It's the start of a new year and maybe its time for investors to take a re-look at their mutual fund portfolios to ensure that they are invested in the right schemes. We outline the most "invest-worthy" equity fund schemes that investors should consider owning.
Given Personalfn's mutual fund research processes, the best funds for 2007 are unlikely to be very different from those we recommended in 2006. Its because our view on a fund is crystallised after considerable deliberation that involves scrutinising the fund's performance over the long-term (minimum 3 years, although with some exceptions, many of our recommendations have established themselves over close to 10 years) and even then over several market cycles, particularly the downturns.
Performance of course is the concluding point for us. We begin with the sponsor, the credibility it commands, fund management philosophy of the fund house, its investment approach and processes, whether it promotes a steady, team-based approach as opposed to a volatile, fund manager-based approach. This forms the first line of evaluation for us; if a fund house redeems itself on these parameters then we migrate to performance.
At Personalfn, in a lot of instances we come across clients with a high risk appetite who believe that the best way to invest is to stack your portfolio with as many mutual funds (or stocks) as possible. The idea is that there is safety in numbers so by being 'well-diversified' you can cover all your bases.
To counter the diversification rational we have a quote from Warren Buffet, arguably the leading authority on investments 'Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing'. So rather than populate your portfolio with every second NFO (new fund offer), it makes imminent sense to invest some time researching mutual funds so as to pick the best funds. The Personalfn Research Team has selected the 5 diversified equity funds that investors with an appetite for risk must own.
Go for the tried and tested
| Diversified Equity Funds | NAV (Rs) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Since Incep. (%) |
SD (%) | SR (%) | Launch Date |
| DSP ML Equity | 45.29 | 51.6 | 47.2 | 46.7 | 28.9 | 8.35 | 0.41 | Apr-97 |
| DSP ML Opp. (G) | 56.00 | 51.6 | 46.5 | 50.5 | 32.4 | 7.92 | 0.41 | May-00 |
| Franklin Flexi Cap (G) | 20.95 | 48.0 | - | - | 52.6 | 7.98 | 0.43 | Mar-05 |
| HDFC Top 200 (G) | 109.47 | 43.8 | 45.3 | 49.9 | 35.8 | 7.28 | 0.43 | Oct-96 |
| Sundaram Select Midcap (G) | 90.42 | 67.2 | 56.1 | - | 66.1 | 7.56 | 0.52 | Jul-02 |
| BSE Sensex | 54.9 | 38.2 | 32.0 |
1. DSP ML Opportunities Fund
DSP ML Opportunities Fund is an equity fund managed with a free flowing investment style, popularly known as an 'opportunities style' of investing. Launched in May 2000, it began poorly by making aggressive, ill-advised investments in technology stocks, but a change in the fund management team was just what the fund needed to effect a change in fortunes.
Although, an opportunities fund, DMLOF is probably one of the more conservatively managed, predominantly large cap diversified equity funds. It pursues a well-diversified investment strategy across stocks and sectors and is far from opportunistic given the consistency in its stock picks.
More than the fund, this is the mainstay of the well-defined investment processes and approach of the asset management company - DSP Merrill Lynch Fund Managers, a respectable name in the fund management business. The conservative fund management philosophy of the AMC is the reason we did not see any gimmicks being launched in the guise of NFOs when most other AMCs were gripped by the NFO frenzy.
In our view, investors with looking to invest in a well-managed, opportunities style, diversified equity fund with a large cap bias should invest in DMLOF.
2. DSP ML Equity Fund
Coming from the same pedigree as DSP ML Opportunities Fund explains DSP ML Equity Fund's (DMEF) steady track record as a well-managed value-style diversified equity fund.
The value style of investing, a popular investment approach in developed markets like the US, is lesser-known in the Indian context. This style involves investing in fundamentally strong companies that are trading at a discount to their fair values till such a time that their stock prices are fully valued. This is a departure from the growth style of investing, which involves investing in fairly valued companies in the hope that stock prices will rise even further.
