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Why is the NAV so low if the fund scores well on all rankings (second for a five-year return, third for a three-year return and second for a two and one year return)?
This is especially apparent if you compare it with other similar funds like Templeton Prima with an NAV of around Rs 125 or so. Can you explain this discrepancy?
How can a fund that has apparently done so well have such a low NAV? Do they distribute very high dividends?
- Anil
Understand the fund first
Magnum Contra is a diversified equity fund that takes a contrarian view to investing.
A normal diversified equity fund is one that invests in the stocks of various companies of different sectors. Ditto for Magnum Contra.
However, as the name suggests, it will follow a contrarian view to investing. This means the fund manager will deliberately bypass the most popular stocks that everyone is chasing.
Kotak Contra is another example.
The fund manager in both cases will focus on stocks that have strong fundamentals but are trading at a significant discount to their intrinsic value. In layman's terms, a stock whose share price is, say, Rs 15 right now but has the potential to be Rs 100 over a period of time. And, it still does not feature in the "favourite list" of other stock pickers.
In other words, the fund managers of such funds will invest in out-of-fashion sound companies. These will be stocks that are strong on fundamentals but whose value is not yet recognised by the market. To put it very simply, it is like buying umbrellas in the winter to sell them in the monsoons.
If the fund manager makes some good picks, the returns could be phenomenal.
Returns from Magnum Contra
Based on the type of stocks that the fund manager will invest in, this fund will appear unattractive in the short-term. Over the long run, you could reap some great returns.
Do note, it may take a long time to deliver attractive returns. Therefore, you should invest in the fund if you have the patience and are willing to block your money for some time.
Also, it will not be right to compare the returns to just any other diversified equity fund. Since this one will invest only in contrarian stocks, it is wise to compare its performance with other such funds.
Read How to compare mutual funds to understand this better.
The dividend option
Magnum Contra Fund introduced the growth option very recently - May 9, 2005 to be precise. Prior to that, it only had the dividend option.
In a dividend option, the profits get distributed to the unit holders regularly. In a growth option, the profits are put back in the fund and get reflected in a higher NAV.
The fund has declared five dividends till date during the years 2003 and 2004. Take a look at the dividends declared in the table below. They are a percentage of the face value of a unit. Each unit has a face value of Rs 10.
|
Date |
Dividend |
|
September 11, 2003 |
12 |
|
October 24, 2003 |
33 |
|
November 12, 2003 |
25 |
|
January 28, 2004 |
30 |
|
November 10, 2004 |
21 |
Due to this, the fund's NAV has not grown as phenomenally as some of the other funds, despite the fact that it has generated good returns.
Funds like Franklin India Prima have offered the growth option for a number of years, and hence, its NAV has grown as a result of the accumulation of the profits over a long period of time.
To understand growth and dividend schemes in detail, read The best mutual fund scheme for you.
However, do keep in mind that investment decisions in case of a mutual fund should be guided by factors other than its NAV.
I had invested some money in Kotak Gilt mutual fund in April 2005. Three months later, in July 2005, I switched out of this scheme into Kotak Technology Fund.
Would I be applicable for short-term capital gain tax? The reason being I moved out the entire amount invested and reinvested in the same amount in another scheme.
- Anil Gupta
Gilt funds are those that only invest in government securities and are hence very safe.
There are three gilt funds among the product offerings of Kotak Mutual Fund. Though you have not mentioned which one you have invested in, that is immaterial since the tax treatment for capital gains from all debt funds is the same.
When you sell any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds) and you make a profit on the sale, it is known as capital gain. The tax you pay on this profit is called the capital gains tax.
Short-term capital gain: If you sell the asset within 36 months from the date of purchase (12 months for shares or mutual funds).
Long-term capital gain: If you sell the asset after 36 months from the date of purchase (12 months for shares or mutual funds).
Since your holding period was less than a year, your gains will be treated as short-term capital gains and subsequently taxed.
The short-term capital gains from a debt fund are to be clubbed with your other income and taxable as per the slab system.
Therefore, if you fall under the 30% tax slab, your gains will be subject to tax at the rate of 30% (plus surcharge and cess, as applicable).
To get more information on capital gains, read Understanding capital gains.
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