The Hindu Business Line : Fund Talk

I am a Central Government officer who has about 12 years of service left. I have invested in the following mutual funds: ICICI Pru Infrastructure, Fidelity India Special Situations, Reliance Growth, Reliance Equity Advantage, Fidelity India Growth, Reliance Diversified Power Sector, Franklin India Bluechip, HDFC Top 200, HDFC Index Nifty Plan, DSPML Small & Midcap and JP Morgan India Equity. Kindly let me have your opinion. I have no need for immediate liquidity, but have two daughters, whose needs will have to be met in a few years from now.

S. Ramesh, Chennai

It appears that you have been a recent entrant to mutual fund investing going by the date of fund purchases mentioned by you. This may also be the reason why you have chosen a number of new funds. Close to 53 per cent of your capital lie in funds with a track record of less than three years, with very recently launched funds such as DSPML Small & Midcap Fund, Fidelity India Growth and JP Morgan India Equity having a life of less than a year.

When you are just starting to build an equity portfolio, it is essential that you build the base with funds that have a track record of at least three to five years, if not higher. These funds are likely to give you an indication of how well they have fared across various market phases. While past performance may not be replicated, it helps to understand the fund’s strategy – aggressive or otherwise and how this strategy has helped tackle volatile phases. This will in turn provide you some perspective of whether the fund would suit your risk appetite. You lose out on these accounts if you choose a new fund.

This is not to say that one should never invest in new fund offers. You could invest in a new fund if:

1. If the theme is unique and suits your risk appetite

2. The fund manager has handled other funds and has delivered superior returns in the past, and

3. You are investing in the new fund only as a diversification option.

In future, limit your exposure to a new fund given the limited information on hand. Coming back to your portfolio, Franklin India Bluechip and HDFC Top 200 are the large-cap funds accounting for 22 per cent of your capital. While both these funds are time-tested options, you can consider exiting one of these and instead add Sundaram BNP Paribas Select Focus which has over the past one year shown significant improvement in performance and outpaced the above two funds.

You have theme funds — Reliance Diversified Power Sector, ICICIPru Infrastructure and Fidelity India Special Situations — accounting for 20 per cent of your capital and perhaps a much higher proportion of your present asset value. This proportion appears aggressive.

If you have very moderate risk appetite, consider exiting Fidelity India Special Situations and book partial profits in Reliance Diversified Power Sector (as your holding in this fund is very high). Take small exposure to theme funds and occasionally book profits to maintain your original asset allocation. Hold on to Reliance Growth. You could have avoided DSPML Small & Midcap Fund as Reliance Growth partly replicates the strategy (of investing in Mid-caps). As you seem to have entered the fund very recently, it is likely that you may be sitting on losses given the recent market plunges. Hold on to the fund and exit at a later stage. Ensure that you do not suffer any exit load. Reliance Equity Advantage, JP Morgan India Equity and Fidelity India Growth are all new funds. You have little choice but to hold on to them and watch out for their performance over a few quarters. Exit these funds if they under perform peers with similar investing style.

Hold on to HDFC Index Nifty Plan for the short term. However, when the market rally is more broad based, it is a better strategy to invest in actively managed funds than funds that replicate the index. Diversified equity funds tend to outperform index funds over the long term due to active portfolio management.

Vidya Bala

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