I wish to invest in Escorts Opportunities Fund. I am tracking this fund for the last six months. It is regularly paying dividend @ 1.25 per cent per month. In the last six months, most of the MIPs of big fund houses skipped paying dividends and their NAVs have fallen continuously. I'd like to have your opinion on whether this fund is a safe investment and would be able to honour redemption requests.
—N.C. Dhankhar
Firstly, we would like to clarify that Escorts Opportunities fund is not a MIP. Although the fund has a mandate of investing certain portion of its assets in fixed-income instruments, its main objective is to strongly outperform the diversified equity funds by dynamically moving across equity sectors. Thus, it's basically a hybrid fund and its portfolio is currently tilted more towards debt (57 per cent of the net assets). Equities just account for 31.2 per cent of the fund's total assets as on August 31, 2004. Hence, the fund is currently placed in the debt-oriented hybrid funds' category as per our classification.
Comparing Escorts Opportunities fund with a MIP would be like comparing an apple with an orange. MIPs usually have 75-90 per cent of their investments in fixed-income instruments and the balance 10-25 per cent in equities.
But, in case of Escorts Opportunities, the asset allocation is very flexible. The debt allocation can go up to 49 per cent and the equities exposure can move in a wide range of 51-100 per cent. Thus, Escorts Opportunities fund's performance is currently comparable to the funds of equity-oriented and debt-oriented hybrid funds, not the MIPs.
As far as regularity of dividend distribution goes, a fund's dividends are just a way of distributing profits. After each dividend payout, the NAV of the fund falls by the same amount. But if the fund does not declare dividend, that money doesn't disappear. Instead, it gets reflected in a higher NAV.
Thus, non-declaration of dividend hardly makes a difference to any fund investor. But in recent times, most MIPs have skipped dividends as both equity and debt markets turned sour resulting in sharp falls in their NAVs. The major ones to skip dividends are new MIPs, which were unable to make any profits due to unfavourable market conditions.
Let's first touch your first question. Since all mutual funds have to comply with the SEBI guidelines, safety is not at all an issue with regard to investment in Escorts Opportunities fund. Moreover, as it is an open-end fund and all investments and redemption requests are bound to be honoured within the stated time. So safety and liquidity is not a constrain here. Also, Escorts Opportunities is a no load fund, thus you can enter or exit this fund any day without any load.
But this does not mean that the fund does not have any kind of risk. All mutual funds investments are subject to market risk and nothing is guaranteed here. As far as Escorts Opportunities fund's portfolio is concerned, its equity comprises of large-cap stocks and on the debt side, it has a higher allocation to state government and Central government bonds. But the biggest question about this fund is its dynamic approach towards its asset allocation. In the past one year, the fund's equity exposure has moved between 30-60 per cent. So basically, it's the fund manager's call on either of the market, which could go awry at times.
Moreover, the fund's objective to beat majority of diversified equity funds is unlikely to be fulfilled if it continues to adopt the current strategy. If you compare Escorts Opportunities fund's performance with an average equity-oriented hybrid fund, you would not find this fund appealing any more.
Last year (in 2003), Escorts Opportunities gained 29.85 per cent whereas an average equity-oriented hybrid fund was up 66.55 per cent. Even this year (till September 20, 2004), Escorts Opportunities is down 0.41 per cent but the average equity-oriented hybrid funds are up 0.43 per cent. Thus, it would be better to go for some good equity-oriented hybrid funds like HDFC Prudence or FT India Balanced.
This article was originally published on November 01, 2004.
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