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Suresh Parthasarathy

If 2008 had one positive stock market event, it was the Sensex hitting its all-time high in January; only to witness one of its steepest falls in recent times.

The Sensex and Nifty lost over 50 per cent each over the past year.

Those who believed mutual funds would have protected them on the downside as against direct equity investment would have been equally baffled over the fund returns.

Open-end diversified funds registered losses between 32 and 80 per cent over this period. The average one-year returns of diversified funds stood at 54.5 per cent.

Small and mid-cap focussed funds and sector funds were the worst hit even as large-cap funds bore the pain relatively better.

Several large-cap funds also contained declines better than their respective benchmarks.

While large-cap funds (with investments predominantly in stocks with market capitalisation of over Rs 7,500 crore) were aided by the lower volatility in stocks they invested in, the stronger business and financial fundamentals of these stocks also ensured the de-rating was not severe.

Interestingly, the large-cap funds that contained declines better than the Sensex had different investment themes.

For instance, while Kotak 30 held higher exposures to bank, IT and telecom, Kotak 30 favoured petroleum and pharma. However, a cash holding in the 10-20 per cent range was seen in most of the funds in recent months. .

Another common strategy used by many large-cap funds was to hold top companies in the respective sector.

During the bull phase of the market, funds such as Kotak 30, DSP BR Top 100 and Birla Top 100 and Franklin Bluechip held stocks of companies that were leaders in their respective sectors. These funds continued this strategy during market correction too and contained declines better than the diversified category average. However, some of the large-cap focussed funds that followed a flexi-cap approach to invest in smaller stocks took a sharper hit.

For instance, according to the November portfolio of Principal Large Cap, the fund had invested one third of the assets in stocks from small and mid cap segments; the fund declined more than pure large-caps.

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