Small investors hit as MF fortunes erode

The bigger the fund, the more severe was the drop in its NAV. The popular Magnum Equity Fund floated by mutual fund of State Bank of India, the country’s largest bank, had a NAV of 41.68 when the market was at its peak in February 21. Today, its NAV has fallen by nearly 60 per cent to 16.96. The bank’s Magnum Balanced Scheme also witnessed a sharp 60.75 per cent fall during the same period.

The NAV of Kothari Pioneer’s Infotech scheme with dividend option dropped 48 per cent to Rs 22.10, while the growth option slumped 37.59 per cent. Birla Advantage, the flagship scheme of the Aditya Birla group, came down to Rs 44.92 from its high of Rs 76.13 on February 21, eroding investment by nearly 40.99 per cent. The fund’s IT scheme with dividend option fell by 31.65 per cent (see table).

“I have invested all my retirement benefits in various mutual funds. The heavy speculation prevents me from playing in the market directly, so I take the mutual fund route. But the recent erosion of investors value has really put me on back foot,” said R Sreedharan, who has invested in a number of mutual funds. Many small investors also shifted their monies from fixed deposits to mutual funds hoping for steady growth and higher returns, following the rate cut on FDs. Tax benefits offered by the schemes also lured many investors.

Following the market crash and the consequent slump in NAV of many schemes, some fund managers also called press conferences to reassure investors and prevent panic redemptions. Birla Mutual Fund, which manages around Rs 4,000 crore assets, recently assured investors that there was nothing to worry about the markets’ erratic movement and that it was only a matter of time before their investments realised their value.

“With our long-term investment philosophy, our view is different. We believe that Indian technology stocks are fundamentally very solid and with well-defined revenue models, strong sustainability and high growth prospects, not to mention that many of them are indeed world class companies,” Birla Mutual Fund chief investment officer Bharat Shah said. Ruling out any diversification in portfolio, Shah said, "It’s even more risky to diversify from one sector and invest in three or four sectors."

To add to investors misery, the market was rife with rumours that the Rs 1,00,000 crore mutual fund sector was facing heavy redemption and several funds were unloading scrips in their portfolio to meet the pay-out. Compounding the worries, some mutual funds also stopped announcing the NAVs of their IT-specific schemes around the same time. Some funds even clarified that the schemes were undergoing book closure and hence the NAVs were not announced.

Mutual funds which were reccommending infotech stocks as excellent `buys’ have changed their colour with the market crash. “Anything that goes up as sharply as technology stocks… attracts profit broking, nervousness and weak short-term holders each of which triggers off selling at the slightest instance. In investment parlance, technical correction is bound to happen,” says Kothari Pioneer CEO Vivek Reddy in his letter to investors.

Market regulator SEBI had estimated that mutual funds would end up the fiscal 1999-2000 with around Rs 50,000 crore of inflows (gross). “MF collections had gone up partly in response to the tax breaks given to the sector in the general budget. Investors thought mutual fund schemes are safe bets when compared to direct investment in stock markets. This hope has now been belied,” said an analyst.