Timing the market—entering at lower levels and exiting at higher levels—is always a dream. But investors seldom get it right and usually either miss the bus or board from the wrong end—trip, fall and get hurt. What we need is a system that would encourage us to invest systematically and regularly. We need to invest across assets and in a way that meets our returns expectations, at the same time not getting exposed to too much risk. But with at least a thousand schemes in the Rs7.94 trillion Indian mutual funds (MF) industry, how do we choose the right fund? Money Matters bring you a choice of 50 schemes across equity and debt to help you zero in on a scheme that suits your needs and help you meet your investment goals. Here’s what we like and why:
Large-cap equity funds
A part from the fund management’s pedigree and style, we looked at two statistics: performance consistency and cash holdings. Performance consistency is crucial to choosing a good fund. There is a view that India’s funds industry is still in nascent stages, however, a number of funds have completed 10 years. Thirty funds—and still counting—out of 146 are more than 10 years old. We checked out the 10-year and five-year returns of each of these 30 funds to see the their long-term track record. Then, we checked out the performance in the falling market of 2008 as well as the rising market of 2009. A fund that does well in falling markets as well as rising markets is, typically, a good fund. It also shows the fund manager’s quick adaptability to changing markets.
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For instance, HDFC Top 200 (HT200) lost 45% against 53% that the entire category lost in 2008. When markets rose in 2009, the fund returned 94% against a category average of 78%. “Consistency in returns lends comfort to investors because they pay fees to fund houses to successfully manage the money”, says Prashant Jain, chief investment officer, HDFC Asset Management Co. Ltd, and the schemes’ fund manager for at least 10 years. One of the reasons why HT200 did well was its low cash allocation, as the fund house doesn’t believe in hording cash, even in troubled markets. “If funds are in cash and markets go up substantially, an investor can rightfully feel upset if he has done asset allocation at his end and has invested in equity funds with a long term view”, adds Jain.
Illustration: Shyamal Banerjee / Mint
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According to the fund’s mandate, the common holding between its own holdings and that of its benchmark index (BSE 200) should be at least 60%. For instance, if Infosys Technologies Ltd constitutes 5% of BSE 200 and 7% of the fund, the common holding is 5%. It’s a mandate that doesn’t hug the benchmark index, but also restricts the risks a typical equity fund can take on.
A high cash holding is not bad, though, if your fund manager is able to get his cash calls right; exit it before markets begin to fall and deploy it back in time before stock prices start to rise again, the way UTI Opportunities Fund (UOF) did in early 2009. From around 30% of cash in January and February 2009 when markets were down, UOF swiftly deployed its cash by the time equity markets started to rise in March and April. Fund manager Harsha Upadhyaya had also smartly reduced the fund’s allocation to mid-cap scrips from around 30% in August 2007, down to 17% in December 2007, when the markets were high. In more ways that one, UOF lives up to its name and is an opportunistic fund. It focuses on five to six sectors at a time and then invests in scrips within these sectors. Its tight portfolio of around 35 stocks makes it ideal for the fund manager to shift between sectors as and when he sees opportunities. Its timely investments in Hindalco Industries Ltd and Tata Steel Ltd, as well as its early investments in information technology sector helped the fund in 2009.
“We consciously invest in liquid scrips because it makes it easier for us to enter and exit quickly”, says Upadhyaya who also takes active exposures in the derivatives segment to hedge the portfolio.
Though DSP BlackRock Top 100 (DT100) did well when equity markets fell in 2008 (46% loss against a category loss of 53%), it was a little slow in deploying its cash in March and April when equity markets started to rise. Besides, this is a strictly large-cap fund that limits its investments to the 100 largest companies in the market and does not invest in mid-caps; a segment that also did well in 2009.
For investors who don’t like too much risk and do not want to trust fund managers, there are exchange-traded funds (ETFs) such as Benchmark Nifty BeES that give a smart option. No fund manager risk and buying all the scrips in exactly the same proportion, as the index chosen gives investors index returns at a tiny cost. As ETFs are listed only on the stock market, you can’t go for a systematic investment plan (SIP) yet. Enter index funds, and we suggest Franklin India Index Fund–Nifty if you wish to do an SIP.
