The Hindu Business Line : How diversified is your fund?

If you have stepped into the world of equity funds only lately, chances are you have missed quite a good part of the rally that the stock market has recorded in recent times. Assuming your quest for locating the best equity funds has not been satisfied, how will you construct a portfolio, complete with the choicest elements?

While the answer to that question is for you – and you alone – to find out, a number of factors need to be considered before you start marking the funds off one by one. Take, for instance, the sheer diversity of the market, marked as it is by stocks representing every conceivable sector.

Should you, given such diversity, choose a fund that maintains a broad-based portfolio, or should you stick to one that is spread over only a limited range of sectors? Clearly, the definition of “diversification” varies from product to product, from one fund manager to another. And that is true for any market condition.

Take the newly-introduced AIG India Equity Fund, which has recently come out with its maiden fact-sheet. Mr Tushar Pradhan, who manages it, is well into ultra-large companies (in terms of market capitalisation). The first ten of these together account for roughly 40 per cent of the assets. Take the top 20 stocks and the tally moves up to 61 per cent.

Now, it is for you to determine whether such a fund is diversified enough to suit your purpose. If you are satisfied with the idea, stick to it by all means. If you are not, simply check out other products and find the ones that meet your objective.

Concentration or size?

Sometimes, concentration – that is, spreading assets over a limited number of sectors – is part of a fund’s stated intent. Principal Focused Advantage, for instance, easily makes it to this select group. This fund chooses its stocks from half a dozen sectors; viewed from that angle, it runs a concentrated portfolio.

At the other end are entities that carry a sizeable number of stocks, much more than the 40-50 stocks that many fund managers often have typically. We can cite the examples of more than one small-cap oriented fund here.

How does AIG India Equity compare with JP Morgan India Equity? Both AIG and JP Morgan are contemporaries of sorts in India, having flagged off their maiden products almost at the same time. Well, the latter has over 65 per cent of its assets in 15 large stocks. Again, we are referring to what is mentioned in its initial fact-sheet.

Considering the total portfolio, “mega cap” accounts for a high 53 per cent – the term within quotation marks relating to stocks commanding a market cap of $10 billion or more. JP Morgan, which had allocations to 47 stocks, had pointed out that it was overweight on industrials/infrastructure, technology, telecom and cement.

The point is, it takes all types. As fund circles maintain, investors need to weigh all the possibilities and make their choice judiciously. It is often argued that you need to select multiple styles for yourself – may be, throw in a concentrated fund with a couple of diversified ones! We are being flippant, but the argument seems sensible. And never was this more critical than today. The variety offered by the asset management industry is quite striking already. All indications suggest this will only increase in scale. It is just a matter of time.

Feedback may be sent to nilanjan@thehindu.co.in

More Stories on : Mutual Funds | Stock Markets | Mutual Confidence

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page