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| Smart Investor | |
| If you are a mutual fund investor, it is easy to lose perspective amidst the jargon that accompanies funds today. How do you separate the wheat from the chaff? Follow age old investing rules for starters. Performance, quality of fund management and getting your own investing priorities right. Easier said than done. It is easy to make your investment decision based on past performance. But that is no guarantee for future performance. It is better to trust a fund with good record and management. But among the plethora of ‘me-too’ offerings there are a few thematic funds which are worth a look. Yes, it is a bad idea to put in money in new funds because you do not know what you are buying. Here we have picked the best funds. Some have incredible records. Others make a compelling case due to their themes.
SBI Magnum Contra  There are theories galore about investment techniques. But ultimately what will decide your success ratio is your ability to pick stocks which are going to be winners of tomorrow. The more undervalued a stock is, the better its chances of doing well in future, provided the fundamentals are in place. But what if the markets are ignoring it? This is where contrarian investing comes into play. And it works - if you go by the example of SBI Mutual Fund’s Magnum Sector Umbrella – Contra Fund. Launched in July 1999, the fund has been among the best funds in the diversified category in the past 12 months, giving returns of 101.61 per cent. It has done well over longer periods also with a three-year return of 70.95 per cent and five-year return of 46.22 per cent. Returns since inception amount to 29.29 per cent. The fund’s contrarian approach works in two ways. One approach is to invest in sectors that are under-owned at any given point of time. However, the fundamentals of these sectors are turning positive, though the triggers are still some way away. Under such circumstances the fund manager bets on under-owned sectors where positive news flow may be some time away. To quote a recent example, the fund went overweight on the automobile sector around four months back when people in general were positive on steel but negative on auto. At that time the fund manager decided to take a contrarian bet and got out of steel and went heavily into autos, which provided good returns to investors. The second level of contrarian play is on large-caps and mid-caps. For example, the fund was overweight on mid caps right through 2004 and early 2005. However, when mid-cap valuations rose to high levels, the fund leaned towards large-cap stocks. If you are looking for an alternate investing approach allied to a good record, then this one may be worth a look. DSP Merrill Lynch Tiger Fund   Asian Tigers may have failed as a result of liberalising their economies too much, too fast. But if one is sure that economic reforms in the country will be pursued for sure, even if it happens slowly, DSP Merrill Lynch Tiger Fund is unlikely to fail. Tiger, a short for The Infrastructure Growth and Economic Reforms, was launched with much fanfare just ahead of the general elections in 2004 when the markets, as also India, were shining with the NDA promising fast-track reforms. DSP ML lost no time in making an offer to convert economic reforms into economic profits for common investors. Ironically, the dramatic turn of events which saw the BJP lose miserably and the Congress form the government with support from Left shattered all hopes. Markets plummeted, particularly share prices of companies hoping for reforms like banks and oil. That is history. The UPA government has pushed the reform agenda, albeit at a slower pace. In future, too, reforms should continue and that will unlock value in several public and private enterprises, eventually translating into shareholder returns. Tiger focuses on companies and sectors which are impacted by policy changes - disinvestment, increase in FDI limits, opening of business to private sector, deregulation of price controls and government funding programmes. Besides, Tiger also seeks to play the infrastructure growth story. Again, the poor state of the infrastructure in the country should be reason enough to believe that the potential for growth is enormous. Currently, Tiger has the highest allocations to banks, electricals and engineering and construction companies. Since launch, the fund has gained over 70 per cent. Though one may be tempted to book profits, this fund is really for the long term. Be brave and ride the Tiger.
Kotak Global India   Fund managers are forever talking about the ‘India growth story.’ Most concentrate on earnings growth potential and low valuations apart from other fundamental factors before picking a stock. The theme of Kotak Global India is quite different in that respect. The theme of the fund lies in the fact that over the last decade, a lot of Indian companies have become globally competitive on the back of improving productivity, cost competitiveness, and an aggressive mindset. The rise in proportion of exports, emergence of India as an outsourcing hub, higher profitability and rising cash flows have raised the profile of many domestic companies in the demanding global market. Kotak Global invests in companies that are globally competitive or are focussing on international markets for growth, as it seeks to benefit from this new found competitiveness. The performance of the fund has been pretty good, with a return of 40.62 per cent since inception and 63.12 per cent in the past year. When it started, Kotak Global had taken heavy bets on the pharma, auto and auto ancillary sectors, with the top holdings being Cadila Healthcare, Sun Pharma and Mico. However, the huge appreciation in prices and a downturn in the fortunes of pharma stocks have forced it to cut its exposure to these segments. IT, engineering and textiles are the current favourites. Investing based on potential global opportunities may be fraught with risk, due to the fluctuation in exchange rates and other variables. However, considering the enormous opportunities in the global market place, competent companies should do well. So if you believe in the potential for wealth-creation of companies that have gone global, then Kotak Global is for you.
