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N Mahalakshmi
Despite a number of mutual funds posting remarkable gains even at the peak of market turbulence, the negative perception about mutual funds in India doesn't seem to be changing. That's not without reason. The fabulous gains from the superior performing funds have not trickled down to precipitate a change in investor sentiment for the simple reason that these funds control only a very small portion of the total funds available to the industry.
The funds under management of the better performing class - the private sector mutual funds - is less than 6 per cent. UTI still controls 83 per cent of the Indian fund industry. And the public sector mutual funds, apart from UTI, which have been rather inactive in the bearish phase after the 1994 scam command the rest of the cake. Among the equity funds, barring one or two, all schemes from public sector mutual funds including UTI, have been mediocre performers at best.
Browsing through the latest financial result of the mutual fund behemoth, two startlingobservations come to the fore: (a) Investors are waking up to reality and turning their back on non performers and (b) UTI has been a victim of its own conduct. During the one year period ending June 1998, all the growth funds of the mutual fund behemoth, The Unit Trust of India, have faced tangible redemptions.
The 14 equity funds, which offer an exit option either by virtue of being open-ended or offering a repurchase in case of closed-ended funds, have confronted a net outflow of Rs 1,117 crore during the year. Of this, the three open-end funds alone have contributed to 36 per cent of outflows. The combined unit capital of all growth funds was down 9.25 per cent. The decline would have been greater by 3.15 per cent had the four growth schemes launched during the year not garnered Rs 283 crore.
Index equity fund was the only equity fund to record an inflow of Rs 1.84 crores -just a drop in the ocean. That's not all. The most alarming thing is that the funds under management or the investible corpusunder the various growth schemes of the mutual fund major has declined sharply from Rs 14,699 crores in June 1997 to Rs 10,452 crore in June, 1998. Of this depletion of Rs 4247 crore, nearly 20 per cent is attributed to redemptions while the rest 80 percent is on account of depreciation in the value of assets.
PERFORMANCE
The bear has finally pinned down UTI. The average depreciation in the net asset value of UTI's growth funds during the one year period ending June 30, 1998 was 20.75 per cent as against a fall of 23.62 per cent and 21.90 per cent in the BSE Sensex and the National index respectively. Out of 17 equity funds of UTI, 12 outperformed the BSE Sensex while 8 outperformed the Natex.
Besides, UTI's equity funds have failed to keep pace with other top performing peers in the past two years. During the one year period, the average fall in the NAV of all growth funds excluding those of UTI was 9.27 per cent - less than half of the average fall in UTI funds.
Open-end growth funds fell byan average 4.13 per cent, while the three open-end equity funds of UTI, which constitute over three quarter of this segment, registered an average fall of 18.71 per cent - over four time the average fall in other open-end equity funds.
Closed-end funds of families apart from UTI lost an average 10.40 per cent while UTI funds were again the underperforming lot depreciating 20.33 per cent. One out of three open-end funds of UTI underperformed the sensex as against one out of eighteen among the rest of the open-end funds.
Twenty-three per cent of equity funds posted a gain while none of the UTI funds were even close to a positive figure. The best performing fund, Mastergain '91 was down 9.67 per cent. Unbelievable but true - none of the UTI funds was even an above average performer. The best performing equity fund, Alliance Capital Tax relief posted a return of 30.68 per cent outperforming the best performing UTI fund by a mammoth margin of 40.35 per cent. The benchmark was hardly a standard as 92 per centof the funds outperformed the BSE Sensex.
But are declining markets to be blamed solely for the depreciation in value of assets of UTI's equity funds ? No. Both the fund management as well as the huge corpus are to be blamed equally. For instance, Mastergain with a corpus of over Rs 1750 crore, has over 250 equity holdings in its portfolio. This makes portfolio monitoring a rather difficult task. However, better fund management could have enhanced the performance of quite a few if not all. Particularly in a year when the rules of the game have changed and growth stocks have stolen the show, UTI funds with their predominantly value-oriented portfolios have been laggard.
The size of Mastershare, Mastergain and Masterplus were unable to benefit from the infotech led rally of 1997 for the floating market capitalization of these stocks was not enough to absorb all their monies. UTI has, historically, invested in large-cap stocks and the fund management has been passive. With little room to time the market dueto the size factor, except for minor tinkering of portfolios, UTI funds continue to hold on to these stocks till redemption. While this strategy is justified in case of funds with a large corpus, UTI has been following the same technique even in case of its smaller funds. The underperformance of Grandmaster is a case in point. Birla Advantage with a similar size and portfolio orientation as Grandmaster has managed to grow by 34.01 per cent compared to a negative growth of 24.31 per cent in the latter in the past one year.
Besides investment performance, UTI's investor servicing in its open-end equity funds also leaves a lot of room for improvement. While most open-end funds disclose their portfolio quarterly, UTI does it less frequently. Most open-end funds offer sale and repurchase based on the previous day's NAV.
UTI follows historical pricing in its three open-end equity funds. This essentially means that funds likes Birla Advantage will be available on December 4 on a price based on the NAV ofDecember 3 while UTI Mastergain '92 is available on December 4 at price of December 1. UTI's resistance to change track with the changing market scenario has costed it dearly. With investor interest in equity products at its nadir, UTI is unlikely to attract huge sums in its equity products. After the controversy, Unit Scheme '64 is already reeling under redemption pressure. With interest rates becoming more volatile than ever before and the existing assured return schemes of UTI facing shortfalls, UTI will be under pressure to reduce its reliance on assured income products. If the mutual fund major fails to mend its ways and improve investment performance, it may be forced to relinquish its dominance sooner than later.
-- Value Research
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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