Flirting with a bubbled-up market is often a painful experience. One sharp jab, and the bubbles burst. Even if you do your best to maintain a long-term mindset, your confidence is, no doubt, shaken. Within six months (8 January-15 July), the Sensex experienced a fall of 8,197 points. If you are looking for culprits, there were many: ridiculously high valuations, which automatically make a market vulnerable to a correction, skyrocketing crude oil price, rising commodity prices, inflation, higher interest rates, global growth concerns and political uncertainty.
The ones that tumbled included mutual fund schemes focused on real estate, construction, power, capital goods and banking. Another common thread running through all such funds was the high allocation to mid- and small-cap stocks, the least being 43% and the highest being 99%.
As an investor, you should play it safe with thematic funds and ensure that these, along with mid- and small-cap funds, do not form the core of your portfolio. The extra upside potential they offer can be offset by the risks they assume. The pronounced losses that they incur during downturns can nullify the fabulous gains during rallies.
It was basically such funds that got hit the hardest, with the exception of two tax-saving funds. We looked at equity funds that fell the most between 8 January and 15 July and settled for the top six. Read on to find out what brought these down. But bear in mind that we looked only at the portfolios from the end of 2007 to June and have not attempted an analysis of their entire history. But remember, you should not make any decision based on emotion. We don’t pretend to know when the market will mount a sustained rebound: It could be any time. What we do know is that if you are able to stay put during this current rout, you will be happy that you did it.
Nelson Mandela once said, “Things will be better in the long run.” It was just a question of when. He always played for the long run. You should too!
JM Hi Fi (-58.18%)
Hefty allocation to construction played spoilsport
The fund manager looks for stocks which could benefit from the structural changes brought about by the government’s liberalization policies and investments in housing, infrastructure and financial services sectors.
Also see JM Hi FI (Graphic)
Like other funds in the JM stable, this fund had a hefty allocation for construction (37.46%), along with metals (16%). Ironically, the large-cap exposure and higher number of stocks did not cushion its fall. So, though it delivered less than some of the other JM funds last year, it fell the hardest this year. By June, the fund was invested in just five sectors, with construction (37.14%) and financial services (27.24%) accounting for more than half of the portfolio. These were the sectors that were severely hit in this crash, with BSE Realty falling by 66.60% and Bankex by 54.43%.
Kotak Emerging Equity (-52.04%)
Size does matter
This scheme is focused on mid- and small-cap companies.
Also see Kotak Emerging Equity (Graphic)
Another newcomer, it had its best quarter just before the crash when it delivered 42.37% (8 October - 7 January). Not surprising, considering that construction, metals, financial services and basic engineering cornered half the portfolio. As of May, the fund was still betting the most on construction and financial services (both of which got hammered in this crash) and was still heavy on mid- and small-cap stocks (72.56%), which also got thrashed. But the fund manager is attempting to play it safe by making it more diversified. From 27 stocks in August 2007, the number went up to 45 (May).
ABN Amro Tax Advantage Plan (-53.49%)
Fell, against all odds
An equity-linked savings scheme (ELSS), this one has a three-year mandatory lock-in like any tax-saving funds. These funds are not thematic but are diversified equity schemes.
Also see ABN Amro Tax Advantage Plan (Graphic)
A significant large-cap allocation of 35.25% and an investment of just 40.63% in the top performing sectors—energy, metals, construction and basic/engineering (December), is what led to its average performance of 56% in 2007. Since then, there has been a significant change in the portfolio. But even then, in the past four months, the fund manager has been increasing his large-cap exposure. He also increased his exposure to energy (21.27%) and technology (14.94%). Financial Services follows at 13.30%, and it was these stocks that fell in the crash (BSE Bankex fell by 54.43%).
ABN Amro Future Leaders (-51.92%)
Defensive sectors didn’t help
To invest primarily in companies with high growth opportunities in the mid- and small-cap segment.
Also see ABN Amro Future Leaders (Graphic)
The fund’s return last year was a disappointing 47.59%. The reason could be its allocation to technology (20.22%), financial services (19.13%) and health care (10.37%). The metals exposure of almost 9% (November) was reduced to 5.62% (December) while the allocation to energy was nil—two sectors which delivered spectacularly in 2007. But in the latest crash, the health care and infotech exposure could not form a buffer, despite both these defensive sectors together having a 31% allocation. The reason could be the high exposure to construction (12.98%) and financial services (18.52%). The extremely high mid- and small-cap allocation, too, did not help.
Taurus Infra-Tips (-52.23%)
High on infra-and capital goods
As the name suggests, this fund would focus on companies in the infrastructure sector and related industries.
Also see Taurus Infra-Tips (Graphic)
Launched in March 2007, so there is no annual performance to go by. Its best quarter, though, was between 21 August 2007 and 20 November 2007, when it delivered a return of 48.55%. From 32 stocks in November 2007, it has now narrowed to just 23. Besides such a concentrated portfolio, it also takes heavy sector and stock bets.
Its exposure to energy was 30.81% and 13.51% construction in December 2007, with Reliance Infrastructure and GMR Infrastructure alone cornering 10.51% and 7.43%, respectively, of the portfolio. Yet, it had a surprisingly substantial large-cap allocation of 59.57%, which has stayed somewhat the same, and now also has a cash allocation of 16.31%.
JM Equity Tax Saver Fund Series I (-51.62%)
The numbers speak for themselves
This is an equity-linked savings scheme. Like any tax-saving funds, this one has a three-year mandatory lock-in. These funds are not thematic but are diversified equity schemes.
Also see JM Equity Tax Saver Fund Series I (Graphic)
Being a close-ended fund, the portfolios are not regularly disclosed. There was no data available for our analysis.
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Goldman Sachs AMC has filed an offer document with the Securities and Exchange Board of India to launch its maiden fund, Goldman Sachs India Equity Fund. A general open-ended equity fund with a broad mandate to generate long-term capital growth from an actively managed portfolio of equities, it may also invest in debt and money market instruments with a maximum exposure of 35%. The minimum investment needed to be part of this fund is Rs50,000. The fund will have an entry load of 2.25% for investment up to Rs5 crore. It will also levy an exit load of 1% if redeemed within six-months or 0.5% if redemption is between 6 and 12 months of investment. The fund performance will be benchmarked to the performance of the BSE 500 index.
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Bharti AXA Mutual Fund is launching its first equity diversified fund, Bharti AXA Equity Fund. It will invest in equity and equity derivatives across all market capitalizations. It is Bharti’s first offering in the equity space and that, too, in the diversified category, which is the biggest category with 179 funds. After the dream run in 2007 with around 60% return, this category is going through some turbulent period in 2008. The YTD return of the category is -33.25% (January to August), a far cry from last year’s performance.