IDBI-Principal Future Goals Series

Recommendation:

IDBI-Principal Growth Fund: Avoid for now

IDBI-Principal Income Fund: Invest now in small lots

IDBI-Principal Balanced Fund: Avoid

IDBI-Principal Cash Management Fund: Invest

Suresh Krishnamurthy

AFTER the entry of Principal Financial Services as an equal stakes joint venture partner in IDBI Mutual Fund (now IDBI Principal Mutual Fund), the fund has made its first initial public offering. On offer are four schemes -- an equity scheme, an income scheme, a balanced scheme and a liquid scheme.

IDBI-Principal Growth Fund: According to the offer document, this growth fund is an equity scheme focussing on stocks of companies which have prospects for above-average growth over an extended period of time. The aim of the fund is to build a diversified portfolio with the objective of providing long-term capital appreciation. The scheme is suitable for investors who are willing to risk investing in growth stocks vis-a-vis stocks of companies with lower potential for growth.

Judging by the disclosures in the offer document, the investment focus is likely to be more on growth stocks from sectors such as software, FMCG and pharma with exposures to other stocks built in to provide the benefits of diversification. This is more or less in line with the investment strategy followed by other mutual funds in their diversified equity schemes. However, a negative in the case of IDBI is its past track record which, in equity investing, has not been too impressive. While the entry of Principal Financial Services is a positive development, it may be better for investors to wait for now and evaluate afresh after considering the performance of the fund.

IDBI-Principal Income Fund: According to the offer document, the fund would invest in fixed-income securities. Generally, it would invest on a long-term basis. The focus of investment in longer-dated securities indicates that shorter-term volatility in net asset values cannot be avoided if interest rates change sharply. In this backdrop, only investors who are willing to invest with a longer-time horizon should consider investing in the fund.

Another factor to be considered is that the fund has not indicated its preference for active fund management in its income scheme. This may tend to enhance the risk profile of the scheme. On the other hand, considering the recent rise in interest rates, this may be an opportune time to invest for the long-term. In this backdrop, investors can opt for subscribing in small lots, while exposures can be enhanced after considering the fund performance.

IDBI-Principal Balanced Fund: The balanced fund would invest a minimum of 50 per cent in equities and 30 per cent in debt instruments. Also, the equity and debt investments would not invest more than 70 per cent in equity and 50 per cent in debt. According to the offer document, the fund would not take high risks in managing the equity portion of the portfolio. The scheme would focus on stocks that have predictable earnings and which based on growth prospects are under valued at the market place.

Similar to the equity fund, investments in the balanced fund can be avoided for the time being since the track record is not too good. This is especially more important given the fund's stated objective of value investing. After evaluating the performance of the fund, investments can be considered. Also, balanced funds do not appear attractive per se since the asset allocation decision needs to take into account the needs of each individual investor, which balanced funds do not. Since the asset allocation concept introduced by IDBI-Principal Fund provides such an option balanced funds can be avoided.

IDBI-Principal Cash Management Fund: The cash management fund has two options -- Money at call option and liquid option. The liquid option is for the retail investor while the money at call option is targeted at the institutional investor. Most treasury management products in India have generally performed quite well in India in recent times. Given this backdrop, investments can be considered by investors.

Terms and conditions: The terms and conditions applicable for the four options are similar. The fund offers dividend plans and growth plans for investors with facilities for dividend re-investment, dividend sweeping, systematic investment and systematic withdrawal. In the case of initial issue expenses, 6 per cent is charged for equity and balanced funds. For income and cash management funds, the initial issue expenses are being absorbed by the asset management company.

Investors who have opted to invest in the equity and balanced schemes can choose the dividend option for now. A re-evaluation of the option can be considered after the budget pronouncements next year on taxation of dividends declared by equity and balanced schemes.

Asset allocation: Innovative, but...

THE IDBI-Principal mutual fund has also come out with an innovative concept of asset allocation in this offer. Under the asset allocation facility, an investor can suggest the proportion of amounts to be invested in two or more schemes. The investor is also allowed four opportunities in a year to switch between schemes -- that is, change the proportion.

Also, there is an auto rebalancing facility every June and December when the mutual fund would automatically reset the asset allocation to the proportion indicated earlier by the investor. The advantage of the asset allocation concept is that the investors can opt for a particular proportion based on the needs. For example, a young investor can invest more in equities while an older investor can choose to park more in debt instruments.

However, the negative aspect for an investor is the semi-annual auto rebalancing. Since funds can appreciate over six months, a switch would involve tax implications. A portion of the investments, which gets shifted every six months, would always remain short-term investments. The tax for short-term gains in the maximum marginal rate is now 34.5 per cent for individuals. This incidence of taxation would as such bring down the returns for an investor. Alternatively, if equity funds decline, the investor would incur short-term loss, which cannot be set off against any other income except capital gains. These issues can be avoided if auto rebalancing is done once a year or earlier, if the investor so chooses.

Nature of Scheme : Open end

Schemes on offer : Growth,Income,Balanced and Cash management

Mutual Fund : IDBI-Principal Mutual Fund

Fund Manager : IDBI Principal Asset Management Co.

Sponsors : IDBI and Principal Financial Services Inc.,

Minimum amount : Rs 5,000 and in multiples of Re 1 thereafter

Asset allocation : Rs 8,000 and in multiples of Re 1 thereafter

Liquidity : Repurchase at NAV

Scheme reopens : November 23