| . | If you walk into a five star hotel and order a cup of Coffee, you may be presented with a flask of dicoction, a glass of milk, and a bowl of sugar seperately. The idea is that you can mix them to your customized taste rather than accept the ready made mix prepared by someone else. If however you are not adept at the art of mixing, you may end up mixing a too strong or a too light a coffee and end up feeling that you would have been better off with a readymade coffee. A similar diemma now confronts the investors as the "Trend of Customized Mutual Funds" enters the Indian scene. During the last two weeks we discussed two mutual fund investment opportunities, viz the UTI Millennium Fund and SBI Magnum’s Sector Fund Umbrella. They represented this new generation of Mutual Fund instruments which presented a customizable basket of several sector funds to the investors. The concept is innovative and many investors would be attracted to them not only during the initial issue but also after they open their books for sale later. But like all customizable products, the responsibility to get the best out of the product now lies with the investors. Otherwise they may end up making a mess of their investment. Let us therefore try to identify a customization method by which we can get at least a better than average benefit out of the products. As we have already discussed in detail, both the above fund offers are packages consisting of multiple sector funds with a free transfer of funds permitted between different funds at NAV s of the respective funds without any exit or entry loads. The UTI package has five sector funds while the Magnum fund is a package of 4 funds. The normal approach of investors is to chose the sector fund which is likely to do best and keep switching funds from less performing sector funds to better performing sector funds from time to time. In this game of dynamic portfolio balancing, only some of the investors will be smart enough to forecast the trend of the market and act at the right time. A majority of the ordinary investors would not however be so capable and may remain passive expecting the fund manager to do his best. The difficult part of managing this investment is, identifying the funds from which they need to exit and the fund to which they should shift into. To get the best out of investment in these package funds, investors can borrow the principle of "Following the Trend" which is the basis of technical analysis and charting techniques of investing in the secondary markets. Investors in the UTI Millennium Fund and the Magnum Sector Fund Umbrella can adopt the following similar but simplified approach. Both the above funds will periodically announce the NAVs, which reflect the performance of the funds in terms of the market value changes of the underlying portfolio of investments. Under the suggested strategy, investors should get information about the corpus of each of the funds at different points of time and tabulate the information in the format indicated in the table below.
After ranking the funds based on the increase of corpus of a fund in the tracking period, investors should pick the Top 2 of the five funds and shift their investments from other funds into these two funds only. In every subsequent evaluation, they should keep moving their funds into only the top 2 funds for the time being. Even if this means reversing their earlier decision, they should continue to do this without hesitation since they will be actually following the market closely in such decisions. The evaluation period should be as short as feasible and perhaps will be determined by the periodicity of information flow from the fund managers. This simple strategy should provide ordinary investors an opportunity to systmatically harness the intelligence of the more experienced co investors of the fund. Na.Vijayashankar 5th June 1999 | . | ||||||||||||||||||||||||||||||||||