The Hindu Business Line : Defensive tilt

Considering the present stock market conditions, with high valuation levels, which among these will be the best diversified equity funds to own? I am looking at Magnum Contra, PruICICI Discovery, Tata Equity P/E and Birla Dividend Yield Fund.

S. K. Sharma

Thane

Your asset allocation pattern — how much of your portfolio is invested in debt and how much in equity — will be the key factor influencing your returns in the event of a stock market meltdown. So we suggest that before zoning in on individual funds, you should first check on this pattern.

Even if you select defensive equity funds, they would carry equity risks and could suffer a meltdown if the stock market corrects sharply. So, if you are worried about a stock market meltdown (and you have reason to be, with valuations at rich levels for most stocks), trim your exposure to equities to levels you are comfortable with. Book profits on stocks or equity funds and re-invest that portion in debt investments or debt funds.

Asset allocation first

You should consider investing fresh money in equity funds only if you are sure that there is room for equities in your portfolio, based on your preferred asset allocation.

If you are convinced about the need for new equity investments, your choice of funds is reasonably good, if you have a defensive intent. PruICICI Discovery is a value fund, which focuses on low P/E (valuation) stocks. With its portfolio P/E at about 14 times by end-January 2006, at a big discount to market valuations, the fund certainly appears to carry lower downside risk. Its track record since inception is also good enough to consider new investments.

Birla Dividend Yield Plus invests only in stocks that are at twice the dividend yield of the Nifty. A dividend yield strategy is usually a good antidote against downside risks, as it zones in on stocks that enjoy low valuations or under-perform the rest of the pack.

Choosing the right ones

Among the dividend yield funds, Birla Dividend Yield is a good choice because of its structuring. However, the fund may not be an ideal investment if your return expectations are high. It has sharply under-performed other diversified funds over the past year. This is mainly because value and dividend yield stocks have sharply trailed "growth" stocks during the secular bull rally. Though Contra Funds are usually good defensive investment options because they focus on recent underperformers, Magnum Contra Fund does not neatly fit into this compartment. The fund has displayed good stock selection and has been an early entrant to capital goods and engineering stocks. However, its current portfolio does not reflect a pure contrarian strategy.

The stocks in the portfolio may have good growth potential, but the majority of them are high P/E "growth" stories. This is, nevertheless, a good fund to own because of its good five-year record, which has been sustained in recent times. We do not recommend Tata Equity P/E fund at this juncture because of its relatively short track record and its moderate performance since inception.

You could probably divide your investments between Magnum Contra, Birla Dividend Yield and PruICICI Discovery. Take the systematic investment route to reduce your exposure to the stock markets at a specific point in time. This will be further insurance against a market meltdown.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859-860, Anna Salai, Chennai 600002.

Aarati Krishnan

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