What’s in

AIG India Infra and Economic Reform Fund (AIE)

The fund has been working hard at improving its performance over the past three years, bouncing up from just matching the benchmark it tracks three years ago to outperforming it by 4 percentage points over the past year. Apart from investing in infrastructure related sectors and having significant exposure to small- and mid-cap stocks, it invests in sectors that benefit from economic reforms; the latter allows AIE to invest in the banking sector—something that most other infrastructure funds do but cannot justify as being true-to-label. “Under the theme of economic reforms, we try to look for opportunities where the companies will benefit due to reforms undertaken to reduce fiscal deficit,” says fund manager Huzaifa Husain, explaining the exposure to banking stocks in an infrastructure fund in general and government-owned banks in particular.

Canara Robeco Infra Fund (CRI)

Good performance and staying true to its label, just like AIE, are reasons we pick CRI. Fund manager Soumendra Nath Lahiri, who joined Canara Robeco Asset Management Co. Ltd, in March 2011 has experience running infrastructure funds; he managed DSP BlackRock India TIGER Fund (The Infrastructure Growth and Economic Reforms Fund) since its inception in January 2005 till March 2008 and returned a compounded annual growth rate of 40.66% compared with 27% by diversified funds. After Lahiri took over CRI in March 2011, he reduced the scheme’s exposure to banking—sold banking stocks, including ICICI Bank Ltd and Punjab National Bank—and added stocks of equipment providers, including Bharat Electronics and Texmaco Rail and Engineering Ltd. “We look at those banks or financial institutions that lend significantly to the infrastructure sector. We’ve kept it as a pure infrastructure fund,” says Lahiri. The fund’s exposure to the cement sector paid off well last year.

AIG India Short-Term Fund (ASF)

With returns of 9.51% last year, ASF has been one of the best performers in the category. Ignore its one-star rating; as per Value Research’s present methodology, ASF lost its rating largely because it got categorized as an ultra short-term fund. That happened because last year, few short-term funds including ASF decreased their average maturities to escape the ill effects of rising interest rates; when rates rise, prices of debt securities fall. From July to November, ASF’s average maturity was about 116 days compared with a category average of 533 days.

At present, Value Research is tweaking its methodology to accommodate short-term debt funds’ manoeuvre to tackle interest rate volatility. As per its revised rating that it will issue mostly next month, ASF will get a four-star rating. “Our current classification of debt funds is not foolproof. We are fixing it and should be out with the tweaked methodology and categories by next month,” says Dhirendra Kumar, chief executive officer, Value Research.

Fund manager Vikrant Mehta’s priority is to maintain liquidity. So ASF sticks to high quality scrips, especially certificate of deposits, or CDs, (short-term papers issued by banks). “CDs are among the most creditworthy and tradable instruments in the fixed-income market. Other than CDs, we continue to take in phases exposure to commercial paper (CPs), corporate bonds and government securities. However, as the fund’s current emphasis is on both credit quality and tradability, the investment universe considerably narrows down to select entities in the public and private sector,” says Mehta, who also cites this as one of the reasons behind its concentrated portfolio, apart from a small corpus size of about Rs 100 crore.

Canara Robeco Short-Term Fund (CST)

Here’s another well-performing short-term fund that got penalized by Value Research for the same reason as ASF. With returns of 9.18% last year, CST is a consistent performer. The fund holds high quality debt papers and takes measured exposure in corporate papers that come with a high credit rating and liquidity. It invests 30% to 45% in CDs and the rest in corporate papers. But Ritesh Jain, head (investments), Canara Robeco Asset Management Co. Ltd, isn’t much worried about the scheme’s small corpus. He says: “The corpus is smaller compared with some peers but as of now it is at a decent size. Generally, the risk on portfolio size comes from illiquidity, credit and concentration. Our short-term fund’s portfolio has high credit quality, very liquid papers and the concentration risk is very low.”

HDFC Balanced Fund (HBF)

Hidden in the shadows of its elder peer, HDFC Prudence Fund (HPF), this scheme is carving a niche for itself. The two mutual funds are actually quite different. First, both the funds are managed by two different fund managers. While Prashant Jain manages HPF, Chirag Setalvad manages HBF. Second, HPF invests 70-75% of its corpus in equities at all times, while HBL invests between 65% and 69% in equities.

