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What mutual funds don't reveal
September 09, 2004 12:30 IST
A cursory glance at the objectives of most mutual fund schemes is likely to leave investors truly confused. The scheme's objective should be a coherent statement which tells investors what the scheme stands for.
It should convey what the fund manager's area of operation will be i.e. what kind of investments he will make and what investors can expect from the scheme. Put simply the objective is a précis which introduces the scheme to the investors.
Sadly what we experience are objectives which convey very little and sound more like clones of every other scheme. Terms like "long-term capital appreciation", "higher yield" are habitually used, but the need to define them is rarely felt.
Let's take a few examples to better understand this.
When an equity-oriented mutual fund's objective simply states "to achieve capital appreciation" it fails to communicate anything significant to the investor. The objective reveals neither the investment style nor management style; also it doesn't inform investors for what tenure they should be invested in the fund to achieve capital appreciation.
A fund claims to be an open-ended growth scheme investing in high dividend yield companies. But the term "high" is not explained or benchmarked against any standard. This part has been left to the investors' imagination.
On the other hand an articulate objective can be an advantage for the fund and the investors. The objective can prove to be a guiding force which helps an investor select a given fund from a host of choices available to him.
It can help him pick the fund that best matches his own investment objective and profile. Similarly for the fund house it's an opportunity to attract the right investors who agree with their professed philosophy.
Fact sheets of leading schemes and their objectives
For example an objective reads "the fund seeks to achieve long-term capital growth and will invest across all market capitalisations including small, mid and large cap stocks.
The fund aims to be predominantly invested in equity and equity related instruments but can move a significant portion of its assets towards fixed income securities if the fund turns negative on equity markets."
An investor opting for this fund knows reasonably well what to expect from his investment. Though it would have been even better if the objective had specified a minimum tenure of investment too.
A loosely defined objective brings a certain degree of ambiguity to the investment which is not a positive sign. Conversely a clearly defined one signifies a commitment on the fund's part; something investors can draw confidence from.
The next time you decide to get invested in a mutual fund scheme pay attention to its objectives as well. It might reveal more about the fund than all the numbers and statistics!
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