In the year 2006, 2007 and early 2008 (before equity markets around the world melted down to the news of the U.S. Subprime mortgage crisis and the Lehman Brothers bankruptcy) the Indian equity markets were buzzing, and numerous mutual fund houses in great gusto were launching several New Fund Offers (NFO) banking on upbeat investor sentiments. The objective in this case was clear – “to garner more AUM (Assets Under Management)”. But now after facing discomfited time during the turmoil of the equity markets, mutual fund houses are trimming down on their product portfolio size. To simply put, strategically they are merging some schemes with the existing ones.
Recently, JM Mutual Fund announced the merger of 8 equity oriented mutual fund schemes with the existing ones, in the following manner:
(Source: JM Mutual Fund)
And to follow suit, JP Morgan Mutual Fund and UTI Mutual Fund too has announced scheme mergers. JP Morgan Mutual fund has announced the merger of JPMorgan India Alpha Fund (a debt oriented interval scheme) with JPMorgan India Treasury Fund (an open ended income scheme). While UTI Mutual Fund has announced the merger of UTI Variable Investment Scheme – Index Linked Plan (an open ended equity scheme) with UTI Balanced Fund (again an open ended equity oriented hybrid scheme).
But all these scheme mergers do they really make any sense, does it really benefit you investors?
Let’s assess that by taking the case of JM Mutual Fund. During the upbeat sentiments of the equity markets (during the year 2006, 2007 and early 2008) JM Mutual Fund launched 9 equity oriented mutual fund schemes by banking on this upbeat investor sentiments. And to capture investors’ attention the fund house also heavily publicised their so called “star fund managers”.
Making hay when the sun shines
(Source: ACE MF, PersonalFN Research)
But as the equity markets around the world rocked on news of the U.S. subprime mortgage crisis and the Lehman Brothers bankruptcy; JM Mutual Fund experienced their much publicised “star fund managers” saying good bye to them.
But this good bye greeted was after causing much damage to the returns of the mutual fund schemes. For many of you investors who invested in mutual fund schemes (from this fund house) on the premise of the persuasive talk on “importance of star fund managers” given by agents / distributors / relationship managers, have either eroded wealth or received sub-optimal returns on your investments.
Report Card
| Scheme Name |
Fund Manager |
6-Mth (%) |
1-Yr (%) |
3-Yr (%) |
5-Yr (%) |
Since Inception (%) |
Std. Dev (%) |
Sharpe Ratio |
Portfolio Turnover Ratio (%) |
Expense Ratio (%) |
AUM* (Rs. in Cr.) |
| Performance of schemes to be merged |
| JM Agri & Infra (G) |
Mr. Sanjay Kumar Chhabaria |
-22.0 |
-18.6 |
-29.6 |
- |
-36.1 |
11.94 |
-0.25 |
7.16 |
2.39 |
120.01 |
| JM HI FI (G) |
Mr. Sanjay Kumar Chhabaria |
-21.4 |
-10.5 |
-23.4 |
- |
-13.5 |
10.96 |
-0.22 |
6.51 |
2.50 |
10.83 |
| JM Fin Services Sector (G) |
Mr. Sanjay Kumar Chhabaria |
-14.7 |
11.7 |
-9.0 |
- |
-0.4 |
12.00 |
-0.07 |
2.37 |
2.50 |
21.40 |
| JM Telecom Sector (G) |
Mr. Asit Bhandarkar |
-19.4 |
-6.9 |
-12.9 |
- |
-6.9 |
11.44 |
-0.10 |
5.24 |
2.50 |
7.70 |
| JM Large Cap (G) |
Mr. Sanjay Kumar Chhabaria |
-7.5 |
9.0 |
3.2 |
1.3 |
9.9 |
8.21 |
0.00 |
8.31 |
2.50 |
5.21 |
| JM Contra (G) |
Mr. Sanjay Kumar Chhabaria |
-20.7 |
-11.2 |
-19.2 |
- |
-17.9 |
12.54 |
-0.13 |
8.88 |
2.37 |
202.26 |
| JM Mid Cap (G) |
Mr. Sanjay Kumar Chhabaria |
-21.2 |
-8.7 |
6.2 |
2.6 |
12.9 |
10.90 |
0.03 |
1.02 |
2.50 |
9.53 |
| JM Small & Mid-Cap-Reg (G) |
Mr. Sanjay Kumar Chhabaria |
-27.1 |
-16.6 |
-25.2 |
- |
-17.5 |
14.34 |
-0.15 |
9.18 |
2.50 |
57.26 |
| Existing mutual fund schemes |
| JM Basic (G) |
Mr. Asit Bhandarkar |
-27.8 |
-27.2 |
-19.8 |
-4.7 |
18.7 |
15.08 |
-0.10 |
8.31 |
2.28 |
353.93 |
| JM Equity (G) |
Mr. Sanjay Kumar Chhabaria |
-11.0 |
2.2 |
-3.1 |
2.2 |
8.3 |
10.89 |
-0.04 |
9.32 |
2.50 |
33.05 |
| JM Multi Strategy (G) |
Mr. Sanjay Kumar Chhabaria |
-16.4 |
-4.9 |
|
|
13.1 |
10.10 |
0.16 |
13.53 |
2.50 |
26.92 |
| JM Emerging Leaders (G) |
Mr. Asit Bhandarkar |
-28.4 |
-11.7 |
-17.0 |
-10.8 |
-6.3 |
15.16 |
-0.08 |
14.57 |
2.37 |
193.74 |
| JM Tax Gain (G) |
