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Investment: How to assess funds that just entered the market

Investment: How to assess funds that just entered the market

There are ways to assess funds that have been in existence for just a few years. The fund's comparison with peers over one year can give a picture about its performance, though planners say one year is too short a period to judge a scheme.

What is the first thing that you look at while investing in a mutual fund ? Past returns, perhaps, in spite of the fact that a good past performance is no guarantee that the fund will do well in future too.

You may also look at the star status of the fund manager and the fund's assets under management (AUM). While these are important in assessing funds that have been around for some time, how can you be sure about those that have recently come into the market?


The fund's comparison with peers over one year can give a picture about its performance, though planners say one year is too short a period to judge a scheme.

For instance, equity diversified schemes of funds that have set up shop in India in the last three years have generated an average return of 4.90 per cent, while those older than three years have returned 3.98 per cent. While this shows that funds from new asset management companies have done well overall, it will be nave to assume that all new funds are doing better than the established ones.

Experts say investors who do not have the means to find out the pedigree of the fund house should wait until it has a long record of delivering good returns.

"Investing is a personalised act. If investors are comfortable with what they see in schemes from new fund houses, they can consider investing in them; else, they should wait to build more conviction. Until then, they can invest in other funds," says Vicky Mehta, senior research analyst, Morningstar India.

However, if a new fund house launches an innovative scheme , those with some risk appetite can invest in it. "When we recommend a scheme from a fund house, we see if the fund house has been in existence for at least two years. It is hard to convince investors to buy new funds, especially in this volatile environment" says Renu Pothen, research head, fundsupermart. com India.

The returns log shows that a one-of-its-kind fund, Motilal Oswal Nasdaq 100 ETF, rose 50 per cent between January and August from the same period a year ago. Motilal Oswal Nasdaq 100 ETF is an exchange-traded fund which seeks to match the returns from Nasdaq 100 index.


Retail investors may not be in a position to analyse the fund house's pedigree, which determines policies and practices of a firm as well as the support system in terms of finances. "We look at pedigree as it determines policies (investment and other), which in turn impact the funds' performance over the long haul," says Mehta of Morningstar. For example, Axis Mutual Fund is promoted by Axis Bank, which has a large presence in the country. The bank's policies and practices will impact the fund house as well.


Most investors fancy star fund managers, something experts advise against. Experts say credit should go to the entire investment team rather than a single person. New fund houses may not have star fund managers but they may have people who have the skills to generate good returns. "A skilled manager can deliver an impressive performance while maintaining a low key. A fund manager's prominence has nothing to do with his investment skills," says Mehta of Morningstar.

Pothen agrees, "A fund's performance cannot be attributed to only the fund managers. A big team contributes to the success."

Experts suggest caution on another front. Many fund houses promote schemes by highlighting the names of their star fund managers. But in reality, many of them may not be at the helm of the scheme and may have been promoted to the role of chief investment officer or head of equities.


AUM is a popular criterion used by retail investors to assess a fund. A new fund house has little chance in this race. Experts, however, warn against over-reliance on AUM, except in a few cases. "Barring a few scenarios, a fund's asset size has no bearing on its performance. On the contrary, a large size can pose challenges for smalland mid-cap funds in the form of market-impact cost, the opportunity cost of having to spread out trades over longer periods and liquidity management," says Mehta of Morningstar. However, large AUMs are good for debt schemes as they can translate into best buy/sell price for securities, say experts.

Published on: Nov 29, 2012, 12:00 AM IST
Posted by: Gaytri Madhura, Nov 29, 2012, 12:00 AM IST