Several schemes are planned to capture specific sector growth, like retailing but quote banks, textiles, pharma companies and hotels stocks as potentialinvestments. A commodity fund (SBI Mutual Fund's Comma Fund) does not invest in commodities, only commodity related stocks. Or, check ING Vysya's three-year closed end fund, which has given itself the freedom to "continuously churn its portfolio", indulge in market timing, change equity exposure at will, invest 100 per cent or 0 per cent of the corpus in equity at its discretion and to trade in derivatives.

Doesn't this sound more like a super-aggressive hedge fund rather than a mutual fund? Strangely enough, the regulator has permitted it to position itself as a balanced fund. Is the booming market making the regulator complacent as well?

Third, does the index benchmark chosen by a scheme, match its objective and investment plans? Every fund benchmark's its performance to an index that is expected to represent its investment profile; it is supposed to be judged against that benchmark. But even in a booming market, fund managers repeatedly fail to beat benchmarks. Of the 126 equity diversified schemes launched between January and September 2006, 67 per cent failed to meet their chosen benchmark when the Sensex rose 28 per cent. Some even choose a deliberately low benchmark. For instance, why should a dynamic asset allocation fund be benchmarked against the Crisil balanced fund index, when it plans to invest in everything from derivatives to commodities and overseas markets?

Fourth, given the long term optimism about the Indian economy, index funds, which mirror a popular index and require very little 'fund management' seem to offer excellent returns over a longer term. The performance of the Sensex and Nifty show that. But although India has several index funds, which collect fatter than required fees from investors, these are the least promoted schemes because they offer little opportunity for churning, deviation and adventurism to fund managers.

... contd.