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Here's a cracker of an investment idea. Diversify your bets across the length and breadth of the country by picking companies from the northern, southern, eastern and western regions. Don't laugh. Five years ago, an estimated 18 lakh Indian investors believed in the idea and poured in Rs 1,854 crore into the SBI One India fund. The fund invests in companies based in different regions of the country, with each region allocated an equity exposure of at least 15% and, at the most, 55% of the corpus. The SBI One India fund was launched during the NFO mania of 2006, when fund houses were coming up with equity schemes almost every week. Nearly Rs 38,036 crore was collected by the 45 new equity schemes launched that year. Reliance Equity alone mopped up Rs 5,790 crore in March 2006, making it the biggest NFO of all time. Marketing honchos, desperate to make their offerings stand out in the crowded market, devised innovative product differentiation strategies. The momentum continued well into 2007, when new mutual fund houses started operations in India. The industry mopped up Rs 29,214 crore from 53 equity schemes launched in 2007, including six infrastructure funds. While the mobilisation was impressive, the returns have been abysmal. Many of the new funds launched in 2006 have either lost money, or underperformed their own benchmark indices (see graphic). The LIC Nomura India Vision fund has been a wealth destroyer par excellence, losing more than 5% every year even though its benchmark, the BSE-200, rose 5% every year during the period. The geographical straitjacketing has been disastrous for the SBI One India fund. It has lost 0.62% every year since its launch in December 2006 (current NAV is Rs 9.70). The market conditions are not at fault. During the same period, the average diversified fund rose around 5.25% a year. These funds have also failed to match the returns of their own benchmarks. The HSBC Progressive Themes fund (originally called the HSBC India Advantage fund) has risen less than 1% a year since its launch in January 2006 even though its benchmark index BSE100 has shot up by 9.5%.

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If someone invested Rs 10,000 in a bank fixed deposit at 8% in March 2006, it would have grown to more than Rs 15,000 by now. If invested in the DSP BlackRock Top 100 fund, the investment would have zoomed to Rs 20,250. Even if it was left to idle in the savings bank account, it would have grown to Rs 12,100. In the HSBC Progressive Themes fund, the value of the investment is floundering at Rs 10,200. This shows that fund managers don't always get it right. Many of them are as prone to making mistakes as the common investor. At the time of the dotcom bust of 2000, many funds had lined their portfolios with dud tech stocks. In 2007, most funds were reducing their exposure to ITC, Infosys and TCS and bingeing on infrastructure stocks, such as L&T, Bhel and Reliance Communications. While ITC, TCS and Infosys have done very well in the past four years, the infrastructure sector has got mired in all sorts of problems. Focus on AUM, not returns It's also clear that the focus of fund houses was on collecting assets rather than generating good returns for investors. Besides the 2.25% entry load on equity funds, the fund houses also earned from the expense ratio they deduct from the NAV of a fund every year. What was the rationale of launching an equity fund like Reliance Equity when faithful warhorses, such as Reliance Growth (launched 1995), Reliance Vision (1995) and Reliance Regular Savings Equity (2005), were already at work? Reliance Equity has earned 3.56% annualised returns since its launch, compared to the 7.33% growth in its benchmark index, the Nifty. During the same period, Reliance Vision earned 8.46%, Reliance Growth earned 11.44% and Reliance Regular Savings Equity rose 16.08%. When you adjust for inflation, which has been very high in the past 4-5 years, the losses mount. LIC Nomura India Vision has lost more than 13% every year. SBI One India investors have lost

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8.8% per year. Instead of gaining, Reliance Equity has actually lost 4.7% every year. Many investors make the mistake of not accounting for inflation while looking at their returns. An investor in the SBI Infrastructure Series 1 fund, which was launched in 2007, is still holding the loss-making scheme even though his investment of Rs 30,000 is down almost 20% to Rs 24,100. He's waiting for the fund's NAV to rise to Rs 10 (it is Rs 8.07 right now) before he exits because he doesn't want to sell at a loss. He doesn't realise that if inflation is taken into account, he would incur a loss even if he sells at Rs 12.

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