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Should you invest in New Fund Offers?

Published on Tue, Feb 13, 2007 at 13:58 | Source : Moneycontrol.com

Updated at Tue, Feb 13, 2007 at 16:15

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A few weeks back, when I read the factsheet of HSBC Mutual Fund, it reminded me of the movie "Kramer vs. Kramer". The connection was the title "HSBC vs.HSBC i.e comparison of 2 of their existing schemes.

We all know the Name Games that most fund houses play, and enough gyan has been published by several authors about New Fund Offers (NFOs), what to stay away from, and the nuances of mutual fund investing.

When new products are launched, fund houses and distributors alike share several themes or marketing wisdom. The lay investor is obviously bombarded with what we call as financial pornography. Innovative themes such as Invest in all 4 regions of India or invest in India's true potential are launched practically every month. So what should an investor do is the key question facing all of us today? (Also read - Mutual Funds: Your best personal Portfolio Manager)

The rat race for becoming the top fund house in the country is getting fund houses to launch several schemes that actually are nothing but a replica of some of their existing schemes. Some of the mutual funds do launch products to complete their portfolio, which is fair (e.g a fund house with no mid cap or balanced fund launching one). However, hardly any effort is made by the fund industry to educate investors by providing them the right set of offerings, instead most of the focus is on increasing the Assets Under Management (AUM) on the basis of collection in NFOs.

There are no set rules for differentiating advisors either. To the fund houses, the best advisor is the one who has the most assets. This is like saying that the best doctor is the one with most patients or should I say "Lives". (Also read - Should one invest in Index Funds?)

I restrict this article to a comparison of 2 schemes from one fund house to see if New Fund Offers are really anything different or just OLD WINE in a NEW BOTTLE.

At the start of 2006, HSBC launched a New Fund called HSBC Advantage India Fund. I asked one of their Sales Managers at that point of time "How is HSBC Advantage Fund different from HSBC Equity Fund (which is one of their core and best performing funds)?" I got some fundas on how the fund manager would pick stocks based on several themes prevalent in the industry but most of it was pure marketing talk. Beneath the layer I could see that most of the fund houses were adopting the "Make hay while the sun shines" approach and were launching another ME-TOO scheme under the garb of fancy terms.

Exactly 1 year down the line, December 2006 factsheet of the Fund house revealed the following

7 of the top 9 holdings in HSBC Equity and HSBC Advantage India Fund are same.
28 of the stocks in HSBC Advantage India Fund and HSBC Equity Fund were common. In all HSBC Equity had 35 stocks and HSBC Advantage India had 39 stocks.

HSBC Equity Fund			HSBC Advantage India Fund
Top 9 Equity Holdings as on Dec 29, 2006			Top 9 Equity Holdings as on Dec 29, 2006
Company	Value(Cr.)	%	Company	Value(Cr.)	%
Infosys Technologies	74.8	7.08	Infosys Technologies	83.15	5.93
Tata Consultancy Serv.	51.69	4.89	JaiPrakash Associates.	62.14	4.44
Reliance Industries	51.44	4.87	Larsen & Toubro	58.56	4.18
Mahindra & Mahindra	47.42	4.49	Bharat Heavy Electricals	58.4	4.17
JaiPrakash Associates.	43.25	4.09	Grasim Industries	54.91	3.92
Bharat Heavy Electricals	43.23	4.09	Nagarjuna Construction	54.68	3.90
Tata Motors	37.97	3.59	Tata Consultancy Serv.	52.42	3.74
Maruti Udyog	37.62	3.56	Tata Motors	51.73	3.69
Larsen & Toubro	37.56	3.55	Mahindra & Mahindra	44.16	3.15

Take a look at the holdings and does anything seem radically different to you. It's doesn't to me atleast but maybe the fund house has a different view on it.

Now let's look at the return component from Feb 24, 2006 (the date of first declaration of Advantage India NAV) till date.

					Returns
Scheme Name	Date	NAV	Date	NAV	Absolute	Annualized
HSBC Advantage India (G)	25/01/07	13.176	24/02/06	10.298	27.9502	30.4532
HSBC Equity Fund (G)	25/01/07	73.607	24/02/06	54.353	35.4235	38.5958

HSBC Equity scores by over 8 %.

So how much do the investors who have invested close to Rs 1700 crore in the fund lose? (Also read - How to profit from Mutual Funds?)

8% of Rs 1700 crore is a stupendous Rs 136 crore. This is the cost you pay by investing on the basis of Billboard ads, commercials, or rosy themes.

Moral of the Article:

Your goals and objectives are key, nothing can supersede your goals and nothing should.
Make sure you have a firm Investment policy in place - one that clearly spells out which product to buy for each goal, why to buy, when to buy and when to sell.
And finally say "No" to Financial Pornography that is thrown at you in the name of Newsletters, Insights, and New Fundas etc.

Don't alter your investment strategy or goals just because a new fund is launched in the market. How well it fits within your situation is more important than anything else.

HSBC Mutual Fund already has India Opportunities, and Advantage India in it's portfolio and they are now launching another "Unique Opportunities Fund". Guess the next fund might be "Distinct Opportunities or probably Regional Opportunities". Well I better not speculate on this one.

Happy Investing (or Sorry for some it can very well be "Happy Buying")

- Amar Pandit

The author is a practising Certified Financial Planner. He can be reached at amar.pandit@moneycontrol.com

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