The Hindu Business Line : Principal Equity: Sell

Principal Equity has returned 10.4 per cent annually since inception and has just about managed to keep pace with the Nifty's return of 11 per cent over the same period.

Investors in Principal Equity can consider reducing exposure to the fund and move to other diversified schemes with a better record.

Principal Equity's returns since inception and over the last year have slightly lagged its benchmark, the S&P CNX Nifty, while a number of its peers have outpaced a similar benchmark.

Investors looking for a fund with a large-cap bias may opt, instead, for HDFC Equity or PruICICI Power.

These funds have performed consistently for over 10 years and weathered various market phases.

A systematic investment plan would enable investors to average the rupee cost, especially in the present volatile market.

For a scheme launched in 1995, the fund has had enough time to improve its performance and smoothen out the rocky phases.

For its conservative risk profile, the returns appear much lower than what funds with similar risk profile have registered.

Performance: Principal Equity has returned 10.4 per cent annually since inception and has just about managed to keep pace with the Nifty's return of 11 per cent over the same period.

It has outperformed the Nifty in just five of the last 12 months (returns calculated on a monthly basis), suggesting average performance.

Although the fund has a mandate to invest in medium- to large-size companies, it appears to restrict its portfolio to frontline players in most sectors. While a number of diversified funds with a large-cap bias participated in the mid-cap rally last year, Principal Equity stuck to a large-cap portfolio.

Over June to September 2005, it held as much as 80 per cent of assets in stocks with a market capitalisation of over Rs 2,00 crore.

The fund's return of 25 per cent over the past year has considerably lagged large-cap funds such as HDFC Top-200 and Kotak-30, that notched up over 40 per cent in the same period. Their timely allocation to sector themes has resulted in superior performance.

Principal Equity, however, remained heavy on a few sectors that were under-performers during the last year.

Until February 2006, the fund held about 10 per cent in petroleum stocks such as Hindustan Petroleum, Indian Oil Corporation and Chennai Petroleum, whose performance remained sedate over the holding period. The fund also held pharma stocks at a time when they lagged the broad market.

Principal Equity's decline of 25 per cent since the May 10-market peak is also sharper than its benchmark.

The portfolio lacked downside protection as a result of low exposure to software stocks.

Portfolio overview: The top five stocks in the portfolio accounted for 22 per cent of the asset size as of June. Exposure to individual stocks was restricted to 5 per cent.

Consumer goods and engineering got the maximum allocation. ABB, Siemens, Bharat Heavy Electricals, ITC and Asian Paints are some of the stocks held by the fund in the above sectors.

Between January and June the net assets declined by 20 per cent to Rs 70 crore.

Mr Rajat Jain manages Principal Equity. The fund has an entry load of 2.5 per cent and does not charge any exit load.

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