What’s in, what’s out

What’s in, what’s out

New Delhi: There are two reasons why new schemes jump through all the hoops to muscle into Mint50. Either they are replacing consistent underperforming schemes that are exiting Mint50 or they have built up so much steam on the back of super performance that we have no option but to invite them in. Let’s welcome the new members.

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New members

Franklin India Bluechip Fund (FIBF): Last year, we told you that we’re keeping an eye on this fund. Launched in 1993 as a closed-end fund originally, what sets this fund apart from other schemes is its stubbornness to stick to its mandate to invest a substantial portion of its corpus in large-cap companies. According to data provided by Value Research, an MF tracker, FIBF has consistently invested at least 80% of its corpus in large-cap companies.

The fund suffered a painful dip in 2007 when it underperformed markets and quite a few of its peers. The year 2008 was again painful because of the market crash. Ever since it has recovered and is back on track.

According to its December-end portfolio, the scheme’s top three sectors are banks (17.92%), software (9.64%) and industrial capital goods (8.37%). FIBF’s other key characteristic is that it doesn’t take cash calls. Not that it’s bad if the fund manager does it occasionally and adds value, but FIBF’s average cash holding in 2010 was 7.5%.

Canara Robeco Diversified Equity Fund (CDE): This is another large-cap-oriented fund that makes the cut. With a corpus size of just 391 crore, this small-sized fund packs in quite a punch. We like this scheme mainly on account of its fund management. Fund manager Anand Shah doesn’t mind paying a high price for a share if he sees value in it.

The fund doesn’t churn much and is consistent with its top holdings. It can also invest 25% of its corpus in mid-cap companies. Though we feel the fund has too many small holdings (20-25 holdings less than 1% of the corpus), Shah believes it’s adequate. “The bottom holdings are more to do with our mid-cap holdings. We have not compromised on the portfolio quality," he says.

Its exposure to public sector banks such as State Bank of India, Punjab National Bank and also in Tata Consultancy Services Ltd helped in 2010. With a one-year return of 11.59%, the fund is set for an encore.

IDFC Premier Equity Fund (IPE) and HDFC Mid Cap Opportunities (HMO):After we shifted to Value Research star ratings, our basket of mid-cap offerings has been looking very thin with just two schemes, due to a difference in the classification methodology. To fill the gap we’ve added these three mid-cap funds to our list.

IPE’s fund manager Kenneth Andrade takes aggressive sectoral calls and has the conviction to stick with them. He says: “We prefer to hold a tight portfolio of about 30-35 scrips and then ride them out. We try to catch companies in the early stages of their life cycle."

For the first nine months of 2010, it had invested up to 35% in the consumer non-durables sector. Without investing in banking stocks (investing in which helped many equity funds deliver good returns in 2010) and very thinly in pharmaceuticals, the scheme gave 32% returns. Despite investing in small-cap companies, the fund has managed its downside well. One good thing about IPE is that it stops accepting fresh money from investors if Andrade feels the corpus has grown too much and opportunities are limited. At present, you can invest in IPE only through a systematic investment plan; lump sum investment is not allowed.

Though HMO’s corpus stands at 1,195 crore, we feel the fund (that became open-ended last year after being closed-end for three years) has steam left. Fund manager Chirag Setalvad is confident that this size poses no problem for a mid-cap fund. HMO’s portfolio is pretty diversified across about 50 scrips and doesn’t usually invest more than 5% in single scrip. Last year, its investments in mid-cap companies such as Carborundum Universal Ltd, Exide Industries Ltd, Crompton Greaves Ltd helped the fund clock an impressive 32.13% returns. “We do not feel we are over-diversified. But we aim to invest in good quality managements," says Setalvad.

DSP BlackRock Micro Cap Fund (DMC):This is the riskiest of all Mint50 mid-cap-oriented schemes as it invests in companies ranked below 300 in terms of market capitalization. Handling small-sized companies require strong research and sharp understanding of their businesses and so far DMC hasn’t disappointed. We’ve put DMC in the satellite category, so make sure you have a high risk-appetite if you wish to ride this bucking horse.

Franklin Templeton India Dynamic PE Ratio FoF (FTPE): We usually don’t recommend fund-of-funds, or FoFs, (schemes that invest in other MF schemes). First, you don’t necessarily need one if you refer to Mint50. We believe it’s our job to recommend you funds to invest in; FoFs are essentially meant for those who can’t figure out which schemes to invest in. Moreover, FoFs impose an additional cost of 0.75% per annum, apart from the expenses of its underlying schemes.

However, we make an exception here in recommending FTPE but there’s a good reason behind doing that. Here it is.

More than being an FoF, FTPE is more of an asset allocation fund. It switches between equity and debt depending on Nifty’s price-earnings (P-E) multiple. Higher the Nifty’s P-E, lower is its allocation to equity and vice-versa. When Sensex was around 10,000 levels in March 2009, FTDP had invested 91% of its corpus in equities. At present, when Sensex is around 19,000 levels, it has only 25% in equities.

The fund’s belief in its formula has so far paid dividends; its past five-year and three-year returns have been 16% and 8%, respectively. For the two asset classes, it toggles between FIBF and Templeton India Income Fund. The fund is not meant for everyone; if you wish to opt for an asset allocation type of scheme, this one is for you.

Canara Robeco Short Term Fund (CST) and UTI Short Term Fund (UST): These two additions in the short-term category are in order.

With a corpus of 132.3 crore, CST is one of the smallest short-term funds around. Though you should ideally invest in large-sized funds when it comes to debt funds, CST is well managed and doesn’t take unnecessary risks. Its average maturity is around four months, one of the least among peers. “Short-term rates have gone ahead and they are headed higher. Rising interest rates lead to a fall in the market prices of debt scrips," says fund manager Ritesh Jain, adding he won’t increase his portfolio’s maturity till at least March. On account of a small corpus, the fund’s portfolio is concentrated compared with its larger peers, but Jain’s track record in debt fund management inspires confidence.

We also like UST because of its track record and its consistent investment in highly rated securities.

Bidding adieu

Among those that went out, most of them did so because we felt that better alternatives merited inclusion in Mint50.

Notable among the exits are ICICI Prudential Short-Term Fund and Kotak Bond–Short-Term. Existing investors can stay invested and we believe that their fund managements remain decent. But to invest afresh, choose funds that make the cut. Both the schemes have earned a two-star rating each from Value Research. Mint50 doesn’t typically go below three stars.

We dropped HDFC High-Interest Short-Term Fund though it’s a decent choice in the short-term category because we weren’t comfortable with too many schemes from the same fund house. The new Mint50 has seven schemes from HDFC Asset Management Co. Ltd. Existing investors can continue with the fund.

With returns of 5.7% in 2010, Franklin Templeton India Monthly Income Plan is the bottom performer in the hybrid–debt-oriented conservative category. Since it has also earned a two-star rating, we are dropping it. Existing investors may switch to its Mint50 peers in the category.

If you’re invested in Sundaram Select Focus, we suggest you switch to a better performing large-cap fund. Last year was a disappointment because of its allocation to mid-cap scrips; some of its calls went wrong. As one of the steps the fund house took to correct that, about three months back it tweaked its mandate to be able to invest in up to 50 scrips, up from the earlier limit of 30. Though 30 scrips is a bit much for a scheme with a focused approach, 50 is too high a number for a scheme that plays a focused theme.

Ultimately, Franklin India Index Fund–Nifty remains a good scheme, but with so many actively managed schemes, we had to drop this one. Existing investors may continue with it; it continues to be a good option, but we have replaced it as we found better options in the market.