The Hindu Business Line : `Commonality in fund portfolios due to too many funds chasing too few stocks'

Kolkata May 21 Mr R. Swaminathan, National Head - MFs, IDBI Capital Markets Services, discusses a range of topical issues, including commonality of equity funds' portfolios, the comeback staged by tech funds and the potential of index funds. Excerpts:

Tech funds have delivered decent returns in recent months. Is there a case for increasing exposure to tech?

Yes, these funds have done well till about the last days of April. This is in spite of the rupee going down vis-a-vis the dollar. As on May 11, their average returns have been the highest in the equity-oriented funds category. Tech companies have been steadily performing; many of them had hedged their currency positions in advance. Tech funds are dependent either on their products/services or on outsourcing contracts. While guidance from companies triggers a positive outlook for the industry, investors should exercise caution.

What could be the downside?

Being sectoral in nature, these are vulnerable to chances of appreciation of the rupee against foreign currencies and outsourcing policies of other countries. The rupee has gained about 8 per cent against the dollar this year, the biggest gain among Asian currencies. It is at its 9-year high. The buoyant uptrend in industrial output and the expected GDP and increasing dollar reserves may bolster the sentiment on the rupee in the near term. Further downslide in the Indian currency - if that happens on account of global factors at play - may lead to risks.

Despite the great variety that equity funds offer, there is a serious commonality in portfolios. How do you see this?

Such commonality may not be disputed as views of fund managers can more or less converge in terms of choice of promising sectors. Besides, the indices limit themselves to 100-500 companies. The number of companies with large capitalisation is also limited. Imagine a situation where a fund house has the same stocks in a few or all its equity products. The objectives of the latter may be more or less similar. In such cases, the fund manager's confidence in stocks is reflected in the portfolios. In fact, over the years, too many funds have chased too few stocks. This has enabled the stocks to appreciate, leading to today's scenario.

But we do have many listed companies...

The stock market has gained in terms of a greater number of listed companies. For many companies, market capitalisation has gone up significantly. Fund houses have brought in new products, including mid- and small-cap funds. The investor has plenty of choices. The economy has grown, companies have clocked profits and market caps have soared. These have really tested the efficiency of fund managers. And they will have to cover more sectors and analyse more companies in future.

Lately, index funds have come up, sometimes beating actively managed funds. Yet these do not really sell in India. Is this quite normal?

The index fund basket in India is a mere fraction of the overall size of diversified equity funds. The stock market boom has persisted over the last 3-4 years and investors have swayed with the trends. The probability of earning in such a market, outpacing the index over a longer period, is still given a premium. This explains why there is not much appetite for index funds. There will be a stage when it will be difficult to earn by a great margin. Also, the cost of managing funds will become crucial. In such a situation, index products are bound to attract more money. The potential in India is immense.

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