Third, while Jain invests significantly in large-cap companies, Setalvad leans more towards mid-caps. Setalvad’s other scheme, HDFC Mid-cap Opportunities Fund—a mid-cap-oriented scheme—is also part of Mint50. “Our smaller corpus gives us greater flexibility to invest in mid-caps as the scheme is nimble-footed”, says Setalvad. While HPF has returned 28% in the last three years, HBL has returned 27%; both have outperformed many equity diversified funds despite having limited equity exposure.

Franklin India Index Fund (FIIF)

Due to lack of other options—and also because we don’t want to pick too many funds from within the same fund house—our sixth empty spot goes to an index fund. We already have three exchange-traded funds (ETFs) in Mint50, but you need a demat account to be able to buy them. If you don’t already have a demat account, we suggest that you go for an index funds instead, in case you are interested in passively managed funds. With a corpus of Rs 138.7 crore, FIIF is one of the largest index funds in India. It tracks the Nifty and comes at a low cost of just 1%; index funds can charge a maximum of 1.5%. Its tracking error (difference between its returns and that of its benchmark index; Nifty) is one of the lowest at 0.27, according to data provided by Value Research.

IDBI Nifty Junior Fund (INJ)

Up till today, we had only one option—Benchmark Nifty Junior BeES (BNJ), an ETF—that allowed you to invest in Nifty Junior index. Nifty Junior index consists of 50 scrips that are the next set of 50 most liquid stocks after the 50 Nifty stocks. These are companies that experts believe are next in line to crack into the Nifty index; a move that gives a push to their share prices. But since BNJ is an ETF scheme, it can be bought only on stock exchanges and, therefore, require a demat account, we add an index fund tracking Nifty Junior index. Of the two index funds that track Nifty Junior, INJ comes with a lower tracking error, as per Value Research’s data.

•••••

What’s Out

DSP TIGER Fund (DTF)

DTF’s performance has been stable, but it goes out because of a better alternative that has a similar mandate (AIG India Infrastructure and Economic Reform Fund). The fund’s size has gone down significantly; at present, its size is Rs 1,652.5 crore as on 31 December 2011, down from Rs 4,024 crore as on November 2007. The fund is over-diversified; it has about 65 stocks and 47 stocks in its portfolio held less than 2% each. In December 2010, it had about 90 stocks. “The portfolio is more concentrated than what it was before. But a large portfolio also leads to better liquidity management; it’s easier for us to sell them when we want to,” says Anup Maheshwari, head (equities and corporate strategy), DSP BlackRock Investment Managers Ltd.

ICICI Prudential Infrastructure Fund (IPI)

Apart from the fact that there are better alternatives, IPI appears to lean too much on the banking sector, including private sector banks. The banking sector was its top sector in 11 of the past 12 months. It invests in private sector banks; these lend negligibly to the infrastructure sector because infrastructure projects take a long time to generate profits and also because many private sector banks prefer to lend to the retail segment.

“Our experience with this fund is that we shouldn’t create narrow products and if it’s narrow, we shouldn’t create a situation that becomes problematic for the investor. It’s safer for the investor to have a wider definition. Banking stocks have proved to be safer than infrastructure companies,” says Sankaran Naren, chief investment officer, ICICI Prudential Asset Management Co. Ltd. IPI’s intentions are transparent, but we feel that our two new additions, AIG India Infrastructure and Canara Robeco Infrastructure Fund, embody the infrastructure sector better than IPI.

Franklin Templeton India Balanced Fund (FTB)

FTB’s performance has not been impressive. In fact it’s a middle-of-the-road performance. In 2010, it went up by 14.8% compared with the category average that went up by 15.2%. Despite investing aggressively in equities, the fund has given only marginally higher returns compared with the category average. Since FTB was a “satellite” scheme in Mint50, we decided to let it go, especially when your first choice under balanced funds is either HDFC Prudence Fund or HDFC Balanced Fund.

Reliance Short-term Fund (RST)

With returns of just 7.89% in 2011, RST has been the weakest performer in Mint50’s short-term bond funds. Its Value Research rating has dropped to two stars. Unless there are good reasons, we don’t pick funds rated three stars or below.

Change in fund management

We also don’t retain funds where the fund manager has left the firm. Venugopal M., fund manager of Tata Infrastructure Fund and Tata Balanced Fund, has left Tata Asset Management Co. Ltd. There’s been a change in guard at Principal Income Short Term Fund too; its fund manager Shobit Gupta has quit the firm and Pankaj Jain is the new fund manager. Existing investors may stay for some time to monitor the performance; fresh investors should consider other alternatives for now.