DSP Merrill Lynch Opportunities Fund: Sell

Recommendation: Sell

S. Vaidya Nathan

INVESTORS in the DSP Merrill Lynch Opportunities Fund could consider paring exposures and switching to diversified funds. The NAV has gained around 25 per cent in October and November and is now close to the Rs 7 mark. For those who had entered the fund at Rs 10, it would mean taking a loss.

But it may better to cash in the recent uptrend and invest in diversified funds with a more consistent track record, such as Bluechip, Zurich India Equity and Templeton India Growth, among a short list. The portfolio is heavily weighted in cyclicals and resembles the portfolio of a diversified fund.

This is just as well, for if the fund had stayed with mandate of trading on dynamic changes, the performance may have been inferior. But the upside from current levels may be limited. From a long-term perspective, it may be better to be in a clearly-focussed diversified fund with a lower risk profile.

Suitability: The risks associated with the fund are on the higher side, given the scheme's objectives and the fund's track record of seeking out momentum opportunities. The present portfolio may not carry a high degree of risk. But given the objective of `moving investments across different sectors as prevailing trends change', there is the risk of sizeable trading that could undermine performance.

So far, the fund has not recorded adequate returns to compensate for the enhanced risk profile and it may be a long way from achieving such a position. In the last year, as well as since its launch, the fund has underperformed the markets.

Portfolio overview: The performance has been helped by the close to 20 per cent exposure in Ranbaxy, Cipla and Dr Reddy's. These stocks have been the prominent gainers in the last three to four months and this has helped lift the NAV from around Rs 5.6 per unit to the present levels. The fund is heavily weighted in economically-sensitive sectors, with these stocks accounting for around 55 per cent of net assets.

Most of the frontline economically sensitive stocks have enjoyed good valuation levels, driven by the diversification of institutional investors. With the economic scenario holding more downside risks, the scope for net gains from these exposures may be limited.

The fund has close to 3.25 per cent of net assets in India Cements and Zee Telefilms. These exposures are of concern and are unlikely to make improve returns. The fund has a sizeable cash position of around 15 per cent of net assets. This offers a cushion to the NAV which could be used well by investors.

Fund facts: The DSP Merrill Lynch Opportunities Fund was launched in May 2000. It offers entry with a load of 2 per cent on the NAV. There is no exit load. The minimum investment amount is Rs 5,000. The manager is Mr Anup Maheshwari. The fund has turned in negative returns of 31 per cent since launch.