The Hindu Business Line : Pullouts hurt new equity funds

Investors now seem to believe they can do the same with mutual funds as well. After garnering respectable sums of money in their IPO, new equity funds are finding a significant portion of their assets draining out within the first six months!

Kotak Global India Fund, for instance, collected about Rs 360 crore in its IPO in January 2004.

Today, though the fund has delivered a 40 per cent appreciation in its net asset value since launch, it has shrunk to 70 per cent of its original size. This suggests that well over a third of the initial investors in the fund may have pulled out within a year.

This is not a one-off instance. Similar numbers for 10 equity funds launched over the past year show that they have suffered net outflows of between 17 and 50 per cent in the period since launch!

It is not poor performance by the fund that is prompting these pullouts, either. Kotak Global India Fund has consistently figured among the top-ranking equity funds over the past year.

And the 10 new funds listed here have delivered returns of between 11 and 40 per cent to the investors who have stayed till date.

What, then, is prompting these pullouts, if not performance? Imperfect selling practices are one reason, feel industry experts.

"First, investors don't come in with the right (investment) horizon. I don't know whether this is because of a poor understanding of the product or wrong selling. Second, investors are encouraged to churn their portfolio very often, so that they keep moving from one product to another," explains Mr Ajay Bagga, Chief Executive Officer of Kotak Mutual Fund.

He feels that the solution is for the fund houses to strengthen relationships with customers.

"We are probably focusing too much on performance and too little on establishing a direct rapport with the customer," he says.

As a step to discourage such pullouts, Sundaram Mutual Fund, on its newly launched S.M.I.L.E Fund, has imposed an exit load of 2.25 per cent on redemptions within the first six months. Another industry watcher points out that the fee structure for mutual fund distributors actually encourages customer churn.

IPOs sold during their initial offer period usually earn the distributor a higher incentive, prompting them to hard sell them. The distributor also earns a fee every time the investor make a fresh investment from the entry load charged to the latter.

Investors, too, have their quirks. Some subscribe to IPOs because they believe that an opening NAV of Rs 10 per unit will provide them with better opportunities for appreciation. Others prefer new funds because they feel that the fund's unused cash position in the initial months will insulate it from any sharp fall in stock prices.

These investors may bail out after the initial months, if they feel their target returns have been met, say industry watchers.

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