Monthly income plans have failed to perform in the past. Is the new scheme from JP Morgan worth considering?
JPMorgan Mutual Fund plans to launch an open-ended monthly income scheme—JPMorgan India Monthly Income Fund. Such schemes are commonly known as Monthly Income Plans (MIPs) as they offer a regular stream of income every month in the form of dividends. A typical MIP invests almost 85% of its assets under management (AUMs) in debt and keeps a small equity exposure for the upside. The scheme from JPMorgan Mutual Fund would invest 75%-100% of its assets in debt instruments and the remaining portion of the portfolio would be invested in equity.
In an analysis conducted a few months back, we found that MIPs have delivered a lacklustre performance (Read: Monthly Income Plans: Are MIPs worth considering?). In a period when the Reserve Bank of India (RBI) had cut interest rates and when the Sensex went up by nearly 15%, MIPs delivered a below par performance. In a period where MIPs got a chance to prove their mettle, even large fund houses struggled.
Over a year or so back, we compared the performance of MIPs with bank fixed deposits (FDs) (Read: Bank fixed deposits Vs MIPs: Neither monthly, nor income). Even after adjusting for taxes, FDs have proved to be better than the average MIP, over some periods. But the returns on an FD are assured. There are a few MIPs that have done well, but many have been terrible performers.
MIPs are riskier than pure debt funds because of their equity component. While they offer the opportunity to earn higher returns than those from pure debt funds, these may be lower, if the equity component performs poorly, as MIPs usually invest in blue-chip stocks only. There are only a handful of MIPs which have understood what serious asset management is all about.
How has the fund management company performed in the past? JP Morgan currently manages two schemes—JPMorgan India Equity Fund and JPMorgan India Smaller Companies Fund. Both the schemes have performed better than their benchmarks taking a three-year period. Even though the schemes have aged more than five years, they have been able to accumulate a total corpus of just over Rs300 crore. The fund management does not have a long track record of consistent performance.
Here again the fund house has chosen four managers to look over the scheme. The equity portion of the scheme would be managed by Harshad Patwardhan and Amit Gadgil who have 19 year and 11 years of experience, respectively. The debt segment of the scheme would be managed by Namdev Chougule and Ravi Ratanpal, who have 11 years and nine years of experience, respectively. Whether having four fund managers would ensure benchmark beating returns would be left to be seen.
Other details of the scheme
Minimum Initial Application: Rs5,000 per application and in multiples of Re1 thereafter.
Additional Application: Rs1,000 per application and in multiples of Re1 thereafter.
Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a) Up to 2.25%
Additional expenses under regulation 52(6A)(c) Up to 0.20%
Additional expenses for gross new inflows from specified cities# Up to 0.30%
Within and including 18 (eighteen) months from the date of allotment in respect of Purchases made other than through SIP—1%.
Investing in a few stocks means high risk and depends more on the fund managers’ views of a particular sector and stock. A wrong call would mean sub-standard returns
Most equity diversified schemes invest in a portfolio of over 40 stocks. The new scheme—Union KBC Focussed Equity Fund—planned to be launched by Union KBC Mutual Fund proposes to invest in 20-30 equity stocks. Other diversified equity schemes on an average invest in a portfolio of 40 or more stocks. The more diversified a portfolio is, the lower is the systematic risk. Investing in a few stocks increases the risk associated with individual assets. Therefore, if a few stocks fail to deliver, the returns of the entire portfolio is affected. In a well diversified portfolio the underperformance of few stocks has a little impact on the overall performance of the scheme.
In our analysis of the April portfolio of equity diversified schemes having a corpus above Rs100 crore, out of the 111 schemes we found that just 14 schemes invest in 30 stocks or less. Six of these schemes have underperformed the benchmark over the one-year period as on 30 April 2013. The schemes which underperformed the benchmark included HDFC Focussed Large Cap Fund and DSP BlackRock Focus 25 Fund. ICICI Prudential Focused Bluechip Equity Fund which has a corpus of above Rs4,000 crore was able to outperform its benchmark. The other ‘focussed’ scheme present on the list was Axis Focus 25 Fund. This scheme is recently launched and has a track record of less than a year. HDFC Focused Large-Cap Fund and IDFC Imperial Equity Fund which invest in 20-25 stocks underperformed the benchmark by over 3%. The above performance just goes to show that it is a difficult task to produce benchmark beating returns by investing in a small basket of stocks.
The scheme would invest 75%-100% of its assets in equities and the rest in short-term debt and money market instruments. The performance of the scheme would be benchmarked to the S&P BSE Sensex. Selecting a few winning stocks is a skill very few have mastered. Picking the right stock at the right time would be crucial for the performance of the new scheme. Union KBC MF has a fund management history of less than three years. Its first and only open-end equity diversified scheme— Union KBC Equity— was launched in June 2011. The returns of the scheme over the period have been in line with its benchmark. Over the year it has delivered a return of 15.57% whereas the S&P BSE Sensex has delivered a return of 15.07%. However, the equity management of the fund house has a short track record of performance.
The scheme would be managed by Ashish Ranawade who has 14 years of experience in investments.
Minimum Application Amount:
Rs25,000 and in multiples of Re1 thereafter
For Systematic Investment Plan (SIP):
Rs1,000 and in multiples of Re1 thereafter (for monthly frequency)
Rs3,000 and in multiples of Re1 thereafter (for quarterly frequency)
Minimum additional amount for purchase/switch in:
Rs1,000 and in multiples of Re1 thereafter
Maximum total expense ratio (TER) permissible under Regulation 52(6)(c)(i) and (6)(a): Up to 2.50%**
Additional expenses under Regulation 52(6A)(c): Up to 0.20%~
Additional expenses for gross new inflows from specified cities under regulation 52(6A)(b): Up to 0.30%#
1% if redeemed/switched out within one year from the date of allotment. Nil thereafter
In a circular dated 19th June, SEBI announced that the subscription period of an NFO of a mutual fund scheme under the Rajiv Gandhi Equity Savings Scheme would remain open for 30 days, against 15 days for other schemes
The Securities and Exchange Board of India (SEBI) has notified regulations that allowed mutual funds to accept investor money in new plans under the Rajiv Gandhi Equity Savings Scheme (RGESS) for 30 days, as against a 15-day subscription period allowed for other schemes.
The relaxation has been made only for mutual fund schemes under RGESS, a government initiative aimed at attracting small investors into the capital market.
In a circular dated 19th June, SEBI announced that the subscription period or the window, for which a new fund offer (NFO) of a mutual fund scheme remains open, has been extended to 30 days. Generally, an NFO remains open for a period of 15 days.
Besides, SEBI said the timeframe for RGESS mutual funds allocating the refund money and issuance of statements by mutual fund houses would be 15 days from the closure of the initial subscription. The deadline remains at five days for other mutual fund schemes.
The notification comes into effect immediately. Under the scheme, announced in the 2012-13 Union Budget, new investors putting in up to Rs50,000 in the stock market and whose gross total annual income is less than or equal to Rs10 lakh, can avail tax benefits.
The scheme encourages flow of savings into financial instruments and improves the depth of the domestic capital market. The scheme was notified by the department of revenue, finance ministry in November 2012, following which SEBI issued the guidelines.
As per the notification issued by SEBI on RGESS, there would be a lock-in period of one year on investments made under the scheme.