The Hindu Business Line : Bullet, barbell and ladder

ONE day it is the FII gang that is after desi mutual funds, sniffing to route their funds. Another day it is the MFs who are eyeing the commodity markets as good prospects. For those who are joining the MF show (and we're not talking about any exhibition of horse paintings) late in the day, Sundar Sankaran has just the right book for you — Indian Mutual Funds Handbook, published by Vision Books (visionbk@vsnl.com).

Shekhar Sathe writes in his foreword that the quality of an MF is best described by the acronym RESTFUL — risk/reward relationship; ease in transacting; service standards of the fund-house; transparency of disclosures to investors; familiarity of the fund-house to customer needs; utility of the scheme to meet investors' financial planning needs; and liquidity. If that makes you too restful, preface can shock you with a line like this: "Even many who have been part of the industry for several years continue to have some misconceptions."

In about a dozen chapters, Sundar takes readers through the legal structure of MFs, equity investments, debt market, derivatives, net asset value, offer document, taxation, financial planning, and investor protection, wrapping up with case studies. How is an MF like a laundry? To answer, there is a story with a moral: There is a danger of losing your shirt. Intro will take you through the jargon jungle, so you'd know that AMC is not annual maintenance contract; NAV is not pronounced naïve; STP is a stranger to software technology park; systematic withdrawal plan is not a trick to siphon off value; and funds can have crores as AUM, that is, assets under management. Take a SIP of water before you proceed, but that's systematic investment plan, a close cousin of value averaging.

If you thought there are only two types of shares, equity and preference, read in chapter 3 about stocks sporting first names such as growth, income, cyclical, defensive, momentum and value. That is one too many, and so `burp,' you say, but GARP stocks are those that offer `growth at a reasonable price'. Okay, you then cross about half-a-dozen risks in debt market — such as interest, credit, re-investment, call and forex — and land in style where await bullet, barbell and ladder. They are only different investment styles, so pinch yourself as lucky to be alive and moving on to the ocean of derivatives. `Loads' come thereafter even as you drive the MF `pass through' vehicle. What a load, you groan, but the answer could be deferred, entry or exit. There's something to occupy your accounting skills in the `liability' chapter where you can pencil through the balance sheets.

All right, you know about double taxation. What is double indexation? It is "the practice of taking the benefit of indexation for two years, while holding the investment for just over a year". Don't forget Sec 88 of the I-T Act that has a soft corner for MFs. You can't avoid comparisons when trying to choose a fund. So, CAGR (note, this is not from the supreme audit body C&AG, but compounded annual growth rate) is one approach to calculating compounded returns. "XIRR is another approach," writes Sundar. Is that "extra income repayable regularly''? Too wishful to believe, but no. XIRR is an Excel function that "captures information on the timing of various cashflows during the holding period of investment". For diehards, there is more. Such as: Beta, convexity, Sharpe ratio, Treynor ratio, Jensen Alpha, Eugene Fama, M2 and RRR. The book offers tips for financial planning. And Sundar is confident you'd make money on the MFs and so guides you to make a neat Will too.

Good fun, reading.

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BookValue@TheHindu.co.in

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