The Hindu Business Line : Buying opportunities in funds with large-cap focus

With recent global events triggering a 10 per cent decline in Sensex levels, several large cap stocks have retreated significantly from their earlier highs. For investors with a 3-5 year investment horizon looking to make equity investments, this may be a good opportunity to take exposures (possibly even through lump-sum investments) to equity funds, which have the flexibility to invest across the market capitalisation range.

Diversified Profile

We recommend funds with a bias towards large cap stocks at this juncture, because the more well-known companies of India Inc may be the first to recover in the event of any appreciation in stock prices. These companies may also be investments of choice for institutional investors, during phases characterised by tight liquidity conditions and greater aversion to risk, such as the one we are witnessing now.

With stock markets turning more volatile, it may also be safer at this point to stick with equity funds that have a diversified profile and a long track record of performance over market cycles. A ranking of all open end diversified equity funds based on their five, three and one year performances, throws up the following funds as good investment options:

Magnum Contra Fund: Among the top performers over a five year period, this fund has always been oriented towards large-cap stocks, though the stock choices have not reflected a contrarian strategy.

The fund has generated a 32 per cent return over the past year, outperforming its benchmark in a challenging period for equity funds in general. About 85 per cent of the July portfolio was invested in stocks with a market cap of Rs 5,000 crore or more, showing a distinct large cap bias. Media, banks and telecom were the preferred sectors in the latest portfolio.

Birla Sun Life Equity Fund: Among the top ten performers based on absolute returns over a five year period, this fund invests in a mix of large and mid-cap stocks. Currently, only about a third of assets are invested in mid-cap stocks.

The fund’s July portfolio also held a significant cash/debt position of 13 per cent. Telecom, engineering and frontline IT were the top sector exposures in July 2007. The fund has delivered a healthy 39 per cent over the past one year, a challenging period for equity funds in general.

DSP ML Opportunities Fund: An aggressive fund which takes focused exposures to a few sectors, this fund’s higher than average risk profile is justified by its track record of consistent performance over market cycles. The fund 217;s one year return at 36 per cent is healthy, and builds on a place within the top ten rankings on a five year basis as well. About 82 per cent of the July portfolio was in large cap stocks, with frontline IT, construction and refining among the preferred sectors.

Franklin Prima Plus: A fund which consistently maintains at least a 75 per cent exposure to large cap stocks, the fund’s one year (35 per cent return) as well as five year returns are inspiring. Media, banks and telecom have been the preferred sector exposures in the July portfolio.

Investors, who already have a portfolio of equity funds, may consider switching from the underperformers in their portfolio, to one or more of the above funds. First-time investors in equity funds can take exposures to three or more of the above funds so as to have reasonable diversification across fund houses.

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