performer and has disappointed many investors over the long term. Due to focus on consumption and agricultural products, it can underperform when these sectors are out of favour. The thematic approach may not suit those looking to benefit from the broader market movement," says Chaurasia.
UNIQUE STRATEGY
JM 11 Core Fund -
The fund invests in 11 stocks with each stock getting a weight of up to 9.09 per cent. In August, it had exposure to Dr Reddy's Laboratories, ICICI Bank, IDFC, Infosys, Larsen & Toubro, Tata Steel, Maruti Suzuki India, Bajaj Auto, Yes Bank, Power Finance Corporation and Tata Motors. The fund prefers large-cap stocks. What makes it unique is its objective to achieve capital appreciation from only 11 stocks. "Being a highly-concentrated fund, it has failed on all parameters. Investors will be better off shifting to a diversified and well-managed fund with a consistent track record," says Chaurasia.
Edelweiss Absolute Return Fund -
"The fund follows three strategies - low risk, trading on the basis of corporate actions and hedged equity investing," says Pothen of Fundsupermart.
There are other arbitrage funds in the industry but this one combines different strategies. It makes use of arbitrage between spot and cash markets, corporate actions and derivatives strategies. "It has lagged its peers in the arbitrage category. It may not be worth holding," says Chaurasia.
