Ask the right questions…

Every time an IPO or NFO comes on the block, the first question everyone asks is “Should I subscribe to XYZ?”. The overwhelming marketing material biases ones opinion towards a “Yes”. I think it is the wrong question to ask.

Whenever we want to buy something, lets say a watch, we ask ourselves, “Where is a shop which sells watches?”. We don’t just walk into any store, and then figure out what to buy.

So just a couple of days ago one of the mutual fund AMCs came up with an NFO. It wouldn’t have been much of a news if it had been any of its peers. But this one in particular has been very adamant about not needing to do ‘AUM seeking activities of releasing a fund for every category’. Plus their flagship fund has posted one of the best performances not just in multi cap across categories. Investors trust the fund managers and their philosophy of value investing. So much so that they were amongst few AMCs who had seen net inflows through the uncertain times that was the year 2020.

Recently they launched a liquid fund which would hold only T-bills and G-secs and would be mostly used as an STP vehicle for people not wanting to put lump sum in equity fund.

The third fund now is a conservative hybrid fund. It’s marketing material says it is for generating income from debt and money market instruments. Capital appreciation from equity and REIT, InvIT components as well as some income from the latter.

There’s nothing to worry about in debt part. The AMC is known to be conservative and hence wont take any credit risk. Equity component is limited to 25% so my guess is that it will be a scaled down version of their flagship fund itself. But with such small allocation, I don’t think exposure to international equities will be there.

The last component is up to 10% exposure in REITs and InvITs. There are several points to discuss here. Most Indian investors are highly exposed to real estate market anyways so logically anyone investing in REITs should take that into account. The 10% exposure in itself isn’t high enough to contribute to the returns of the fund in any meaningful way. And unless this fund forms the core of someone’s portfolio, the exposure to REIT, InvITs will be miniscule. Think of it as 10% of 10%. The AMC is also known to include provisions in their scheme documents which it may not use. The flagship fund has had the provision for REITs for a while but to the best of my knowledge REITs haven’t been part of its portfolio till date. Same is the case with the provision for covered calls.

A doctor doesn’t see the available medicines in the market and then decide what to prescribe to the patient. They first examine the patient and then come up with the best treatment based on available medications. We should look at our portfolios the same. Before looking at funds, stocks etc., we should know what we are looking for…

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