Every bull market seems to compel the mutual fund industry to go into a NFO overdrive and this one has been no exception. But going by the over 50 NFOs launched in 2014, the industry is running out of new ideas. Most of the new schemes with vague labels like 'equity oriented fund' and 'equity focussed fund', were mere clones of established open end schemes, with a close ended twist.
Instead of resurrecting long-dead categories of schemes, why don't fund houses reach out to their two crore investors to find out what types of funds they would really like to have? From my chats with investors, here are three kinds of funds that investors want. Can the industry oblige?
An inflation hedge fund
One basic objective that most Indian investors would like to meet, but fail miserably in meeting, is to hedge against inflation.
Equity gurus will tell you that if you hold equity oriented funds for the really long term, they will certainly beat inflation. But the flat equity markets between 2008 and 2013 showed us that equity funds can lag inflation or 'shorter terms' like 5 years. Options like bank deposits and post office schemes, once you account for taxes, regularly fall two steps behind inflation. So, if I want my investments to beat inflation from year to year, where do I go?
The fund industry must devise a solution for this. Maybe such a fund can construct a portfolio of high yielding bonds and bluechip equities to meet this objective. Or it can use a mix of gilts and high dividend yielding stocks (which are available aplenty during market lows). Or it can be fashioned out of commodity stocks or even commodities that make up big weights in the inflation index.
Generating inflation beating returns isn't a tall order. The maximum CPI inflation rate recorded in India in the last ten years was about 15 per cent, the minimum was about 3 per cent. Given that mutual funds have access to a far wider basket of investment options than the retail investor - gilts, wholesale bank deposits, corporate bonds, commodities, derivatives - they are surely better placed than us to devise an inflation-beating portfolio.
A fixed dividend fund
It's quite surprising isn't it, that despite the stunning variety of debt, hybrid and monthly income funds that the industry has devised for us, we don't have a fund that can deliver predictable annual income?
Yes, monthly income plans have this mandate. But given their equity component, they are liable to skip dividends for a month or two if equity markets misbehave. Equity funds do declare dividends, but they are hardly the ideal products for predictability.
Of all the scheme categories, debt mutual funds alone have portfolios that are designed to generate regular accrual income. But with the category going in for 'active management' and all kinds for specialisations - short term/long term, corporate/gilt, fixed/floating- fund houses seem to be trying too hard to deliver capital appreciation to debt investors.
Instead of frenetically churning the portfolio to make the most of gyrations in interest rates, investors would probably appreciate it, if the debt fund industry came up with a debt scheme that simply declared fixed dividends every year, like clockwork. The dividends need not be double digit, but need to be predictable. Investors may be quite willing to accept a close end fund with this mandate.
A capital gain REIT
Most Indian investors would like a real estate component to their portfolio. And investing in real-life property is no joke requiring huge commitments, leverage and dealing with interminable delays and risks that a builder may foist upon you. REITs were supposed to solve this problem.
But Indian REIT regulations, in their current form, are a clone of the global model. They are mandated to invest mainly in commercial property, rely on meagre rental 'income' for returns and pay out a chunk of their 'gains' as dividends. Instead, how about desi REITs which can focus on residential property and land and deliver, not dividend income, but hefty NAV- based capital gains to investors if held for 8-10 years? This can deliver decent property linked returns to investors without the concentration risks and hassles of actually managing pieces of property.
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