The Hindu Business Line : Fund Talk

Though equity funds have delivered healthy returns in the past four years, equities remain a volatile asset class and an investor in them has to prepare for some downside risks.

I am a military pensioner aged 63, and drawing a pension of Rs 9,000 per month. I invest Rs 1,000 each a month in the following mutual funds through a systematic investment plan (SIP): Franklin India Bluechip Fund, Franklin India Prima, HDFC Equity, HDFC Top 200, Magnum Contra and Reliance Growth. These equity funds were selected after I read an article in your paper about two years ago. Kindly advise me whether I should continue the same investment or make changes in any of the funds.

P.N. Vasudevan

Kerala

First of all, based on your age profile, we suggest that you revisit your overall allocation to equities and equity funds at this juncture, as a substantial portion of your pension money appears to be going into equities. Though equity funds have delivered healthy returns in the past four years, equities remain a volatile asset class and an investor in them has to prepare for some downside risks (erosion in the value of investments).

Given the risky nature of the asset class and the especially uncertain current phase of the market, it may be prudent to cut your equity exposure either by reducing the number of funds or investing smaller sums each month. This is assuming that the pension is your main source of income.

As to your choice of funds, your portfolio calls for only a minor rejig. All of the funds you have mentioned continue to be among the top performing funds over a five-year period and have delivered consistent results through market cycles. Only a third of the funds that are now available boast a track record that long. While the funds you hold have under-performed the Sensex over the past year, we believe that they, with the exception of Franklin Prima, still should have a place in your portfolio.

We believe that you can exit Franklin India Prima Fund at this juncture. The mid-cap fund has significantly under-performed the markets over the last two years. We believe that its large asset base of over Rs 2,000 crore could be a constraint to performance, in terms of selecting small- and mid-cap stocks with high growth potential. Large size can limit a fund's ability to pick mid-cap and small-cap stocks, due to liquidity constraints and impact costs. The fund has been forced to pick larger, "discovered" mid-cap stocks where the return potential is limited.

Franklin Bluechip, however, remains a top choice for conservative investors who desire an exposure to large-cap equity as the fund tends to adhere strictly to its objectives. In recent years, the fund has, at best, delivered a few percentage points more than the Sensex. However, even the modest out-performance on an annual basis is likely to deliver superior returns to holding an index fund over a period of time.

HDFC Top 200, too, offers exposure to large-cap stocks although it has a larger investment universe than that of Bluechip. Both the funds should take care of the large-cap allocation in your portfolio.

HDFC Equity offers a blend of large-cap and mid-cap stocks. Considering that there are few mid-cap funds that have a good track record, we believe that the fund with its flexi-cap strategy may be a right choice for one looking to boost returns to their overall portfolio. Reliance Growth is one of the few mid-cap focused funds that continue to do well. You can, however, reduce your exposure to the fund as you already hold HDFC Equity. Magnum Contra has delivered good returns over the years through its strategy of focusing on stocks or sectors that are out of favour. Contra, for instance, now holds stocks in the metals and cement sectors, which are undergoing a volatile phase. Investors need to have a long holding period for such contrarian funds and must be willing to take knocks in performance in the medium term. The fund is, in other words, suitable for more aggressive investors. You can reduce exposures in this fund too.

Queries may be e-mailed to mf@thehindu.co.in,

or sent by post to Business Line,

859- 860, Anna Salai, Chennai 600002.