World of India!: BizNpersonalfinance : State bank of India MF - subterfuge in new fund offers e

World of India!

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BizNpersonalfinance : State bank of India MF - subterfuge in new fund offers

State Bank of India's Mutual fund division has come with a novel product called 'One India fund'. It is an excellent example of how even big companies can spread falsehoods or be economical with the truth.

The 'One India' fund according to the company is based on the investment belief that having a geographically diversified spread of companies in its equity portfolio, would make for a better return on investment. The Fund would invest atleast 15% and not more than 55% of its equity exposure to each of the four regions. Of course, there is no logical rationale' for this belief at all. The company says that they carried out an internal study on a selection of stocks and found that they were geo-diversified and also performed well in terms of historical record. Really?If I select some of the best BSE 200 companies and then say that they have performed well because the hair oil used by the members of their board of their directors is diversified across different hair oil brands, would I be correct? Statistically yes, but then you know what they say about lies, lies and damned statistics. The fact is that the companies selected are performers anyway and the market just responds to that and NOT because the regd. office of the company is in Barabanki or the hair oil used by the CEO is Dabar Amla !

Now SBI MF is not run by morons. The head honcho who came up with this brilliant idea is a normally sane man called Sanjay Sinha. Then why did they go berserk all of a sudden? There is a method in this madness.

What SBI MF fails to admit that the Indian mutual fund investor is an ignorant lot and goes for new fund offers (where MF's mop up new money for investing in the market) rather than going for a pre-existing fund. Why does the investor do this? Aggressive marketing campaigns for one and the fact that many Indian investors mistake a new fund offer of a mutual fund with an Initial Public offering (IPO) by a company.

The difference between an IPO and a mutual fund NFO is that equity IPO is looked by investors (Iin many instances rightly) as undervalued and there is a possibility of potential gains on listing, if the IPO is priced at a valuation lower than its market deemed value (which becomes apparent on listing of the share).

But in the case of a mutual fund NFO, the money mopped up is deployed in purchasing stocks from the stock market at the ruling market price. So the mutual fund NAV will increase (and hence the investors wealth) only if these existing prices increase. So fundamentally there is no difference between the two. Both pre-existing funds and NFO's can deliver better returns only if the companies they have invested in increase their earnings and hence the share price in the market. Investors, in India , however do not understand this difference and tend to prefer putting money in an NFO, for no reason .

So what do MF's do? They take advantage of the igorance of investors and come with all kinds of different MF products and market them aggressively and mop up fresh money. This is done by almost all market players in the market with impunity. Earlier MF's used to deliberately name these offers as IPO's to make them sound similar to an Equity IPO. SEBI clamped down on this practice recently and asked MF's to use the term NFO's.

Why is this practice so bad? Because it makes false claims about the premise on which an investor can make money and this is mis-representation by any standard. Instead of educating investors with investment schemes based on sound logic, it seeks to confuse them. The number of NFO's MF's have come up with with almost no diffenrentiation between them but which falsely mis-represents differentiation (like the example of One India) are many. This robs the market of meaningful differentiation and therefore promotes confusion in the minds of the consumer.

Its just that its sad that even a Govt. undertaking like SBI MF , which millions of Indians trust intrinsically, is now going down this unethical path instead of choosing to educate investors.

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