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Go long term with your mutual funds
Value Research
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May 19, 2005
Have a query regarding mutual funds? Maybe we can help.

Drop us a line and mutual fund experts, Value Research, will do the needful.

Image I am a long-term investor and have investments in SBI [Get Quote] Global, Contra, Emerging Business Fund and HDFC [Get Quote] Premier Multi-Cap.

Is investing further in SBI Global at current levels with the Net Asset Value between 17.80 and 18.00 still a sound investment?

Also, I am thinking of pulling out of HDFC soon.

What do you suggest?

- Sparsh Bansal

There are a number of issues to be tackled here, so we will break-up our reply.

On the NAV front

One of the most common investment mistakes that mutual fund investors commit is to look only at the NAV of the fund before making an investment decision.

Let's say you are investing in shares. The current price level is crucial to base your investment decision because the current market price will tell you whether the stock is highly overvalued or undervalued.

In other words, does the price of the share justify its earning potential?

However, in a mutual fund, the NAV, which is the price of a unit of a fund, is irrelevant while making an investment decision. This NAV is totally dependent on the companies whose shares the fund has bought and their share price. So it depends on current state of the market. It has no intrinsic value of its own.

Therefore, whether or not you should invest in SBI Global or not should be governed by factors other than its current NAV.

If share prices are high and the market is in the midst of a bull run, the NAV will be high. If low, it will reflect in the NAV.

Let's say a fund coming out with an IPO has its units going for Rs 10. Another fund has its units going for Rs 20.

Both have invested in the same companies in the same proportion. When share prices rise, NAVs will rise proportionately.

If both rise by 10%, Rs 10 will become Rs 11 and Rs 20 will become Rs 22.

A mutual fund unit gets its value from the shares it invests in. If other mutual funds have invested in the same shares, you get the same benefit.

Further investment in SBI Global

Though you have not mentioned how much you have invested in each of the mentioned funds, we suggest you look at other funds before making your investment decision.

The reasons:

1. Three of your funds -- Magnum Global, Magnum Contra and Magnum Emerging Business Fund -- are skewed towards mid-caps.

Mid-cap stocks are those that have an average six-month market capitalisation between Rs 75 crore (Rs 750 million) and Rs 750 crore (Rs 7.5 billion). Market capitalisation is the number of shares multiplied by the current share price.

Mid-caps tend to be more volatile, and further investments in Magnum Global will make your portfolio even more biased towards mid-caps.

2. Magnum Global and Magnum Emerging Business Fund have quite similar portfolios. As per their portfolios for the month of April, their top four sectors are same.

Also, three out of the top five holdings of their holdings are common.

Further investment in Magnum Global will only make your portfolio more concentrated in these stocks and sectors.

3. Choosing some other good fund from a different house will also diversify your portfolio across fund houses, since three of your current holdings belong to SBI Mutual Fund.

Pulling out of HDFC

Coming to your second question, you have not written why you want to pull out of a fund with less than a month's performance record.

If you are concerned about its NAV that had remained below 10 for a few days, note: this is not a plausible reason to exit the fund.

You are a long-term investor, as you have written and, therefore, fluctuations in such a short time horizon should not be of concern to you.

In fact, there are other newly launched funds as well that have remained below par after launch. You should track your fund's performance at least for a few months before making a decision.

Such small ups and downs should not bother you. The minimum time horizon for an equity fund should not be less than three years and, preferably, even longer.

Got a question for Value Research? Please write to us!

Value Research

 

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

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Illustration: Dominic Xavier


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