Ethical flavour in MFs June, 2001

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The concept of a socially responsible fund was hitherto unknown to Indian investors, it is a
popular investment vehicle in the US mutual fund market. Ethical funds, as they are
popularly called, cater to the need of a population segment with personal ethical codes,
which are not in line with normal investment practices. These funds consider environmental,
social and animal cruelty issues before investing in a company. Thus, ethical funds will
follow a process of elimination while taking investment decisions and will not invest in
companies that are engaged in running abattoirs, meat processing and packaging,
production of liquor, tobacco, leather goods pesticides, pisciculture and sericulture.

The first socially responsible fund, to be launched by JM Asset Management Company, is

christined JM Heritage Fund. The fund will to cater to the needs of investors with strong
personal ethic codes. The scheme, structured as a balanced fund, will invest in equity and
debt, would focus on ahimsa. The 'Ahimsa' fund would provide investors with two options -
income and balanced. The second plan is a growth-cum-income plan that invests in both
equity and debt. A small percentage of the fund management fees is kept away for donation
to charities involved in animal welfare. Typically, JM Heritage fund would invest in areas like
petrochemicals, auto, metals, banking and finance, engineering and technology. It might
also consider FMCG and pharma companies, provided such outfits are above board with
respect to cruelty issues.

JM Mutual Fund roped in animal rights activists and organisations such as Beauty Without
Cruelty and People for the Ethical Treatment of Animals as advisors to its ethical fund. JM
MF, during the process of shortlisting the companies in which the fund will invest, wrote to
about 1,000 companies, seeking response to questions on their operations. A number of
interesting issues came to light. Dabur, for instance, does not experiment with animals; yet,
it uses deer horn as an ingredient for Chyawanprash. The company, therefore, does not fit
the bill. It is also noted that advanced bio-tech companies are trying to replace animal
testing.

In the US, where there is a vibrant market for ethical funds, not all socially responsible
funds embrace the same principles. Some leave all companies in the nuclear power and
weapons industries, while others don't buy liquor, gambling, or tobacco stocks. Other funds
pick up companies according to their worker relations, community involvement, or product-
safety records. That apart, funds base their stock pickings on religious principles as well like
Catholic principles, Mennonite principles and conservative Christian principles.

For an investor just looking for performance, there's no reason to buy a socially responsible
fund. There is no guarantee of high returns since the performance, as in case of other
funds, will depend only on the ability of the fund manager and the stocks he picks. But, for
an investor, who is very religious and has ethical convictions, Ethical Funds are the right
funds to invest in.

S suma
 Look Before you Invest

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The mutual funds industry in India has also finally come of age. An indication of this is the
number and variety of funds offered by the issuers, as well as the depth of the market in
terms of the secondary trading. So today one doesn’t need Rs 100,000 minimum to start
investing in shares of sensex pivotals. One can invest in them for as little as Rs 1000. Also
diversification, sector concentration, availing of the interest rate swings is all possible
through the diversified or sector dedicated as well as Debt funds. Mutual funds issuers have
cast their nets wide by offering a plethora of instruments which aim to maximise returns
while minimising risk They offer the advantage of professionals managing your money; and
the funds are usually liquid. Additionally, you benefit from the convenience of not having to
bother about paperwork or repeated transactions.

All this is true, but still this does not mean that investing through a mutual fund is riskless.
Investors are still reeling from the Morgan Stanley debacle. So before investing in a mutual
fund there are some simple but important check points that one should go through.

Check out the Macros

Don’t just blindly look at every new float (new issue by a mutual fund) as an opportunity to
invest. As you would do with investing in the market directly, always keep the background
in mind. What is the current economic scenario, industrial growth, liquidity position in the
markets. Don’t be alarmed by all the economic jargon, just a thorough read of the
newspaper everyday will give you all this dope. Against a turbulent background, where the
economy is in a downtrend, the liquidity position is tightening, inflation is up, perhaps you
can wait to pick up the new float after it is listed rather than at the time of the offer.

Sense the Sensex

One of the cardinal rules of investing is getting the price right. So, watch the sensex (the
group of 100 shares which accounts for majority of the capitalisation in the market), has it
been rising or falling, or has it been steady. In case the sensex has been consistently on a
high, then remember, the fund will invest your money into scrips at these high prices, and
then perhaps it will not be able to generate a positive momentum in its NAV as these prices
may be difficult to reach again. Remember the infotech funds which today are quoting below
par, they had all invested in the frenzy of the ICE age and have been caught on the wrong
foot in the subsequent meltdown. Infact now is the time to invest in these below the par
infotech funds.

Interest rates and Liquidity

In case you are keen on a balanced or debt fund, you must check out the interest rate
scenario. Remember the basic rule - interest rates and bond prices are inversely
proportional. When one goes up, the other comes down. So incase you are expecting a fall
in the interest rates, which normally happens when the liquidity position is loose in the
market, look for investing in Debt funds (which have a medium to long term horizon). In
case you are expecting a rise in the interest rates then look at Gilt funds (which have a
shorter time horizon) or at balanced funds.

After a recky of the Macros, it is time to check out the Micros. What is the parentage of the
Fund house proposing the issue. What has been their past in terms of good management
and reporting practices, despatch of dividends and certificates etc. Their financial
performance in terms of dividend and NAVs. Look at the track record of the mutual fund
under consideration, track record of the fund manager (if possible) and objectives of the
particular scheme. Other aspects like availability of an exit route, specific service standards
promised (like maximum time to be taken in mailing repurchase/redemption proceed). A
fund’s performance is very risky if it is a one man show. One cannot rely on a single star
performer to bale the NAV out. It has to be an organisation and the entire systems that
have to work for the performance. While checking out the fine print on the kind of fund itself
compare it to other similar funds in terms of exit options, expenses etc.

Lastly, Time the market. As we had mentioned earlier timing the market is the essence of
success. See if the time is right to invest in equity funds, i.e-overall economic scenario
seems positive, sensex has been on the upswing but not necessarily peaking, overall
sentiment is flat to good. For balanced funds to debt funds check out the interest rate
scenario. And then decide which type of fund you want to invest in. Have a look at the NAV
performance of other funds floated in the same quarter. For example most of the pharma
funds were floated in the first to second quarter of 1999 have the similar NAVs. So a look at
the recently listed fund, which is similar to the one you are contemplating is perhaps a good
idea. Also remember, there is no hurry. Agreed you must time the market and all that but
one can even pick up a good fund after lisited. The market scenario might change and the
fund which has good portfolio as well as good parentage may get listed below par.

So have a small checklist of these parameters ready and check out the funds attributes
against these before you decide to leap.

Aru Srivastava

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