News: After a Lion, ING comes out with a Cub

(DNA 28/07/2006) Mumbai - The launch of new equity mutual fund (MF) schemes, which seemed to have stopped for sometime with the stockmarket going nowhere, is picking up again.

After the launch of Tata Capital Builder Fund last week, this week the ING Vysya C.U.B Fund was launched. ING Vysya already has a L.I.O.N fund, and the launch of the C.U.B fund should not come as a surprise!

Now, before you start wondering as to what lions and their progenies are doing in the MF industry, C.U.B stands for Competitive Upcoming Businesses. If there ever was a competition for the best product names that businesses give to their new products, the Indian MF industry would have won it hands down.

ING Vysya C.U.B fund is a three-year closed-ended diversified equity scheme (after which it becomes open-ended), which aims to provide long-term capital appreciation by investing pre-dominantly in a diversified portfolio of equity and equity-related securities of companies of small market capitalisation. So the question crops up, “How small is small?”

As per the offer document of the fund, companies that have a market capitalisation of up to Rs 950 crore would constitute the investment universe of the small-cap portion of the fund.

Given this, there is some sort of a definition in place and, hence, this fund is not a total name game, as has been the case with MF schemes launched in the past.

Small-cap stocks would constitute between 65-100% of the total investment of the fund. To shortlist th ese stocks, the fund plans to use what it calls the “Smart Funnel Process for stock selection”. This is nothing but a new way of representing the “top-down” strategy of stock selection that MFs follow.

The search for stocks to invest in would start from the entire universe of small cap stocks, and then on the basis of certain criteria, some stocks would be short-listed. Using this process, the fund plans to invest in around 50 stocks. It plans to invest the remaining part in stocks which do not fall in the small-cap space and money-market instruments.

For investors who are looking at some sort of exposure to small-cap stocks, and who do not have the time or the inclination to research, this seems like a good investment bet.

But they should well remember that such stocks fall the most when the markets fall. Other than this, the biggest issue against any new MF scheme is that it does not have a track record. Given this, it makes more sense for investors to invest in schemes that have performed well over the years.

Past performance does not guarantee future performance, but is better than no performance at all, as is the case with any new MF scheme.

The bigger question that fund houses need to answer is that why don’t they advertise their older schemes that have done well in the past? Why do they stress on raising more and more money on new schemes?

Another issue that the regulator possibly needs to look at is the offer document. “Mutual funds are subject to market risk. Please read the offer document carefully before investing,” goes the disclaimer.

But the fact is hardly anyone reads the offer document before investing. The offer document for the C.U.B is 111 pages long. Who has the time or the inclination to read such a long document? This is the case with most offer documents.

It would, therefore, be a good idea to try and summarise the most important parts of the offer document within a few pages, so that the investor has some idea of what he is getting into it. Right now, the investor mostly invests on the basis of what the distributor tells him about the new scheme, which may or may not be true.