HDFC Prudence Fund  Choosing a balanced fund may not be easy as you really need a fund house with competencies in both equities and debt to give you the best of both worlds. This is where HDFC Prudence stands out. Prudence has been a top-performing fund all through. The fund has delivered a return of 48 per cent per annum for the past three years while over the five-year timeframe the fund has given 31 per cent annualised returns. Prudence is managed elegantly. Usually, the fund maintains its balance by keeping 60 per cent of its money in equities and the rest in debt. Within equities the fund manager picks stocks with are relatively less volatile and hold potential to deliver stable returns over the long-term. Even on the debt side, the fund does not take much credit risk and invests predominantly in government securities and AAA paper, though there have been some instances when the fund picked up lower-rated papers. Sure, balanced funds are out of fashion. But they are perhaps the best place to invest for retail investors because of the sheer discipline it brings to investing. Prudential ICICI FMCG Fund  FMCG funds have been on a fast track for the past one year. All the three FMCG funds - that of UTI, SBI and Prudential - have done well. While the BSE FMCG Index gained 59 per cent during the period, all the three funds beat the benchmark. Prudential FMCG was the best performer and also commands the highest corpus of about Rs 40 crore. Over the last one year, the fund has delivered 113 per cent return. And despite the tough times, it has managed 20 per cent annualised returns over the last five years. FMCG is not going out of fashion too soon. Healthy growth of disposable income, sound growth in the agricultural sector, booming BPO and IT jobs and the robust economy have put substantial amounts in consumers’ pockets. So consumer demand continues to be strong. A good start to the monsoon season raises hopes. So consumer stocks should do well in the year ahead, even if stock prices come off a bit in the interim. Prudential FMCG is managed more like a consumer fund with not just single-use-goods stocks. The fund manager has placed his bets on paints, durables and breweries which have done well at the bourses. These segments should do well in the years to come as well. However, the fund’s NAV gyrates more than that of its peers. But long-term investors needn’t worry.
Franklin India Taxshield  Benjamin Franklin stated, "there are only two certainties in life: death and taxes." While we can’t do anything about the former, there are ways to save tax. In the Indian context, tax-saving funds or ELSS funds have proved a boon to those looking to save tax. And as a category, they have not done too badly. As far as equity fund category averages go, tax-saving funds have done well, giving nearly 74 per cent returns. They have some advantages from an investment point of view. Under the new tax regime (under Section 80C), investments in tax-saving funds are eligible for deductions subject to an upper limit of Rs 100,000 (against Rs 10,000 earlier). Also the structure of these schemes makes fund managers’ job easier apart from protecting investors’ interest. The lock-in period of three years allows the fund manager to invest in stocks and sectors which he thinks are the best bets without having to worry about redemption. This brings in some discipline in the investment process, while it prompts the investor to stay invested for the longer term. Franklin India Taxshield is one of the biggest funds in the category and the most consistent. The fund has given 65.70 per cent returns in the past year and nearly 40 per cent since inception. And what is more, the investing style is skewed towards large-caps which take out the risk element to a large extent. A look at the latest portfolio reveals the fund’s preference towards technology, engineering and banking sectors. Considering the consistency of performance, the fund is a safe bet in the ELSS category. Reliance Banking Fund Investing in sectoral funds is only advisable for those who like all their eggs in one basket. But as times change one or two sectors are likely to come to the fore, rewarding investors who placed their bets on them. Though the current market rally has been a broad-based one, some sectoral funds like FMCG and banking sector ones have done well. These categories have outperformed other equity categories as far as one-year returns go. While FMCG funds have returned 85 per cent, banking sector funds have returned 80 per cent. Diversified funds in comparison have managed only 62 per cent.Analysts are bullish on the banking sector. Most banks have reported a decline in net NPAs and their net interest income has gone up. They have managed to cash in on the investments taking place across sectors, especially in infrastructure. All this is expected to improve bottomlines. Analysts also note that undervalued PSU stocks will get their due valuation soon. In such a scenario, the stock-picking ability of the fund manager will come into the fore. In the small world of banking sector funds, Reliance Banking Fund has done better giving a 67 per cent return since inception. Considering the good performance of Reliance’s other equity schemes, Reliance Banking Sector Fund is likely to maintain its good performance. Considering the plans of Anil Ambani to make Reliance Capital a financial services powerhouse, its mutual fund’s performance may come under focus. If you are not averse to taking a sectoral bet, this one may be worth a try.
