Page 239 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes The second is the UTI Mutual Fund Ltd., sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile
UTI, which had in March 2000 more than ` 76,000 crore of AUM and with the setting up of a UTI
Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking
place among different private sector funds, the mutual fund industry has entered its current
phase of consolidation and growth. As at the end of September 2004, there were 29 funds, which
manage assets of ` 1,53,108 crore under 421 schemes.

Self Assessment

Fill in the blanks:
1. A mutual fund is a .................................. that pools the savings of a number of investors who
share a common financial goal.

2. A .................................. is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed basket of securities at a
relatively low cost.

Caselet Mutual Fund Performance

s a professional investor, I’ve read quite a few annual reports. If you include
quarterly reports, they number well over ten thousand. Early in my career this
Aactivity was limited to reports from companies, but now I research mutual funds
of all types too. One section you see in every fund report is a discussion about past
performance. While “past performance is no guarantee of future results” as the boilerplate
legal language says, it can give you clues as to how a fund invests. Past performance
should also raise certain questions in every portfolio manager’s mind. Namely, why do
we own (or want to own) this fund?

Reading through the report of one highly regarded real estate fund, I was struck by how
the manager portrayed their performance. Because I do actually respect this shop and their
process, we are going to leave the fund nameless. Let me present the performance data
now, before discussion, so as not to taint your first opinion of it. I urge you to study the
table and draw your own conclusion before continuing.
1-Year 3-Year 5-Year 10-Year Since Inception (13.5 Years)
Fund 16.9% – 8.4% 1.5% 10.3% 11.5%
Benchmark 13.5% – 5.0% 3.3% 11.3% 10.4%

Clearly, the fund has underperformed in the last year and in the 3-year period, which is
not alarming in and of itself. But the fund has also underperformed in the 5 and 10-year
periods as well. Ok, well what does management have to say about this? I quote:

“As indicated above, the Fund’s long-term track record compares favourably” to the
benchmark.
It does? All I see is that they had decent performance in the first 3.5 years of the fund’s
existence and they highlight the statistical fact that since inception the numbers are good.
Not so good if you missed those years but held on for the last decade though. But perhaps
there is more to the story?
Contd...

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