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Aarati Krishnan

IT HAS been a breathtaking year for investors in equity mutual funds. The majority of equity funds have beaten the market indices by a huge margin. One in every four equity funds has managed to double its NAV over the past year. And even the laggards in the equity fund category have notched up returns of 60-65 per cent over the year.

But what makes the equity fund rankings for 2003 particularly interesting is the wide divergence in the portfolios, sector and stock preferences of the funds, which have made it to the top of the performance charts. In the previous boom phases, fund managers usually rode on one sectoral theme to beat the market indices.

But over the past year, fund managers have been quite venturesome, packing their portfolios with mid-cap stocks and stocks from unconventional sectors such as chemicals, fertilisers and capital goods, outside of the conventional basket of large-cap, growth stocks. The key trends in mutual fund performance in 2003 are captured here:

Rousing victory for active investing

Equity fund performance in 2003 once again makes a strong case for active investing. In 2003, equity funds notched up an average return of 85 per cent, outpacing the narrow market indices, the S&P CNX Nifty and the BSE Sensex, by a whopping 21 and 19 per cent respectively.

What is more, as an investor, you had a fairly good chance of picking an equity fund that outpaced these indices. About 98 of the total of 137 equity funds, or seven in every 10 funds, outpaced the Nifty and the Sensex.

Equity funds also set straight their track record vis-à-vis the S&P 500 index. In the preceding four years, few equity funds managed to outpace the broader market index. But in 2003, with fund managers actively seeking opportunities outside the basket of frontline stocks, 66 of the 137 funds managed to beat the S&P 500 index.

Different roads to the top

Quite a few of the mid-cap-focussed funds made it to the top of the performance rankings in 2003. But there really is no unifying theme to the top performing equity funds in 2003.

The Franklin India Prima Fund has notched up a return of 165 per cent over 2003, thanks to early entry into mid-cap stocks from such diverse areas as textiles, chemicals, fertilisers and automobiles, and disciplined profit-booking based on target prices. On the other hand, the Sundaram Select Midcap Fund (returns 148 per cent) has benefited from concentrated and early exposures to banking and capital goods stocks.

The Reliance Growth and Reliance Vision funds, which are packed with a good number of mid-cap stocks, have relied on aggressive churning of their portfolios to clock returns of 149 per cent and 143 per cent respectively. But the HSBC Equity Fund has relied on frontline IT and pharma stocks, to manage a 147 per cent return on its NAV.

New versus old

In what is a promising trend for investors, many of the new entrants to the equity fund arena have made it to the top of the rankings in 2003. Funds such as HSBC Equity Fund, HDFC Tax Plan 2000 and Sundaram Select Midcap, with a relatively recent debut, have made it to the top quartile of performers in 2003.

Given that these funds have delivered good performance in just one market cycle, it may be early days yet to judge the performance of these funds. But they certainly deserve to be watched closely by investors for investments at a later date.

Despite this, investors who stayed with the tried-and-tested funds would not have been disappointed in 2003. Diversified equity funds with a good five-year track record, such as HDFC Equity Fund, HDFC Taxsaver, Franklin India Bluechip and Templeton India Growth Fund, made it to the top quartile of the return rankings, with over 100 per cent returns, even if they didn't figure among the top five.

Though the returns on these funds have been significantly lower than that of the top five (which managed between 147 per cent and 165 per cent), investors should not contemplate a switch to the top five funds. While investing in equity funds, consistency is definitely a more valuable asset than high absolute returns over a short period.

Making a comeback

The broad-based rally of the past year also appears to have helped a few funds restructure their portfolios and make a comeback. Birla Equity Fund, PruICICI Tax Plan, IL&FS Growth and Value Fund, among others, have climbed to the top of the performance rankings in 2003, after an indifferent performance during 2000-2002.

Investors in these three funds can hold on to their investments, as the stocks which now figure in their portfolios appear to hold reasonable potential for appreciation. However, investors holding funds with an insipid track record over a long timeframe, say, three years, should consider liquidating their exposures now to lock into the recent surge in their NAVs.

This may be a good time for investors to streamline their equity fund portfolios. This may also be the right opportunity to rebalance your portfolio by booking profits if you are overweight in equities. Investors can also consider switching from equity funds with an unimpressive track record to those which have weathered the markets well over a five-year period.

Index/tech funds make up the rear

While diversified equity funds as a class have acquitted themselves well, index funds and technology sector funds have been the laggards of the year. With returns of 65-70 per cent, index funds tracking the Nifty and the Sensex are piled up at the bottom quartile in the performance rankings for 2003.

With technology stocks slow to participate in the rally, sector funds focussed on IT and software stocks, with returns of 30-40 per cent in the year, make up the tail end of the rankings.

Time for caution

Investors in index funds should probably consider taking profits on their portfolio now, to capitalise on the gains earned over the past year. With the equity rally likely to turn more selective, diversified equity funds may stand a greater chance of delivering good returns than passively managed index funds.

Even for those invested in the actively managed equity funds, this may be the time to turn cautious. Conservative investors should consider booking profits on at least a part of their portfolio to lock into the extraordinary returns of the past year.

Those who have invested in the dividend plans of equity funds would already have done this, by virtue of the large dividend payouts from equity funds over the past three months. Those invested in the growth plans should consider switching to the dividend plans of their respective fund, as this would offer some downside protection.

Investors with an appetite for risk can hold on to their exposures in diversified equity funds, as they may be better placed to participate in any further rally in the market.

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