What does it take for a fund to qualify as a good fund? Does the fund have to score on the returns front? Or should the fund make the grade by exposing investors to lower risk? Given that the term "good fund" is a subjective one, every investor will have different views on this issue. In our view, the fund needs to strike a balance between the two i.e. returns and risk i.e. it should be able to deliver a competent performance on the returns front at lower risk levels vis-à-vis its peers.
Also, it should match the investor's risk profile and fit into his investment portfolio. Finally, the fund must adhere to its stated investment objective at all times. These are some pointers (among a host of others), that contribute towards making a fund, an investment-worthy one.
DSP ML Equity Fund is one fund, which has consistently made the grade on our parameters and merits mention.
What DMEF offers
DMEF, a diversified equity fund from DSP Merrill Lynch Mutual Fund, pursue the value style of investing. This involves identifying fundamentally sound stocks, which are trading at a discount to their fair value. The fund manager buys such stocks and stays invested until the mis-pricing is corrected and the stocks achieve their fair price.
The value funds segment is a rather niche one in the Indian context, with only a handful of 'true blue' value funds in existence. Investments in value funds should ideally be made for a longer-than-average investment horizon. This will offer the undervalued stocks an opportunity to unlock value and deliver to their true potential. In our view, the ideal investment horizon for equities is at least 3-5 years, so for value funds, it should be longer than this period.
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Launched in April 1997, DMEF has been in existence for over a decade now. It has a noteworthy track record to show for and ranks among the better performers in the value funds segment. The fund is positioned to invest upto 50 per cent in large cap stocks and the balance (50%) in mid cap stocks. This makes it well placed to benefit from the investment opportunities arising across market segments.
The fund typically holds a well-diversified portfolio, both in terms of stock and sectoral allocations. This has aided the fund deliver an impressive showing on the risk parameters i.e. volatility control and risk-adjusted returns vis-à-vis peers. DMEF's present avatar is a far cry from its earlier days. Then, the fund was known for holding a concentrated portfolio and poor showing on volatility control front. But a change in its fund management team was instrumental in adopting a process-driven investment approach. The same paved the way for a judicious portfolio management style and a reversal in the fund's fortunes.
| NAV (Rs) |
1-Yr (%) |
3-Yr (%) |
5-Yr (%) |
Std. Dev. (%) |
Sharpe Ratio (%) | |
| DSP Merrill Lynch Equity (D) | 52.8 | 54.5 | 56.4 | 59.7 | 9.22 | 0.34 |
| Tata Pure Equity (G) | 80.1 | 45.5 | 47.2 | 56.3 | 9.18 | 0.32 |
| Templeton India Growth (D) | 51.9 | 45.1 | 41.7 | 49.7 | 9.78 | 0.28 |
| UTI Value (G) | 35.6 | 27.1 | 29.5 | 40.6 | 8.84 | 0.16 |
| S&P CNX Nifty | 42.0 | 41.1 | 39.8 |
(Source: Credence Analytics. NAV data as on October 1, 2007.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)
For the purpose of peer comparison, we have considered only those value funds, which have completed atleast 5 years in existence. DMEF has pitched in impressive performance on the net asset value (NAV) appreciation front vis-à-vis its peers. Over the 3-Yr time frame, the fund (56.4 per cent CAGR) has comfortably outperformed all the funds in the peer group. The scenario is not very different over 5-Yr time frame. DMEF (59.7 per cent CAGR) surfaces as the top performer yet again.
The fund has also successfully outperformed its benchmark index i.e. S&P CNX Nifty across the 1-Yr, 3-Yr and 5-Yr time frames respectively.
Volatility
The fund (Standard Deviation 9.22 per cent) has delivered an average performance on the volatility control front. UTI Value (8.84 per cent) surfaces as the best performer in the peer group, while Templeton India Growth (9.78%) fares the worst.
Risk-adjusted returns
DMEF (Sharpe Ratio 0.34 per cent) delivers a superlative performance on the risk-adjusted returns front as well, and turns out to be the top performer in the peer group. UTI Value (0.16%), the best performing fund on the volatility control front, pitches in the worst performance on this parameter.
The above graph bears testimony to DMEF's good showing as compared to its benchmark i.e. S&P CNX Nifty. Rs 100 invested in DMEF at inception (April 1997) would have grown to Rs 1,579 by October 1, 2007. Had the same amount been invested in the S&P CNX Nifty, it would have appreciated to just Rs 483.
What should investors do?
Now the big question is, should investors consider investing in the fund? Well, that would depend on their risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a 'one size fits all' approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of DMEF in their portfolios.
By Personalfn.com, a financial planning initiative
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