Birla MIP As an investment class, monthly income plans (MIPs) have proved that for investors who are risk averse there is a better way to bigger returns than pure debt funds. A category average annual return of 11.48 per cent may not be much compared to equity schemes, but for investors who prefer safety but don’t mind having some equity exposure, MIPs offer a good option. There is an argument in MIP’s favour when equity markets are booming and debt markets are underperforming. The attractiveness of monthly income allied to an equity component, which is the raison d’etre of an MIP, is being increasingly touted as the remedy for the risk-averse small investor who can benefit from equity gains while being guaranteed his monthly income. The MIP is ideal for those who want a monthly income to take care of his expenses.The reasons for investing in MIPs are manifold. If you are a die-hard debt fan, given a low interest regime, a part of your investment need to make better returns to beat the inflation. In addition, the exposure to equity has the potential to deliver long-term capital appreciation to the investor. But obviously the equity portion brings with it a certain element of risk too. Birla MIP, launched in November, 2000, is one of the most consistent performers in the category. The fund is among the best performing among MIPs with a three-year record, with returns of 11.40 per cent.
Tata Dividend Yield   There is no denying that equity investing is fraught with inherent dangers. Especially so when markets are unpredictable. Dividend-yield funds are cut out for such a scenario. The premise is that when you are not sure of the direction of the market, it makes sense to stick to the safer option of stocks that give you a return nevertheless, in the form of dividends. Dividends are the best form of earning returns on a stock whether or not it provides capital appreciation. That way investing in dividend-yielding stocks ensures safe returns. Though, funds investing in these stocks may not give super normal returns in a bull market, investors will be better off investing in these funds in a bear market. Tata Dividend Yield is one of the four funds in the category, the others being Birla Dividend Yield Plus, Principal Dividend Yield and UTI Dividend Yield. Tata’s fund has given 15.75 per cent returns in the past month and nearly 30 per cent since inception. It proposes to invest 70 per cent of its assets in shares with high dividend yields. Dividend yield will be considered high if it is greater than the dividend yield of Sensex. High dividend yield can be defined as the yield or returns by way of dividend which a share gives as compared with the market price of the share at the time of investment. The advantage of this fund is that its portfolio allocation is more diversified than other similar funds, which makes it a better bet against risk. As per the latest portfolio, it has the maximum exposure to the oil & gas sector, followed by banking and auto sectors. The fund is worth a look if you are a cautious investor and believe in long-term investing so as to reap the fruits of dividends. HSBC Mid-cap Fund   Mid-cap funds are in vogue. But that is not the reason we are featuring HSBC Mid-caps in the ‘best’ list. Firstly, the fund merits attentions as it comes from an equity fund manager with great credentials. HSBC Equity Fund has given a return of over 60 per cent per annum over the past three years. And this came from a blend of mid- and large-cap stocks. The second reason is that the fund will remain relatively nimble footed given that it has clearly laid out a cap on its size (Rs 700 crore). Though this is the first time a mutual fund has tried this in India, it is not uncommon in developed mutual fund markets like the USA. Small size is essential for the success of a mid-cap fund given that liquidity in mid-caps is far less than that in large-caps. There is also the risk of liquidity drying up in case markets turn unfavourable. And currently, mid-cap valuations also look a bit stretched which means that fund managers need to be extremely choosy and a large corpus may yield the best returns. Unlike most other fund houses, HSBC follows a top-down approach to investing which essentially means taking sectoral calls first and then betting across the sector to ride the rally in the sector. Especially in small-sized companies where the execution risk is higher and it is difficult to identify winners, a sectoral approach to investing works better. HSBC Mid-cap is overweight on media, software services, engineering and agrochemicals. Launched in May this year, the fund has already gained over 20 per cent. Currently, HSBC Mid-cap has a corpus of Rs 350 crore. Before the fund shuts its sales window, it may be a good idea to enter.
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