The Hindu Business Line : Templeton India Growth: Hold

INVESTORS in Templeton India Growth can stay invested despite the marked deterioration in performance. The record of Templeton India Growth over a considerably long period has, however, been good.

Its strategy to invest in stocks that are considered undervalued may also work to the advantage of investors now that stock prices are trading at rich valuations. Investors, however, would need patience and stay with the fund through many quarters for the strategy to deliver returns.

Performance: The fund performance in the past year has been below that of the Sensex while a number of other large-cap equity funds have managed to outperform it. The deterioration in fund performance is disappointing given that value stocks have had a glorious run in the stock market over this period.

The underperformance may be mainly due to the investment in oil stocks which most mutual funds have avoided. For instance, at the end of August 2005, the fund had nearly 20 per cent in oil company stocks. In India, oil company stocks, including Reliance Industries, have under-performed the market.

The fund had also invested nearly 65 per cent of its assets in stocks with market capitalisation of over Rs 10,000 crore. Most other funds have benefited by investing in a range of mid-cap stocks.

A long-term investor in the fund would have, however, still seen his wealth grow at a steady rate. Growth in net asset value per unit since March 2003, when the rally began, is also not way below that of many of its peers that invest in large-cap stocks.

Portfolio: Templeton India Growth is still a smaller size fund with net assets under management of about Rs 350 crore. The fund had 26 stocks in its portfolio at the end of August. The top five stocks accounted for 37 per cent of net assets, indicating the concentrated nature of investments. The top five stocks would form less than 20 per cent for most other large-cap funds. In terms of sectors too, the investments are concentrated.

Nearly a fourth of the investments are in banks and finance companies. Almost 20 per cent is in oil industry stocks.

While concentrated investments enhance risks, the valuation of stocks in the portfolio is encouraging. At the end of August, the price to earnings multiple of Templeton India Growth's stocks was about 12.

This is considerably below that of the market PE. Weighted average price to earnings multiple for the market could be about 30. The lower PE could be indicative of lower downside risks compared to the market.

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