Mr. Sanjay Kumar Chhabaria |
-15.3 |
-2.4 |
- |
- |
-11.9 |
11.19 |
-0.10 |
3.73 |
2.50 |
63.01 |
| BSE SENSEX |
|
-6.5 |
6.7 |
5.5 |
11.2 |
- |
9.72 |
0.03 |
- |
- |
- |
| BSE-100 |
|
-8.3 |
4.9 |
5.3 |
11.0 |
- |
10.17 |
0.03 |
- |
- |
- |
| BSE MIDCAP |
|
-17.4 |
-0.6 |
2.3 |
5.4 |
- |
12.37 |
0.02 |
- |
- |
- |
(NAV data is as on March 25, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
*AUM as on December 31, 2010
(Source: ACE MF, PersonalFN Research)
If we observe the return of the equity oriented mutual fund schemes – both the existing ones, as well as those which are going to be merged; they have disappointed you investors as exhibited in the table above. In fact most of them over a 3-Yr time frame have eroded wealth for you investors. Even if we assess the returns since inception the picture isn’t any different, as most of them have yielded negative returns. Moreover when compared to the broader indices, the returns of the respective funds look absolutely dismaying.
So, if one were to invest Rs 10,000 each in the respective schemes at the time of the respective fund’s inception, you have either witnessed wealth creation or wealth erosion as depicted by the chart below.
(Source: ACE MF, PersonalFN Research)
Most of JM’s equity oriented funds have exposed investors to very high risk (as denoted by the Standard Deviation), but have failed to compensate their investors well for the risk taken (as denoted by the Sharpe Ratio) thus making them high risk-low return investment propositions.
Even though the portfolio churning maintained by most equity funds is good (i.e. it is low), it purely reflects that the fund manager’s stock bets going wrong and the fund manager getting stuck in them. It does not reflect any healthy picture of any good buy and hold strategy; because if that did, it would have been displayed in the form of appealing returns generated by the respective funds.
The JM Mutual fund’s decision on merging its equity oriented mutual fund schemes seems to be driven by reducing its product portfolio thus intending to decrease the load of number of mutual fund schemes managed by their fund managers – Mr. Sanjay Kumar Chhabaria and Mr. Asit Bhandarkar. So far, after the earlier fund managers greeted good bye to JM Mutual Fund, Mr. Chhabaria and Mr. Bhandarkar the duo have been managing almost all the equity oriented mutual schemes of the fund house, barring the index fund which is managed by Mr. Chaitanya Choksi. (Mr. Chhabaria has managed 71% of the total number of equity oriented mutual fund schemes, while Mr. Bhandarkar has managed 21% of the total number of equity mutual fund schemes.)
Hence we strongly affirm that despite the merger of the 8 equity oriented mutual fund schemes (with existing ones), JM Mutual Fund would continue to jeopardise investors’ money. Moreover, they are just merging the ugly performers (since inception), with the existing ones which have delivered unappealing returns. Hence now the ugliness would also continue to reflect in the existing mutual fund schemes too. This is purely a case of rectifying the mistakes of the past now after having caused much damage to your hard earned savings. Hence we recommend that you don’t fall prey to the fancy strategies followed by the fund house, and prudently redeem your investments in JM Mutual Fund.
Speaking from a holistic angle, in our opinion all these scheme mergers are intended to trim the product portfolio. This reflects a strategy of rectifying the mistakes done by the fund houses in the past by launching too many unnecessary mutual fund schemes. We believe that in a scenario where there’s already a huge plethora of mutual fund schemes (making it difficult for investors to select winning mutual funds), what is required is simple and easy to understand products. The objective of garnering more AUMs should be set aside by the mutual fund houses and they should introduce only easy to understand products which have the capability of wealth creation.
This article was written exclusively for Equitymaster, India's leading Independent research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian Stock Market.
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