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Striking the Right Balance

IL&FS Mutual Fund, the dormant player in the industry till few years back has now established a place for itself. Its focus on increasing its asset base and improving performance should serve it well.

In the past year or so rapid changes have taken place at IL&FS Mutual Fund. After being a dormant player for many years, the induction of a new management has seen the fund strive to establish a place for itself in the mutual fund market. The asset management company's motto, 'more than a fund, a friend' reflects its efforts to build a relationship of trust and reliability between itself and all the participants in the mutual fund space.

Asset size and the performance of these assets are the most important contributors to the success of any mutual fund. In the recent past, IL&FS has achieved a measure of success in both these areas. The fund has doubled its asset base to reach nearly Rs 1,500 crore. This growth has been much faster than that of many of its similar sized peers. The AMC has also spread its wings. It currently has branches in 9 cities, up from 5 in 2001.

On the performance front, core products IL&FS Growth & Value Fund (a diversified equity fund) and IL&FS Bond Fund (a medium-term debt fund) found a place in the first quartile of their categories in 2002. While IL&FS Growth & Value Fund has continued to maintain its first quartile standing on a year-to-date basis (as on May 31, 2003), the fund house's bond fund has slipped into the third quartile.

Strategy and Performance
The mutual's flagship equity fund, IL&FS Growth & Value Fund, is a medium-risk, medium return product. After a lacklustre performance in the initial years, the scheme has convincingly turned the corner. There is also a greater emphasis on reducing the risks in the portfolio. "Fund managers take due care to diversify the portfolio across sectors. For instance, in the case of IL&FS Growth & Value Fund, the fund has never taken more than 25 per cent exposure in any sector in the recent past," says N. K. Sharma, President & CEO, IL&FS Mutual Fund.

The two index funds—the Sensex and the Nifty trackers—have also done well keeping their tracking error in line with the category. The corpus of these funds, however, is negligible—less than Rs 1 crore, as on May 31, 2003. IL&FS eCOM, on the other hand, is struggling to deliver returns as the technology sector is out of favour. The scheme's performance places it in the middle of its peer group. On the whole, IL&FS mutual fund's equity team almost has a decade of experience in managing proprietary funds and acting as advisors to some of the largest India funds floated by institutions like Oppenheimer and AIG.

As for its debt scheme, it has been a decent performer so far. Focus on quality together with active duration management has helped IL&FS Bond beat its peers each year, except in 2000. In the past one year, the exposure to below AAA-rated bonds has been under 5 per cent of the portfolio.

While its cash fund, IL&FS Liquid Account, is an average performer, its gilt offering, IL&FS Gilt Fund Long-term, is currently ranked among the category's top performing funds in the past one year.

The strategy that the AMC follows for debt funds is very clear: seek stable returns at control-risk levels. In order to achieve this, the fund manager's strategy has been to maintain an ideal balance among various portfolio considerations such as portfolio yield, liquidity, credit risk-profile and interest rate risk profile, keeping in view the current and expected market conditions.

Innovations and New Products
IL&FS Mutual Fund was the first fund house to introduce a trigger facility. This enables investors to set returns targets and have these executed automatically once the target has been reached. This was first introduced in its IL&FS Growth & Value Fund and later extended to all its equity schemes. Earlier, the fund had tried to get its bond fund listed on the National Stock Exchange. The fund has also organised a series of seminars and workshops to inform and educate investors and distributors. Called Mindstorm initiative, this programme has helped the fund develop a closer rapport with distributors and investors alike.

In recent months, the fund has introduced institutional plans across the range of its bond funds. This has been in line with the recent trend in the mutual fund industry to reduce expenses and pass on the benefits of this to institutional and big ticket investors. The AMC is also planning to launch a floating rate fund soon. The fund house, however, is yet to introduce some basic products like a balanced fund, monthly income plan and tax-saving funds. Explains Sharma: "We will fill this gap shortly. We intend to come up with some more innovative products that will help investors fine-tune their portfolios."

Going Ahead
On the whole this fund house has managed to grow at a rapid clip (albeit on a small base) and while doing so, it has infused its existing products with a worthy performance track record. A continuation of this focus on growth and performance along with efforts to reach out to investors can make this fundhouse a preferred destination for mutual fund investors.

STRATEGY NOTE
N. K. Sharma,
President and CEO,
IL&FS Mutual Fund

We sum up our investment approach in two words: Responsible Investing! This has a bearing on all our actions whether in debt or equity. Our investment approach is guided by the belief of being 'true to label'. This means that our actions will be in line with the fund's stated objective. For example, if a liquid fund's stated objective is capital preservation and reasonable returns, we will not have any marked-to-market assets in the liquid fund that puts capital at risk.

Moreover, our emphasis is on achieving consistency of performance. Our products are closely aligned with stated objectives. For example, our flagship diversified equity fund, the Growth & Value Fund is a moderately-positioned fund. We will not take an aggressive call here. We would rather have another product that is positioned as an aggressive fund than tamper with a moderately-positioned fund just to take advantage of short-term market movements to show up on returns and ranking charts. Our investment management function constantly adapts best practices and systems from time to time. In the last two years, there has definitely been a lot of alignment with the market and investor needs.

Organic or Inorganic Growth
There is enough room for organic growth. The mutual fund industry has not matured yet and most people are not familiar with mutual funds. So, we want to play a role in expanding the market as well as educate investors and intermediaries. The stress should be on proper financial planning and asset allocation…the growth of the fund industry will happen with the help of professionally trained and qualified financial intermediaries. In fact, sometime in late 2001, even as a relatively small AMC, we decided to focus on education as a thrust area and launched the Mindstorm initiative… at a time when everyone used to say that larger players should look at market expansion and education.

On Expanding Reach
In the last one year, we have been actively working with all leading national, regional distributors and independent financial intermediaries. The recent thrust has been on banks.

Many private and foreign banks have started recommending and distributing our products. Through the investor service centre route we have penetrated into 16 cities. Also, our AMC has branch presence in over nine cities. Going forward, we expect greater participation from PSU banks.