Personal Finance

The real lessons from Bluechip and Prima

Aarati Krishnan | Updated on December 09, 2018 Published on December 09, 2018

India’s oldest private sector mutual fund schemes can teach us a thing or two

India’s oldest private sector mutual fund schemes turned 25 this month. By any yardstick, these funds have delivered impressive returns, with Franklin India Bluechip compounding investors’ money at 20.45 per cent and Franklin India Prima earning 19.67 per cent since inception.

But investors looking back at the enormous wealth created by these funds seem to be drawing all kinds of wrong lessons from their record.

So, here is setting the record straight, on the real lessons from Bluechip and Prima.

Sponsors don’t matter

Whatsapp forwards tell you that had you invested ₹1 lakh in Franklin India Bluechip (then Kothari Pioneer Bluechip) in December 1993, you would be sitting on ₹1.04 crore by November 2018. In Kothari Pioneer Prima, you would have made ₹89 lakh.

But if you are kicking yourself on this missed opportunity, it is a futile exercise. It is only with the benefit of hindsight that you know that the two new fund offers (NFOs) from Kothari Pioneer were winning bets 25 ago.

If you travelled back in a time capsule to 1993, Kothari Pioneer was then a brand new entity to enter the industry with NFOs on its market-linked schemes. At that time, assured return schemes from public sector fund houses such as UTI, Canara Bank, BOI and SBI were far more popular. At the time, faced with a choice between a private entity’s market-linked plans and assured return funds such as Canstar, BOI Double Square Plus and US-64, investors overwhelmingly chose the latter. These schemes later ran into trouble and had to be bailed out by their sponsors.

Therefore, the real lesson from the success of Kothari Pioneer’s funds is that in long-term investing, you can trust market returns far more than sponsors’ promises. Good performance can come from a fund without a big-name sponsor.

Don’t buy and forget

The other mistaken lesson that many are drawing from this experience is that one can generate wealth by simply buying equity funds and then forgetting all about them. The argument goes that the Franklin India schemes have experienced quite a few ups and downs in their 25-year history — three bear markets, a change in sponsor, spells of under-performance. Tracking the schemes closely may have led to investors over-reacting to these events and jumping off the ship mid-way.

But investors in equity funds have more to lose than gain by ignoring big events that affect their investment. If a change in ownership results in a new fund management team, the performance of your scheme can go for a toss. When a fund takes a big hit in a bear market, it could mean that it fell prey to sector fads or momentum stocks. When it slips behind benchmarks, it could be a temporary hiccup or the beginning of a structural trend.

Franklin India’s case is the exception rather than the rule on the buy-and-forget strategy with equity funds. Both Bluechip and Prima have seen minimal changes in their mandate over the past 20 years.

The takeover by Franklin Templeton didn’t disturb the fund management team or mandates. Though the schemes did take bad hits in bear markets and had spells of under-performance, they were resilient enough to bounce back.

But investors in a majority of the other nineties vintage funds haven’t been as lucky. Some have seen drastic changes in their character after takeovers, some have been bailed out, and others wound up.

Therefore, the lesson from the Franklin experience is not that you should ignore negative events after you buy equity funds. It is that you must review regularly and take a considered decision to hold on if they deliver performance and continuity.

Don’t rush to sell a fund

A third lesson is that one mustn’t treat equity fund investments like stocks and rush to ‘book profits’ based on a year or two of high returns.

After three years of losses from 1995 to 1997, Prima Fund put up a blockbuster show in the next two years, nearly trebling its NAV. But investors who booked profits in 2000 to lock into those gains would have lost out on the 20-fold gains that followed in the next 18 years. Franklin India Prima and Bluechip have seldom been top-ranking funds in their category on an annual basis. But investors who exited them to switch to chart-toppers would have fared far worse than those who stayed.

Overall, there are only three good reasons to sell an equity fund. If it under-performs its benchmark for over two years, you can switch to a better one. If there is a change in mandate that is out of sync with your risk profile, you must look for a better fit. Beyond these reasons, booking profits on an equity fund only makes sense if your goal is less than three years away and you need the money.

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