Proposing to get you into the RICH club

ICICI Prudential’s latest fund will invest in companies operating in four industries

MUMBAI: India’s largest private sector life insurer ICICI Prudential has launched the R.I.C.H fund. As the brochure to the fund reveals, the idea is to “generate superior long term returns from a diversified portfolio of equity and equity-related instruments of companies operating in four important types of industries viz, resources, investment-related, consumption-related and human capital leveraged industries.”

As the first table shows, the scheme plans to invest basically in everything that the fund managers might fancy. The investment objective is also no different from that of the company’s existing equity funds. While Flexigrowth seeks to generate long-term returns from an equity portfolio of large-, mid- and small-cap companies, Maximiser targets long-term capital appreciation from an equity portfolio.

“With the launch of R.I.C.H fund, we have bridged the gap between our existing Multiplier (invests mainly in large caps) and Flexi Growth funds (invests across large-, mid- and small- caps). R.I.C.H fund will be benchmarked to the BSE 200, as against Multiplier’s Nifty 50 and Flexi Growth’s CNX 500,” says Puneet Nanda, chief investment officer, of ICICI Prudential Life Insurance.

Therefore, though the fund might be a little different from the Multiplier fund, but is very similar to the Flexi Growth. One look at the January-end portfolio of Flexi Growth (which was the latest available portfolio on www.iciciprulife.com) reveals the same. The fund has investments in all the areas that the R.I.C.H fund plans to invest in.

So the million-dollar question is: Why launch the same fund with a different name? The answer again comes from the mutual fund industry. Indian investors are suckers for more units. When a new mutual fund is launched, a single unit is issued at Rs 10. Hence, an investor who invests Rs 10,000 in this new scheme will get 1,000 units (Rs 10,000/ 10), assuming no entry load.

If the same investor were to invest in an existing scheme with a net asset value of Rs 100, he will get 100 units (Rs 10,000/100) only. And he doesn’t like holding lesser number of units.

Having said that, more units don’t make any difference. Let us continue with the above example to understand. Let us say both schemes generate a return of 25% in a year’s time. Accordingly, the net asset value (NAV) of the new scheme would increase to Rs 12.5 (Rs 10 + 25% of Rs 10) and the NAV of the old scheme would be Rs 125 (Rs 100 + 25% of Rs 100). The value of the investment in the first case would be Rs 12,500 (Rs 12.5 x 1,000). And Voila! The value of the investment in the existing scheme would also be Rs 12,500 (Rs 125 x 100). Therefore, what matters at the end of the day is the kind of stocks the fund manager invests in and not the NAV at which the investor enters the fund.

What we also need to look at is the past performance of the existing equity fund. Maximiser has been in existence from November, 2001.

As the second table shows, the fund has not beaten its benchmark over the last 1, 2 or 3 years. Even for 5 years, the fund has just about beaten its benchmark.

When you take into account the high upfront costs of unit linked insurance plans, even that little extra edge is negated.

Insurance companies look at themselves as long-term investors and label mutual funds as short-term investors. So let us compare how these long-term investors have done over a period of 5 years vis a vis tax saving mutual funds. Over last five years, tax-saving mutual funds have delivered an average return of 42.3% per year, which is a whopping 6% more than Maximiser. Other than this, the ten best performing schemes have given an average return of 47.8% per year. Of the 17 tax saving schemes that have been in existence for five years or more, 12 have given a greater return than Maximiser.

Therefore, investors should not be carried away by this name game and stick to investing in avenues which have already proven their worth.

k_vivek@dnaindia.net