What are the benchmarks for different mutual fund schemes in India?

The most common benchmarks are:

SENSEX
MSCI India
and a distant third...
Nifty 50

Check the MC ranking at www.moneycontrol.com.

Benchmark indices depends upon the kind of scheme and its portfolio. For equity funds bench mark can be like sensex, nifty.
For a sectoral fund, sector index wud be used.

In case of debt funds common indices used are crisil bond index, and i-sec bond index.

U can only compare apple with apple..is'nt.
And that is how the indices are chosen.

There are mutual funds and there are mutual funds. And then there are the mutual funds with a difference - which invest in real estate, futures markets, other funds, and even hedge funds. But not, so far, in India. As any seasoned mutual fund investor in this country will tell you: "Too many of the same old schemes. Can't really tell one from another. How does an investor decide where to park his funds?"

Take heart, dear investor. If the Securities and Exchange Board of India (Sebi) continues in the vein it has, a whole new world of mutual funds may open up for you. Sebi recently cleared a fund of fund (FoF) scheme. In fact, in its quarterly operational review July-September 2003, Sebi says that giving mutual fund houses an opportunity to "invest in the units of other schemes" is one of its significant achievements.

For long, the Indian MF industry has stuck to the tried-and-tested debt and equity schemes that are merely replicas of each other (though asset management companies claim otherwise). But now that the stockmarkets are running high on energy, even those who prefer to play the markets like a virtual reality game want a bit of that action. Mutual funds seeking to differentiate themselves are waking up to that fact. And have gone to Sebi in hordes with schemes ranging from commodity funds (including gold and real estate), FoFs and equity arbitrage funds.

Of course, not all may come out in the next couple of months. After all, both Sebi and the funds are charting new territory. Being new concepts (the futures market itself is relatively new in India), all of these require due diligence by Sebi and other concerned parties. For instance, a gold fund would require the scrutiny of the Reserve Bank of India, which has its own policy issues vis-脿-vis gold. The fund of funds concept also requires due diligence, as it could mean duplicity of existing mutual funds schemes. Besides, other issues like expenses and load factor have also to be taken under consideration.

While all that happens, here's what you can expect in the coming months.

Commodity-linked Funds

This is a first for mutual funds in Indian markets. Benchmark has applied for an open-ended gold fund called Gold BeES, the prospectus of which is with Sebi. The face value of 1 unit of the gold fund will be equivalent to 1 gm of gold, convertible into paper money at banks. Benchmark will hold the investors' money in bank deposits and track short-term changes in the price of gold, buying and selling whenever necessary. An investor can now have gold and earn interest by way of bank deposits. The gold fund, when it is launched, is likely to be listed and traded on the National Stock Exchange.

The price of gold has seen a sharp rise in recent years after nearly 20 years of slowdown, to touch Rs 5,675 per 10 gm. However, in the long run, inflation could rise faster than gold prices, thereby nullifying returns from gold.

Nevertheless, gold has always held sentimental value for Indians and if the gold fund succeeds, asset management companies (AMCs) may float other commodity-linked schemes too, like real-estate funds or a silver funds.

Fund Of Funds

While the fund of funds (FoF) concept is new in the Indian markets, it has been around for years in the American and European markets. It is essentially a mutual fund that invests in, well, other mutual funds. An FoF can either invest in equity schemes, or debt schemes, or a combination of both, or any other schemes that are expected to perform well. For instance, Franklin Templeton has applied for three different mutual fund products, with different proportions of debt and equity (See 'Franklin Templeton's proposed FoFs').

The rationale behind the FoF idea, which is essentially an open-ended fund, is that even if one scheme does not perform, the loss risk is significantly reduced because the investments are spread over a number of schemes. Besides, fund managers will undertake a systematic portfolio re-balancing to maximise gains and phase out non-performing funds. The FoF is aimed at retail investors as well as institutions.

There is a glut of players foraying into FoFs: Prudential-ICICI AMC, Birla Sun Life, Benchmark and Franklin Templeton, among others, all of which have drafted offer documents with Sebi. Pru-ICICI has already got the nod for its FoF product, PruICICI Advisor Series. The scheme is open to the public through an initial public offering (IPO) till 28 November at Rs 10 per unit. The minimum investment required is Rs 5,000. The others will launch their schemes once Sebi gives the go-ahead.

Incidentally, all these AMCs are investing in their own funds as most feel they have the necessary diversity in their own portfolio to suit their investors' needs. Raghavendra Nath, head of strategy, Birla Sun Life, hints that if the investor so desires, his AMC could invest up to 30% of the portfolio in other mutual funds' schemes. This would include gold and real estate funds.

What companies are loath to discuss, however, is the potential escalation of costs. The company would invest in different schemes under the FoF, and charge an entry load of, say, 2% for each fund, as well as an entry load for the entire scheme after the IPO. Thus there will be a 'double layering' of costs. There will be a management fee accruing to investors if the AMCs floating the FoF are to invest in funds of other AMCs. Also, if there is going to be a churn in the portfolio, a certain percentage of returns will be lost due to the cost of re-balancing. All of these would end up reducing the returns on FoFs.

Equity Arbitrage Fund

The equity arbitrage fund is the closest any mutual fund scheme in India can get to a hedge fund. Sebi has not allowed any asset management company to float a hedge fund in India. Benchmark has plans to launch a 'dynamic arbitrage fund', which will basically try to exploit any arbitrage opportunities that arise from derivatives trading. A fund manager would buy the equities in the capital market and sell it in the futures market, making good the difference. This is how it works: if company ABC's stock is trading today at Rs 30 per share and is expected to rise over the next month, the one-month futures price of the stock will be higher, say, Rs 35. A fund manager would then buy the underlying stock and sell it in the futures market, making a gain of Rs 5. The equity arbitrage fund is market neutral; hence, it will not be affected by temporary fluctuations in the Sensex.

Sanjiv Shah, executive director, Benchmark, says: "After analysing the differences between the underlying price and futures price of shares over a period of three months culminating in September, the results suggest that returns would have been 15-18%, had we undertaken equity arbitrage." He foresees tremendous opportunities for growth and expects returns to outweigh those from money market instruments. Minimum investment in the dynamic arbitrage fund will be of the order of Rs 2 lakh, and it is essentially an open-ended scheme (though withdrawals will be limited to once a month).

However, since it is an equity scheme, there will be a potential decline in returns through portfolio churn. And even though it is 'market neutral', it is still subject to the risk associated with equities and derivatives trading.

Innovation, they say, is the key to success. So in the universe of mutual fund schemes, these new ones might just catch the discerning investor's eye. It is still too early to say whether the asset management companies have a sure-fire winner on their hands. Meanwhile, sit back and watch the action unfold.