PSU(Public Sector Units) Mutual Funds: Should you invest?

Even in the somewhat boring world of finance, fads do have their sway.
Suddenly one sees a rash of IPOs and the accompanying frenzy and another moment there is some capital protection fund that is keeping people in a tizzy. Mutual Funds (MFs) have been cranking out amazing acronyms like SMILE, TIGER, FORCE etc. to endear themselves to investors. Then came themes. Infrastructure & Lifestyle funds were a rage about three years ago. Midcap Funds become red hot after that. Then fixed maturity plans - FMPs and other debt funds gained currency. Now the flavor of the season in MFs seems to be PSU funds- public sector company funds.

What is the logic of a PSU Fund?

Government owned companies are being disinvested now and there seems to be an interest in participating in it. Investing in government owned companies by itself does not look like a theme. The spin given by MF houses is that these companies are storehouses of tremendous value and when this value is unlocked, investors will be frightfully rich. But the companies can be from diverse fields, making it a diversified fund in any case. But, the majority of the companies in the fund will be government owned. So, this a ownership-basis segmented fund.

Is it a good idea then to invest in these MF?

Any company needs to be selected on merits. All government oriented companies are not pure gems. There are gems and there are coal lumps. Bracketing everything under the PSU umbrella and investing in them is obviously not a great idea. The fund manager will have to sift within this pool and select the good ones from the pool. Owning such a fund in noway gives one a better scheme that what is available today.

Government companies are a varied lot. There are good, performing ones like BHEL, NTPC etc. and there are bad ones (many performing too poorly to even merit a mention). The real bad ones cannot be divested, in any case. There are others that will be a victim to government ownership and policies like BPCL, HPCL and other oil companies, which are bleeding due to the onerous burden imposed by it’s owner – the Government.

Government companies can expect some favourable treatment in the policy space which molly-coddles them, like preference to them in government contracts, protection from competition etc. But there are several negatives in government ownership - recruitment policies, compensation policies , speed of decision making, indifferent client servicing and the image they consequently have, bureaucratic processes are all typically their Achilles heel. There may be some who have overcome these, but a majority have still got to surmount these and many other obstacles.

On the whole, government ownership per se, is not a positive for a business. It is a good idea to stay away from these funds. MFs are latching on to the latest fads. You don’t have to. It’ your money after all!


Regards
Team
www.theequitymarkets.com