Mid- and small- cap equity funds
It’s a good strategy to invest in mid- and small-cap funds once you’ve got your large-cap investments in place, as it pays to have a returns kicker to your portfolio. We’ve kept Birla Midcap (BMF) and DSP BlackRock Small Midcap (DSM) fund in our portfolio as both are consistent performers. Despite aiming to invest in mid-cap scrips whose market capitalization is in the range of the highest and lowest market capitalization scrips in CNX Midcap index and also in the range of Rs3,500 crore and Rs4,000 crore, BMF doesn’t take unnecessary risks.
It holds a diversified portfolio and 50-60% of its portfolio is steady. Mint 50 has two DSP BlackRock’ funds in the mid-cap space, but we suggest you choose one out of them.
While DSM aims to invest in scrips below 100th largest company by market capitalization, DSP BlackRock Equity Fund invests around half of its portfolio in large-cap scrips too. With returns of 53% and 145% in the last six months and one year, respectively, DSM was one of the best performing equity funds, thanks to its successful holdings in Cadila Healthcare Ltd, EID Parry (India) Ltd and Gujarat State Petronet Ltd.
What’s common between BMF and DSM is that they lower your risks by holding a diversified portfolio, typically around 50-60 scrips. “Between all our funds, we try not to limit our stake in a company to 5%, hence we restrict buying big quantities”, adds fund manager Apoorva Shah, DSP BlackRock Investment Managers Pvt. Ltd.
A must for any portfolio, ELSS schemes give the section 80C tax break of Rs1 lakh deduction. Apart from long-term performers, we have included Religare Tax Plan (RTP). This is a dark horse, since Morningstar has not rated it yet as the fund did not complete three years till the end of December. But we like the fact that the fund protected the downslide in falling markets and did well when markets swung back upwards again. In 2008, RTP lost just 50% against 55% that the category lost on an average. If fund manager Vetri Subramaniam leverages his past track record and plays his cards well, this could emerge as a steady option. But take a minimal exposure to this fund if you must invest in it. HDFC TaxSaver is making a silent comeback and did well in 2009, thanks to a chunk of its investments in selective mid-cap scrips.
These are funds that invest in a mix of equity and debt instruments. While some funds invest as much as 65% in equities and the rest in debt (Morningstar classifies these funds as moderate equity allocation), others invest between zero to 40% in equities and the rest in debt. Among the ones that invest a substantial portion in equities, we like fund houses that come with good pedigree and good management in equities. While the debt portion of these funds carries very low average maturity since they primarily provide cushion, the equity portion is used to provide a returns kicker.
Among the funds that invest zero to 25% in equities—also referred to as monthly income plans (MIP)—we like HDFC MIP and Reliance MIP. While the debt component of these plans aims to give steady returns, the equity portion gives the returns kicker.
Birla Sun Life MIP Savings5 is also a fund you can look at. The fund lost heavily in 2009 when the government securities market had a sharp fall in February. But we think the fund is back on track. Against a 1.57% return it clocked in calendar 2009, it clocked a one-year return of 10.13% between March and December.
With an exit load of 1% before a year, the fund now aims to avoid large and corporate investors.
Stick to short-term bond funds as interest rates are expected to inch upwards this year. Even among this lot, it’s best to look at funds whose average maturity is on the lower side. Kotak Short Term Debt Fund prefers to invest 60-65% in instruments that earn the fund a steady interest and the rest in scrips above six months’ maturity where fund manager Laxmi Iyer expects to earn a returns kicker. Iyer takes focused bets on non-banking finance companies where she feels the risks are lower but with a potential to earn a slightly higher yield. Of late, the fund has become conservative and has aggressively brought down its average maturity. A lower expense (0.62% against the category average of 0.83%) also bodes well for you as expenses eat into your fund’s returns.
Graphics by Yogesh Kumar / Mint