Take Your Pick

We take a look at the latest equity and debt offerings from DSP Merrill Lynch Mutual Fund

DSP Merrill Lynch has just added two new offerings to its product portfolio. On the equity side, the fund house launched the Top 100 Equity Fund. This fund will invest in the top 100 companies based on market capitalisation. On the debt side, the fundhouse has launched the Savings Plus Fund which will invest 80 per cent of its corpus in debt instruments and the balance in equities.

Though it is similar to a monthly income plan, the fund has no commitment to pay monthly dividends to investors. In a monthly income plan dividends are paid on a monthly, quarterly or half-yearly basis.

 

Says Dhawal Dalal, fund manager, DSP ML Saving Plus Fund: "Since there is no pressure to pay out monthly dividends, we can invest with a longer term perspective." However, for investors looking for a regular income, the fund does offer a dividend plan.

DSP Merrill Lynch's track record on the debt side has been quite impressive. On a one-year period (as on January 31, 2003) its medium-term debt and gilt funds generated returns of 13.47 per cent and 19.68 per cent respectively, much higher than the category averages (See Mixed bag).

However, debt markets have turned extremely volatile as tensions between the US and Iraq have escalated. In fact debt funds, after generating impressive returns in the last couple of years, now find themselves in negative territory. The average one-month return of debt funds is a negative 2.50 per cent. Bouts of volatility can actually knock off a substantial portion from your returns.

For instance, a 50 basis points rise in interest rates can knock off around 150-200 basis points from the fund's returns. And since interest rates are likely to stabilise at current levels, the gains from capital appreciation are also capped. So fund managers concur that debt funds will only generate returns of 7-7.50 per cent on a one-year period. Given increasing volatility, from a returns perspective they don't look too attractive.

In the case of the Savings Plus Fund, though the equity portion enhance the portfolio returns, a major chunk of its returns are still dependent on the debt markets. Given the current volatility it makes sense to wait for a while before investing, even if you swear by debt funds.

Now let's turn to DSP Merrill Lynch's equity offering, the Top 100 Equity Fund. What's so unique about the product? Not much, only that it will have a defined universe of stocks to invest in. If you were to look at the list ofhe Top 100 stocks by market cap and other diversified funds they tend to look similar.

This is because most of the big diversified equity funds have substantial exposure to large-cap stocks. For instance, Alliance India Equity and Birla Advantage have around 80 per cent exposure to the Top 100 Stocks.

Almost all stocks from Zurich India Equity, Franklin Bluechip and Templeton India Growth are from the Top 100 Stocks list. In fact, if you look at the portfolio of DSP ML's Diversified Equity Fund, you will find that only around 12 per cent of its corpus is invested in stocks outside the Top 100 companies by market capitalisation. So the product offers no real unique selling proposition.

Says Anup Maheshwari, fund manager, DSP Merrill Lynch: "The idea was to keep it simple. As returns from fixed-income instruments start to wane, investors will turn to equities and we didn't want to present them with a complicated product. So when you say you are going invest in the Top 100 companies, it creates a instant recall with investors."

The fund is also betting on the fact that the equity markets are likely to make smart gains this year and that large-cap stocks would be major beneficiaries in case of any market rally. The fund hopes to generate superior returns by building a portfolio of 25-30 stocks which are considered as best picks among the Top 100. The Top 100 Equity Fund will also be more aggressively managed than the Diversified Equity Fund.

Says S Nagnath, Chief Investment Officer, DSP Merrill Lynch Mutual Fund: "On a risk-adjusted-returns basis, the Top 100 EquityFundwill fall between the DSP ML Equity Fund and the DSP Opportunities Fund." While the investment strategy of the Opportunities Fund is to aggressively bet on any two outperforming sectors, the fundhouse follows a buy-and-hold strategy for its Diversified Equity Fund.

The advantage of investing in the Top 100 Equity Fund is that you are buying into quality large-cap stocks. But in a bull market, even ordinary stocks could get overvalued and find themselves in the Top 100 Stocks list.

So stock selection could play a critical role in the fund's ability to generate superior returns. Since the fund has a defined universe of stocks, you have a reasonable picture of what you are getting into.

On the flip side, if there are interesting opportunities in small- and mid-cap stocks, the fund will be unable to capitalise on them. Also, some feel that large-cap stocks don't always ensure high liquidity. Some large-cap stocks have a low free float.

However, Maheshwari feels that the free float of a stock is often a wrong indicator of liquidity. "Take the case of Wipro when the stock was available at around Rs 23 in 1996. There were hardly a few thousand shares traded. But now, despite the promoter holding still being high, you can buy and sell any amount of Wipro shares. Once the earnings start to climb, liquidity automatically comes with the stock," he explains.

As far as the performance of DSP Merrill Lynch's equity funds goes, its Opportunities Fund and Tech Fund have done reasonably well.

However, the performance of its diversified equity fund has been quite disappointing. The fund finished 38th out of the total 60 funds on a one-year period(As on January 31, 2002). Going by three-year returns, the fund finished again 38th out of a total of 50 funds.

According to the fund, investment calls in some unlisted companies went wrong and the losses eroded a major chunk of returns. However, the fund has since phased out of most of its bad investments, it is claimed.

Should you invest? There are enough companies in the Top 100 worth investing in. The fund should be able to generate decent returns unless its investment calls go terribly wrong.

Though in the short-term equity markets could be volatile, long-term prospects look bright for equities. So invest in the fund with a longer term perspective.