DMEF scouts for value picks mainly among large cap companies. True to the investment approach of the fund house, it is well-diversified across stocks and sectors. Among its limited peer group, it has usually maintained an edge over competition by providing higher absolute and risk-adjusted returns.
In our view, DMEF is the first stop for investors looking for a well-managed value fund in the large cap segment.
3. Franklin India Flexicap Fund
An equity fund with as limited a tenure as Franklin India Flexicap Fund (launched in January 2005) would not usually have figured so high on our Research Team's list of recommendations. But FIFF is no ordinary fund; it is backed by a fund management team headed by K.N. Sivasubramanian and R. Sukumar, two very experienced fund managers who have given us Franklin India Bluechip and Franklin India Prima.
Both these funds, would normally have occupied the slot that FIFF now occupies, but as we mentioned right at the start, when we can do with one fund, we would not like to have two.
Franklin Flexicap was launched with a mandate to help it overcome the limitations of its illustrious predecessors (Franklin India Bluechip and Franklin India Prima). So unlike them, it can invest in companies regardless of the market capitalisation. So far, the fund has maintained a predominantly large cap portfolio recognising the risks of being over invested in mid caps.
In our view, investors looking for a fund that can invest freely across market capitalisation should invest in FIFF given the impressive track record of the fund management team that is managing it.
4. HDFC Top 200 Fund
Talk of well-managed diversified equity funds and HDFC Top 200 Fund emerges as an obvious option. The reasons are obvious - over the years HTF has established an impressive track record across time frames and parameters related to risk and return.
HTF has undergone a long journey from ITC Threadneedle to Zurich India Mutual Fund finally resting with HDFC Mutual Fund, one of the more respectable names in the AMC business. But a constant with the fund, for most of its existence, has been Mr. Prashant Jain, one of the more competent fund managers, who has directly or indirectly managed the fund. It was under him that HTF made the timely decision to exit technology stocks before the crash in March 2000.
HTF is one the earliest proponents of the index-plus investing style. It is mandated to invest at least 60% of its net assets in stocks drawn from the BSE 200. The fund is invested predominantly in large cap companies. It pursues a relatively well-diversified strategy as far as stocks are concerned but takes sectoral bets to score above-average returns.
In our view, investors looking for a fund that has consistently generated above-average returns at lower risk, must invest in HTF.
5. Sundaram BNP Paribas Select Midcap Fund
Having selected the regular large cap/flexi cap equity funds, it is time to move to a 'niche' fund that can give a boost to your portfolio. Look at Sundaram BNP Paribas Select Midcap for that edge.
Only 4 years in business and SSM has already assumed leadership position in this segment. Managed by Sundaram BNP Paribas Mutual Fund (a fund house known largely for its conservative investment style), SSM has adopted two measures to lower the risk in a relatively high risk segment.
For one, it diversifies its portfolio to include as many as 100 stocks. And two - it moves into cash (upto a maximum of 35 per cent of net assets) when it finds the market at uncomfortable levels. This particular feature held the fund in good stead during the crash in May 2006 when its fully invested peers witnessed significant erosion.
On the flipside, this has worked against SSM over the last few months when its peers have made the most of the rally from 9,000 points to 14,000 points, while it has been sitting on cash (31 per cent on October 31, 2006). However, over a market cycle, we believe SSM will still come out tops vis-a-vis its peers.
In our view, investors looking for a well-managed mid cap fund that has shown consistency in performance across parameters (related to risk and return) must invest in SSM.
Having selected the 5 funds is only one part of the investment process. The other and equally important step is to invest in the funds in the right allocation so as to make the most of what they have to offer investors. For instance, an investor with an appetite for risk who wants to avoid short-term volatility must consider investing a larger amount in HDFC Top 200 than Sundaram Select Midcap.
For the high risk investor, it could be the reverse. To add that element of customisation in your investment plan, you must get in touch with an experienced and competent financial planner.
How women should plan their finances - New Issue of Money Simplified! Free download
More from rediff