Why is my fund's NAV so low?

ave a query regarding mutual funds? Maybe we can help.

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

I invested in Franklin India Flexi Cap by buying 2500 units during its IPO.

But the fund's NAV has not gone beyond Rs 10. On May 25, it was 10.08.

When can I expect the NAV to rise handsomely?

Do you have any idea where they are investing – which shares are they buying?

- Shantanu Banerjee

The Franklin India Flexi Cap (see below for a detailed explanation on flexi cap funds) fund has created a history of sorts by mopping up over Rs 1,950 crore in its Initial Public Offering in February 2005.

This was an amazing amount of money to be collected in a fund IPO.

Overnight, Franklin India Flexi Cap became India's largest open-ended equity fund, displacing its stablemate Franklin Bluechip, which took more than a decade to reach its current size.

The scale of Franklin India Flexi Cap's success (and that of other new funds during the period) shows that, to many people, hype is more important than a long track record.

It is true that Franklin India Flexi Cap's Net Asset Value -- the price of a unit of a fund -- is below Rs 10. But so are most of the funds which were launched during the same period. So there is no reason to panic.

Franklin India Flexi Cap started declaring its NAV from March 7, 2005; since then, the equity markets have also declined.

The ultimate aim of every fund manager is to deliver a superior return as compared to its stated benchmark and rank among the top funds in its category. But if there is a slide across the board in the equity market, you can't expect a miracle.

Always look at a fund's returns from the viewpoint of the benchmark. Is the benchmark the Sensex or any other index? If that has fallen or risen, compare it to your fund's NAV and find out how it has done.

In the period from March 7 to April 29, 2005, when the fund showed a decline in its NAV by 6.3%, the benchmark index S&P CNX 500 dropped by 10.34%. During the same duration, the category of diversified equity funds fell by 6.6%.

In this instance, you still have a reason to cheer that your chosen fund has been able to deliver a better return than its benchmark.

A closer look at the performance of funds would tell you that, in the category of diversified equity funds, even seasoned players have shown a decline in their NAV during the same period.

Undoubtedly, the slide in the top-rated funds have not been of this magnitude. For instance, Magnum Global lost only 1.8% in the same period.

This is a direct fallout of investing your savings in a fund IPO and not in an older fund which has successfully encountered the highs and the lows of the equity markets.

Some of the funds in the category of diversified equity funds like Alliance Buy India and Kotak Opportunities performed quite well in the same time period gaining over 7% and 3.5%, respectively.

Investment in equity mutual funds should always be done with a long-term perspective. Such small ups and downs ideally should not raise your heart beat.

The length of time that has gone past is miniscule compared to what you should invest for. The minimum time horizon for an equity fund should not be less than three years; it should, preferably, be even longer.

It is true that many investors who have invested in various equity funds during the recent boom have unrealistic expectations but nothing can be done about that.

This is a long-term play and that's the way you will have to look at it.

• Go long term with your mutual funds

Portfolio

As per the latest portfolio declared by the fund for the month of April, it has a well-diversified portfolio spread over 75 odd stocks.

It has the maximum exposure in the technology sector (16.45% of total investment), followed by 15.28% (financial services sector) and 12.99% (automobiles sector).

ONGC, SBI and Satyam computer services are the three top names in its portfolio.

For details on the portfolio, you can directly see the portfolio of Franklin India Flexi Cap.

• Why mid-caps are hot

Understanding the market cap concept

Stocks are generally categorised on the basis of large-cap, mid-cap and small-cap.

If the number of shares in a company is multiplied by its current price, the result is market capitalisation.

National Stock Exchange's Mid-Cap Index defines a mid-cap stock as having an average six months market cap between Rs 75 crore (Rs 750 million) and Rs 750 crore (Rs 7.5 billion).

Bombay Stock Exchange Mid-Cap Index: the highest average market cap at the time of starting the index at Rs 2,476 crore (Rs 24.76 billion) and the lowest Rs 418 crore (Rs 4.18 billion).

The BSE Small-Cap Index has 425 companies, with the highest average market capitalisation at around Rs 417 crore (Rs 4.17 billion) and the lowest at Rs 53 crore (Rs 530 million).

A mid-cap fund will invest in mid-cap companies and a flexi-cap fund will invest in companies across all market caps.

History has demonstrated that these categories tend to perform differently through economic and market cycles. So a flexi-cap fund will invest across all caps in order to get the best from the stock market by shifting from one type to another.

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

 

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

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Illustration: Dominic Xavier