ATM :: Mutual funds in 2014: Invest directly for big gains

Babar Zaidi, ET Bureau Dec 30, 2013, 08.00AM IST | Economic Times


The new year gift by Sebi for mutual fund investors has proved its utility. The direct plans launched by mutual fund houses at the beginning of 2013 churned out better returns for investors than their regular counterparts.

In some equity funds, this outperformance was as high as 75-80 basis points. Don’t underestimate the potential of what seems like a minor difference. Even a 75 basis point higher return on a 10-year SIP of Rs 5,000 can make a difference of Rs 50,000 in the final corpus value.

Within six months of their launch, the direct plans had cornered 25% of the total AUM of the industry. Reliance Mutual Fund had the largest AUM under direct plans, followed by UTI Mutual Fund and ICICI Prudential Mutual Fund. However, a study by Crisil shows that direct plans mostly attracted large investors, such as corporates and institutional investors.

Direct plans are no different from regular plans except that they have lower charges. The amount that the fund house saves on the distribution and commission expenses is passed on to the investor.

The year offered very important lessons to mutual fund investors. For one, small was beautiful. A clutch of tiny equity funds delivered spectacular returns, even as giant-sized schemes moved sluggishly. These money spinners are not mid- and small-cap funds that invest in little-known stocks and typically have low asset bases. They are large-cap and multi-cap schemes, which invest in blue-chip stocks and are highly rated by Value Research. Their performance is also no flash in the pan but has been consistently good over the past three years.

However, despite the good returns and high ratings, these schemes have not attracted the attention they deserve. The total AUM of these five schemes grew from Rs 210 crore in January to Rs 234 crore in November. Despite giving a return of 17.36%, the AUM of Tata Ethical Fund grew 7.5%, which shows that some investors actually sold off this money spinner.

On the other hand, gigantic funds, such as HDFC Top 200 and HDFC Equity, gave muted returns in 2013 because of their concentrated exposure to banking stocks. The two largest equity schemes in India had 28-30% of their total corpus in banking stocks. The sector declined by over 10% in 2013.

This brings back memories of the tech boom and bust of 2000, when equity schemes had lined their portfolios with IT stocks. In 2007, they had made the same mistake with infrastructure and realty stocks.

Strategy for 2014

If you are confident of investing on your own, it will be a good idea to move your investments to a direct plan. Before you do so, here are a few things to keep in mind. One, you might be slapped with an exit load if you shift out of the regular plan before the minimum period.

Also watch out for the capital gains tax. If you shift from one scheme to another, it is treated as a redemption. If your equity or balanced fund investment was made less than a year ago, there’s a 15% tax on any capital gain. If it is a debt-oriented scheme, the gain will be taxed as regular income.

Diversified equity schemes will be your best bet in 2014. Sure, some sectors such as IT, pharma and banking are expected to do better than others, but an astute fund manager will take this into account while picking stocks for the fund. If you still want concentrated exposure to a single sector, pick a good tech, pharma or banking fund. They may prove rewarding in 2014.

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