label of a mutual fund makes no sense!

If you have seen the Sprite ad, you will appreciate this for sure! Mutual funds have a compulsion to raise money continuously – and this they can do only if their sales team is able to sell.

However, in a very funny way, ‘what sells is what gets sold’ – so they need to come out with ‘NFOs’ (new fund offers) regularly. This is very simple – but for a SEBI diktat – which does not allow a MF to come out with a nfo if it already has an existing fund similar to the one that it wants to launch.

So mutual funds play the labelling game and you have an alphabetic soup out there – dividend yield, power fund, blue chip fund, mid cap fund, ….and we have about 400 equity schemes but labelled differently.

Having created such a large alphabetic soup fund the managers have to buy shares which fit into the ‘scheme’. This is difficult. If you are running a power fund for example can you buy the shares of a ‘merchant banker’ (thank God none of them are listed)? The answer is YES. Afterall you can argue ‘this merchant banker will help power companies raise money in the capital markets’. So the label is just a fable which was meant to ‘entrap’ you.

It is very difficult to run a very focused fund – especially for a short period – and all fund managers move jobs quite frequently. So a power fund can have a bank, a ‘opportunities fund’ can have a bank, a ‘special situations fund’ can also have the same bank. Also if you ran a blue-chip fund you could pick up the same bank. If you ran a ‘growth’ fund you could pick up the same bank, because it has a good growth prospects. If you ran a value fund you could still pick up that bank because its price has dropped and is now below the book value. If you ran a large cap fund you could pick up that bank because that bank is a large cap bank. If you ran a mid-cap fund you could pick up that bank because the bank helps small and medium enterprises.

So if somebody were to talk to you about investing in a ‘dividend-yield’ fund, ask for the portfolio, you may be surprised that the portfolio is similar to the ‘growth’ fund that you already own!

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3 Responses to “label of a mutual fund makes no sense!”

  1. Hi,

    Your views in this blog are not based on accurate facts.

    As per the blog, you say “what sells is what gets sold”. Tell me, in which industry do you find salesmen trying to sell what is actually good. Even in case of an FMCG salesman, he will sell more of Lux as compared to Dove because it is easier to sell!!!

    NFOs sell not because of the sales efforts. They sell because of the mentality the a Rs. 10 NFO is cheaper than Rs. 50 NAV. Something that advisors need to work on. If they at least advise investors, and not act as courier boys peddling forms, the practice will automatically stop.

    Also, in defence of Portfolio construction by Mutual Fund Managers, let me put it this way – do investors understand the difference in a focussed portfolio and a diversified one. Everyone who invested in the tech bubble “IT funds” were heard cursing the funds throughout the period of 2003-07, saying other funds bounced back but theirs did not. Did any investor try to understand the investment pattern or read the offer document before writing the cheque or signing the form? All that they wanted is a quick buck.

    Please let us understand, that most of us who call ourselves investors are nothing but speculators expecting the investing community to time the market better than us. If you read the book ‘The Intelligent Investor’ by Benjamin Graham, you’ll know what I am talking about.

    With the kind of competition in the investment industry, even good fund managers are forced to churn their portfolios against their wishes as the ‘investors’ would not want to see the same stuff in their portfolios. They want something “new”, some thing “different”, some different “story”, which drives sales teams to come up with new sales ideas.

    Also the mention about finding the same portfolios in different types of funds is justifiable. GE, the world’s largest company was a value play, a growth oriented stock, a dividend yield stock and a defensive bet – all at the same time!!! If a company like GE can be in all the baskets, Indian companies would pale in comparison. India is a high growth ecenomy and I am sure that any company that grows faster than the real GDP of any country can be classified as a growth stock. Lets take HUL for example – Dividend Yield is fantastic, the best defensive play that you can get, growing faster than the economy and at the same if one reads the balance sheets, it is a wonderful value play!!!

    I agree that so many different funds may not be required and probably the fund managers need to stick to their mandate more strictly than they do. However, in the cat kills cat scenarios where your performance over 10 year periods are of little relevance as compared to the last 1 month return, I do not blame these poor guys.

    Give tham a chance…


  2. if you think you know what is a mid cap, small cap and large cap see the portfolio of dsp blackrock mutual fund. You may start wondering about IOC, Bpcl, Tata Steel, Ntpc, Nestle, ….and wonder whether the manager is trying to predict that these are FUTURE small caps…!!

  3. Why can’t the mutual funds split the MF units to create the illusion of being cheap instead of starting a new fund?

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