Gujarat Mineral Development Corporation reported a 60% jump in net sales and a 107% jump in its operating profits, comfortably beating its own averages
This three year close-ended scheme comes with a fixed formula—the moment your investment grows by 50% from the time of allotment, the scheme will be liquidated. A formula-driven approach leads to a random outcome as does the equity horizon of three years
Union KBC Mutual Fund plans to launch a unique close-ended equity scheme, Union KBC Trigger 50 Fund, according to an offer document filed with the Securities and Exchange Board of India (SEBI). The scheme would invest in a portfolio of equity and equity related securities, predominantly constituted of small and mid-cap companies. This being a close-ended scheme, the scheme would mature three years from the date of allotment. However, if at any time during the lock-in period the scheme crosses an NAV of Rs15 per unit (allotment NAV will be Rs10 per unit) the scheme will be liquidated. (Please note: As per the new Scheme Information Document for Union KBC Trigger Fund dated 25 September 2013, the scheme will be liquidated when the NAV of the Direct Plan of the Scheme crosses Rs13 per unit and not Rs15 as stated earlier) In other words, if your investment grows by 50% or more within the three-year period the scheme, the fund manager will wind-up the scheme by liquidating the scheme portfolio within 10 business days and return the money to you and other investors of the scheme. The scheme would be benchmarked to the BSE Mid-cap Index and the minimum investment amount during the new fund offer (NFO) would be Rs25,000.
The Fundamental Flaw
The fundamental flaw is that all fixed formula-driven approaches that are not flexible enough would give random results, as was pointed out in the book “More than You Know” by Michael Mauboussin, chief investment strategist at Legg Mason Capital Management. A fixed formula approach for investing in the stock market would work only with luck. What if the scheme does not meet its trigger value? One would have to settle for the return at the end of three years. The stock market itself can produce random results in a period of three years. In the chart we have shown the rolling 3-year returns and this is based on the Sensex. Over an even longer period, say five years, the volatility reduces compared to the three-year period. Imagine the returns if we were to take the same for small-and mid-cap schemes. It would be much more erratic.
Therefore by investing in such a scheme one cannot expect reasonable returns as the period itself is too short for investing in equity. When investing purely in equity one should look at the long-term horizon spanning over a period of five years or more.
Performance of small and mid-cap schemes
Since this is a small- and mid-cap scheme, it is important to see how similar schemes have performed in the past. Over the last quarter ended September 2012, small- and mid-cap schemes were the best performers in terms of returns (Read: Moneylife, Issue dated: 1 November 2012). These schemes normally do well during a market rally, but you should be aware of the downside risks as well. In FY09-10, when the Sensex grew by 70%, from 10,000 to 17,000, such schemes with a similar investment objective performed really well. Birla Sunlife Small and Midcap Fund gave a return of 141% and DSP BlackRock Small and Midcap Fund followed closely with a return of 139%. However, for the calendar year 2008 when the Sensex crashed to half its value, in the same period the CNX Midcap index fell by 59%. Funds like Birla Sunlife Small and Midcap Fund and DSP BlackRock Small and Midcap Fund fell by 61% and 58%, respectively.
Fund management of Union KBC Mutual Fund
Union KBC Mutual Fund is still a fairly new fund house. Both its equity schemes were launched last year. They even filed an offer document to launch an open-end small and mid-cap scheme, but that is yet to be launched (Read: Union KBC Small and mid-cap fund: Is it worth the risk?) Ashish Ranawade, chief investment officer, Union KBC Mutual Fund and the fund manager of the scheme has an experience of over 18 years in investments and was associated with UTI Mutual Fund and ING Investment Management in the past. But it’s still too early to comment on performance of the fund management.
Should you invest?
This being a close-ended scheme of just three years, yours returns would be random. At the same time, it is not improbable that your investment does not mature before the stipulated period by growing by more than 50%. It has happened in the past, small- and mid-cap schemes have grown as much as 70% over a single quarter, but that has been from the bottom of the market. Therefore if the timing is not right, your investment would get decimated and worse you may not be able to easily exit as this is a close-ended scheme. We would suggest not to take the risk and check out other open-ended small- and mid-cap schemes which have performed well in the past and to invest for a longer period. If you would like to reduce your risk even further, opt for a consistently performing multi-cap scheme.
Responding to a query regarding lock-in requirements for allotted shares, the market regulator said a prospectus is a document with legal validity and the company is legally bound to abide by the disclosures made therein
New Delhi: Market regulator Securities and Exchange Board of India (SEBI) has said that a company is 'legally bound' to abide by the disclosures made in its prospectus for allotment of shares to investors.
"A prospectus is a document with legal validity and the company is legally bound to abide by the disclosures made therein," SEBI said.
This was in response to a query that sought regulator's opinion regarding lock-in requirements for alloted shares as stated in the company's prospectus.
According to SEBI, the disclosure in the prospectus on allotment of shares, has enforceability as in case of a contract.
The opinion was sought by Rushil Decor Ltd, which pursuant to an initial public offering allotted shares in July 2011.
The company had specified in the prospectus that the entire pre-issue share capital of the company, other than minimum promoter's contribution would be locked-in for a period of one year from the date of commencement of commercial production or date of allotment, whichever is later.
However, the company stated that it "inadvertently" linked the lock-in period with commencement of commercial production and wanted to rectify the same.
As per SEBI, while the disclosures made by the entity did not violate any requirement under the norms but that the relaxation from lock-in requirements as stated in the firm's prospectus would not be permissible as the company is legally bound to comply with the statements.
"...the company would be legally bound to comply with the matters stated in the prospectus, based on which it has raised money from the public," the regulator said.
The regulator noted that the lock-in of pre-issue share capital is significant from the point of view of investor protection.