:: For the purpose of general awareness ::
Black Holes that Gobbled Up Rs 7,000 cr:
They told her she could achieve her financial goals faster by investing in equity funds. They said the infrastructure sector was poised for explosive growth and that she could be a part of it if she invested in two new funds. Convinced, Vandana Kothari, a Santiniketan-based artist, invested Rs 20,000 in Lotus Infrastructure Fund in November 2007. A month later, she put in another Rs 10,000 in UTI Infrastructure Advantage Fund. Both the funds were new, closed-ended and sectoral.
Financial planners balk at the thought of money lying in a savings bank account. Equity investments can make it zoom to over 15 per cent, while a more conservative approach can yield about 10-12 per cent in a hybrid fund. Even a no-risk fixed deposit can give you about six to seven per cent. Why earn a piffling 3.5 per cent in a savings bank when your money can grow faster elsewhere?
Yet, Kothari would have earned more had her money stayed in her bank account. The two funds have given negative returns since their launch and Kothari's investment is now worth Rs 25,500, down 15 per cent. The only consolation for Kothari is that she is not alone. More than Rs 7,000 crore invested in 36 consistently underperforming equity funds earned less than this between May 2007 and April 2010.
The average annualised returns earned by this category of lemons during the three years was -1.64 per cent. It may be argued that the past three years have been extremely volatile, with two bull runs and one bear attack running back to back. However, during the same period, the broader market, represented by the Sensex and the Nifty, grew at a compounded annual rate of 7.5 per cent.
The picture becomes more exasperating when you factor in inflation. The wholesale price inflation has risen at an average rate of six per cent per annum in the past three years. This means the real drop in the value of an investment is greater than that reflected by the figures. The value of an investment in a mutual fund that has fallen by about four per cent every year has actually gone down by about 10 per cent. Why did these funds perform so badly compared with their peers when all were investing in stocks from the same universe?
Financial planners balk at the thought of money lying in a savings bank account. Equity investments can make it zoom to over 15 per cent, while a more conservative approach can yield about 10-12 per cent in a hybrid fund. Even a no-risk fixed deposit can give you about six to seven per cent. Why earn a piffling 3.5 per cent in a savings bank when your money can grow faster elsewhere?
Yet, Kothari would have earned more had her money stayed in her bank account. The two funds have given negative returns since their launch and Kothari's investment is now worth Rs 25,500, down 15 per cent. The only consolation for Kothari is that she is not alone. More than Rs 7,000 crore invested in 36 consistently underperforming equity funds earned less than this between May 2007 and April 2010.
The average annualised returns earned by this category of lemons during the three years was -1.64 per cent. It may be argued that the past three years have been extremely volatile, with two bull runs and one bear attack running back to back. However, during the same period, the broader market, represented by the Sensex and the Nifty, grew at a compounded annual rate of 7.5 per cent.
The picture becomes more exasperating when you factor in inflation. The wholesale price inflation has risen at an average rate of six per cent per annum in the past three years. This means the real drop in the value of an investment is greater than that reflected by the figures. The value of an investment in a mutual fund that has fallen by about four per cent every year has actually gone down by about 10 per cent. Why did these funds perform so badly compared with their peers when all were investing in stocks from the same universe?
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