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Sunday, Sep 05, 2004

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Markets - Mutual Funds

Striking the right balance

Aarati Krishnan

Mr Prashant Jain, Chief Investment Officer, HDFC Mutual Fund

HDFC Mutual Fund has unveiled two new fund products for equity and debt investors. Mr Prashant Jain, Chief Investment Officer of the fund, answers queries on how these funds are different from HDFC Mutual's other offerings and what investors should expect from them.

HDFC Core and Satellite Fund will earmark 60-80 per cent of its portfolio for well-established, large-cap companies — called "core" stocks — and 20-40 per cent to small- and mid-cap stocks, the "satellite" holdings.

Most diversified equity funds do follow an internal allocation pattern between large-cap and mid-cap stocks. How is the "Core and Satellite Fund" different from your other equity funds, such as HDFC Equity, HDFC Top 200 and HDFC Capital Builder?

The distinction between the Core and Satellite parts, is not as much of capitalisation as it is of the quality, sustainability and the risk in the investment.

We define "core" companies as well-established companies with the following characteristics: companies with a long and successful track record that enjoy a leadership position in their markets, have significant competitive advantages and are available at prices less than their intrinsic value.

On the other hand, the companies that will comprise the Satellite part of the portfolio will offer a higher return potential but also carry higher risk. The higher returns will be on account of:

  • Presence in an emerging area or a new business model;

  • New technology/research-driven company without much commercial success till now;

  • A turnaround case or an out-of-favour company — for instance, a company facing a temporary setback as a result of which the stock price is depressed and/or the stock is not actively covered by analysts; and

  • A company expected to benefit significantly on account of changes in the external environment, such as commodity prices and exchange rates.

    Other equity funds of HDFC Mutual Fund invest only in the "core" type of stocks.

    If an investor already holds Top 200 Fund or HDFC Equity, why should he invest in this fund?

    Diversification. This fund will invest some portion of the assets in a controlled and disciplined manner, in slightly higher-risk options.

    If the fund is successful in its objectives, the slightly higher risk in this fund should result in higher returns over a period of time. This fund will provide diversification to an investor who has investments in our other equity funds.

    What sort of an investor is this fund suitable for?

    As this fund will invest in Satellite stocks, the risk profile is expected to be marginally higher than our other equity funds.

    This fund would be suitable for an investor who is willing to accept marginally higher risk.


    HDFC Multiple Yield Fund: With 85-95 per cent of its portfolio to be parked in debt and 15-25 per cent in dividend yielding stocks, the HDFC Multiple Yield Fund is a product meant for more conservative investors.

    The fund expects to prevent capital loss and deliver positive returns, irrespective of the movement in the equity market and interest rates.

    Why do you plan to restrict the maturity profile of the debt portion to one year?

    There is uncertainty about which way interest rates will move. The investment objective of the fixed income portion of the Fund is to eliminate the interest rate risk over a one-year period.

    The Fund will try to achieve this by buying fixed income securities of roughly one-year maturity, and by adopting a predominantly "buy-and-hold" strategy. This should result in returns on the fixed income portion that are nearly equal to the underlying yield on bonds over a period of time, irrespective of interest rate movements.

    The fund appears to emphasise positive returns. But even dividend yield stocks can fall significantly, in practice, when markets reverse. How will your equity strategy be structured to reduce downside risk?

    The fund will normally invest 15 per cent of its assets in equities. The fall in the equity market, if any, will thus impact only 15 per cent of the portfolio.

    Besides, this fund has two sources of income — one from the fixed income portfolio and the other from dividend yield on equity holdings.

    Taken together, they are expected to partially/fully offset the depreciation, if any, on the equity investment over time. The investment strategy for the equity portion will be to buy a few stocks with a moderate dividend yield, and a few with high yields.

    This will ensure that there is a reasonable balance in the portfolio between growth and yield stocks.

    (The IPOs for the both the funds open on August 20 and close on September 10.

    Readers are requested to compare these products with similar offerings before making an investment decision.)

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