The Hindu Business Line : <I>Going for consistency </I>

You have consistently advocated that investors should invest in older funds with a five-year track record and stay away from new funds. I did a comparison of the returns on new funds such as SBI Multicap, Fidelity Equity and SBI Midcap with older funds such as HDFC Top 200 and HDFC Equity, over the same period.

I find that there is not much difference in the returns from new funds, compared to older funds. Further, the funds that you are suggesting today too were new funds some years ago. Maybe, in 2010, you will suggest investing in some of recent new funds. So what is wrong in investing in them now, when their NAV is at Rs 10 to 15 per unit?

T. P. Bhola

The return numbers you have worked out actually answer part of your question. You've discovered that an older fund, with a higher NAV, can perform just as well as a new fund that started out at Rs 10. This reinforces the fact that entry level NAV is irrelevant. The important point is that while the new fund has managed this return over one three-month period, a fund such as HDFC Top 200 or HDFC Equity Fund has repeatedly managed these returns over several such three-month and six-month periods!

Let us say you were faced the task of selecting a sixth batsman for the Indian team to follow Sehwag, Tendulkar, Dravid, Yuvraj and Kaif. Would you select a man who scored a brilliant century in his first and only match? Or would you prefer a player who has 80 one-day matches to his credit and has averaged over fifty? Obviously, the latter would score because his performance is consistent and thus, more credible.

Consistency in performance across different market phases is the reason why we recommend investors should park the core portion of their portfolio in equity funds with a good long-term record.

The identity of the fund manager, stock selection, sector choices, investment style — each of these factors contribute to an equity fund's returns. When you select a fund based on a short-term return, say, for six months or even a year, it may have done well because it was in the right sector or in the right stocks at the right time. What is the guarantee that it will be equally fortunate over the next six months?

Equity funds also find it easier to race ahead of the market in a bull phase, but find bear phases more of a challenge. When a fund manages to consistently get its portfolio right over market cycles, it gives you greater confidence that the returns from the fund could be sustainable.

Even investing in funds with a good five-year record is not a foolproof way to ensure consistent good performance. Such a fund may slip up. But it is the best way you have right now, to make sure that you don't have duds in your portfolio.

As to your query about whether we will recommend some of today's new funds in 2010. Well, we may, if they continue to perform well over the next few years. But we can assure you not all of today's new funds will make it to the "Buy" list for 2010. Quite a few will have slipped up in their performance as the pace of the stock market rally slows down and they may not be as adept at handling bear markets. The managers of many funds have been used only to a bull market.

Queries may be sent to: mf@thehindu.co.in or by post to Q&A, Business Line, 859/860, Kasturi Buildings, Anna Salai, Chennai - 600 002.

Aarati Krishnan

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