Personal Finance: New Funds On The Block

Old, I always say, makes gold even if it is the mutual funds business we're talking about. My wife then pointed out the (falling) prices of gold to me, which made me think it was time to re-examine me prejudices. If you look around, you will find that there are more than a dozen new mutual fund schemes on offer today, with at least 3 of them being umbrella funds focusing on specific sectors. While these schemes are, probably, all worth investing in, will they prove to be superior investments? Will they fetch me better returns than the older schemes in the long run? Will the specialised schemes do better than the general schemes?

I know, I know, conventional old me has always warned you to steer clear of new schemes, and to invest only in those with established track-records of 3 years or more. But, if you are crazy enough to follow my advice, you will have to ignore 66 of the 101 open-ended funds that have been launched in the past 3 years-including the 31 that are less than a year old. At the very least, I felt we should study the performance of these schemes in statistical terms before vouchsafing any generalisations. And that's what I spent the last fortnight doing.

Take one wild guess about what the numbers told me. That's right, my key finding was that the new equity funds all yield higher absolute returns than their predecessors. In fact, there's a kind of inverse correlation between the age of a scheme and the returns it offers. However, and this is crucial, this was only possible because the new fund-managers took greater risks than the older ones would. And, on a risk-adjusted basis-which is the fundamental assumption of the BT-Value Research Mutual Fund Scoreboard-I was right all along: the new schemes simply could not outperform the old schemes.

Although I couldn't perform the same kind of operations on the sector-specific schemes for want of data, they could deliver superior absolute returns although they will not enjoy the benefits of diversification. In my opinion, since such schemes contain stocks that normally move in response to stockmarket upheavals, they should suit investors who want growth over a 3-5-year time-frame. Personally, I would invest in such funds only as add-ons to my primary portfolio-not as a complete investment solution.

So, don't buy the units of any scheme just because it is new. Consider a new scheme only if you like a particular sector, and invest in it only if you are able to establish a fit with your portfolio and needs. Even then, I will always argue that you should prefer a fund-manager with a good track-record. For, only if you evaluate schemes over long periods of time will you be able to cotton on to their performance pedigrees.

THE GROWTH UMBRELLAS

Unit Trust of India
(Growth Sector)

SBI Mutual Fund
(Magnum Sector)

Tata Mutual Fund
(Life Sciences & Technology)

Brand Value

Pharma & Healthcare

Software

Services Sector

Petrochemicals

Infotech

Pharmaceuticals

FMCG

Contra Fund

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Infotech

Pharmaceuticals

FMCG

Agro & Biochem

Telecom