Keep equities skew, cast net wide in 2005

The new year is as good a time as any other to take stock of one's investments in the equity market.

With stocks having turned in phenomenal returns in 2004 and the Sensex near 6700 levels""-it started the year at 5915"" the risk-reward ratio for investors is turning increasingly adverse.

That the markets have been driven primarily by the huge inflows from overseas, thanks to a weakening dollar, is without doubt.

The fundamentals of the economy however, are intact and therefore, companies should continue to show good numbers, though there could be a slowdown, with inflation in commodities putting pressure on profit margins and the high base effect coming into play. Nonetheless, returns from the stock market could well outshine those from the fixed income segment.

However, with equities having outperformed beyond expectations, those investing now will have to be prepared to spend time in the market. 
 

Diversify, spend time in the market
Diversified funds Open-end schemes	Assets under management, Rs crore	Annualised returns, (%)
		1 year	2 years	3 years
		to December 24, 2004
Reliance Growth	826.00	43.79	91.26	78.99
Principal Growth Fund	256.00	41.41	62.78	48.01
HSBC Equity Fund	1520.00	40.97	""	""
DSP ML Opportunities Fund	596.00	32.52	74.73	56.43
Tata Equity Opportunity Fund	309.00	30.20	""	""
HDFC Top 200	598.00	30.07	72.14	55.01
Birla Advantage Fund	437.00	29.29	62.49	40.05
Franklin India Prima Plus	547.00	28.01	61.04	46.19
HDFC Equity Fund	1192.00	27.72	69.34	53.26
Franklin India Bluechip	1939.00	27.58	64.84	49.09
UTI Mastershare	1367.00	21.92	44.26	""
Source:IL&FS Investmart

"We are recommending equities for a three-year period for those who want an exposure to this asset class " asserts Sanjiv Duggal, CIO, HSBC AMC.

Clearly the returns are going to be relatively muted in the short term and investors would need to be patient.

Which kind of mutual fund schemes are likely to do well from here on?

Fund managers are unanimous about staying with diversified growth schemes as opposed to sector funds.

Observes Milind Barwe, managing director, HDFC AMC, "The market does not appear to be focussed on any single sector and even those where there are important policy changes such as pharmaceuticals or textiles, appear to be discounted."

Adds Rajat Jain, CIO, Principal PNB AMC, "In such a market, diversified growth funds choose themselves."

Duggal too believes that it is risky to take concentrated bets on a sector and believes that stock selection would be more appropriate.

The outlook for mid-cap schemes too appears to have been tempered by the spectacular returns that many of the stocks have given. sample this : the CNX Midcap 200, has moved from 1538 to 2645, between July and now, a return of 72 per cent, whereas the Nifty during this period moved from 1537 to 2115, a return of 38 per cent.

Duggal is clear that investors should stay with diversified growth schemes but could take a small exposure to mid-cap schemes.

Adds Barwe, "To some extent, mid-cap schemes have played out and one would have to choose carefully which of these schemes to invest in. He asserts that the large cap schemes which have well-known and well-understood stocks are needed to balance the volatility of small-cap stocks. Jain feels that perhaps one could stay away from midcap schemes. "These schemes may be too volatile," he apprehends.

As for index schemes, which mirror the indices whether the 30-stock BSE Sensex or the 50-stock NSE Nifty, fund managers once again agree that this is not a year to put money in them.

Explains Jain, "Index schemes tend to do well if the large cap stocks that dominate the weightage in the index, do well, for example, oil stocks. So unless one is very confident that these stocks are going to perform well, it might be better to opt for a diversified growth scheme.

Duggal agrees. "I wouldn't really recommend index schemes since I feel active schemes will outperform the benchmark," he said.

Says Barwe, "This is a stockpickers market and so at these levels , index schemes might not do as well as active schemes."

Once again, fund managers reiterate that small investors should invest through systematic investment plans i.e., put in small amounts every month, rather than buy into schemes all at one. That is particularly important now, with the indices at all-time highs.

A staggered investment would allow you to average your costs over a period and ensure better returns.

So, with the outlook for the debt market not all that exciting, equities might be the best way to make your money work for you in 2005. But remember, stay diversified and spend time in the market.