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Meltdown Mutations

The financial crisis has had a profound effect on fund investors’ functioning

One interesting result of the financial crisis has been a new focus on how fund investors invest and disinvest rather than just what they invest in. By how, I mean the pace at which they move in and out of funds, as well as how they book and protect the profits that they have made.

I guess this is an inevitable by-product of the sea of regret that Indian investors have been floating in since last years’ crash. Since that crash came after years of massive gains (and was so deep), most investors lost a good chunk of the returns that they had earned.

For most of us, the regret was not that we made the wrong investments, but that we ended up losing the money that we should have been able to keep. Those who came a little late to the party lost not only all the returns that they had earned but even a good part of the capital that they had invested.

A few weeks ago, I had written about a product from ICICI Prudential Mutual Fund in which gains made in stocks were regularly transferred to a safe and steady debt fund. The idea was an automated profit-booking system whereby profits once generated are made permanently safe from the vagaries of the stock markets. The product was not entirely new — asset management companies (AMCs) have long offered a triggered switch in which gains above a certain level are switched to a different fund.

However, ICICI Prudential’s product did come out at a very uncertain time and succeeded in striking a chord with investors.

Now, Bharti-AXA Mutual Fund, which is a relatively new fund company, has introduced a variation on this theme, which is better suited to the new, hopeful mood on the markets. Here, money is first invested in a safe liquid fund and then gains are periodically shifted to an equity fund.

This way, investors effectively get protection of the initial capital. The originally invested amount is always safe and only its gains are exposed to equity. Even if there’s a collapse of stock prices, the investor won’t be out of pocket. Even in the worst of times, a conservative large-cap equity fund is unlikely to lose more than 50 per cent except temporarily (something that we’ve recently seen). This effectively means that for all practical purposes, such an investment offers true capital protection.

It must be noted that despite their different packaging, both these concepts are variations of an age-old idea that lies at the heart of sound investing — that of asset allocation and asset rebalancing. The idea is simply that an investor chooses a particular balance of debt, equity and other asset types as ideal. Then, as one asset type earns more than the other, money is periodically shifted from the one that’s earning more to the one that’s earning less to restore the original balance.

The two specific products that I’ve talked about actually practise only half of this principle. In both, the movement is only one way. In one, most of the money will eventually end up in fixed income and in the other, as equity. Actually, it’s plain old balanced funds that offer the best implementation of asset reallocation, as they always have.

Depending on where profits have been generated, balanced funds can shift money either way between equity and debt. For most investors, steady investment in a good, balanced fund should take care of all asset allocation concerns.

Read Also:
Snapshot of Bharti AXA
Snapshot of ICICI Pru Target Returns