The Hindu Business Line : Fund ideas for the medium term

A sweeping market meltdown of the kind that we witnessed last week does not come about too often. But when it does, and you are inclined to invest in stocks, the choices can be befuddling. The recent market rout cut such a wide swathe across stocks and sectors that even investors who had the resources to make fresh investments would have found it difficult to decide what to buy.

What is more, the intense intra-day volatility witnessed in individual stocks would have also made it well nigh impossible for investors to catch fancied stocks at low prices.

Taking the mutual fund route to equity investments may be the ideal way to resolve this dilemma. Equity funds allow you to buy a basket of stocks without day-to-day monitoring. Diversified equity funds with a good track record across market cycles such as Birla Sun Life Equity Fund, DSP ML Opportunities Fund, Sundaram Select Focus, Magnum Contra and HSBC Equity Fund, should of course remain on the “buy” list of investors at times such as this. But in addition, here we present a few theme and index funds that appear attractive for investors with a three-year perspective. Investors may consider adding one or more of these funds:

Junior BeES Exchange Traded Fund: The Junior Nifty index offers investors a good exposure to the emerging large caps of India Inc without the liquidity risks inherent in the mid-and small-cap stocks. Emerging large cap stocks are likely to be high on the radar of institutional investors- both foreign and domestic- looking for less expensive options outside the Nifty and Sensex baskets.

The recent corrective phase has trimmed the valuations for the Junior Nifty index from about 31 times trailing earnings in the second week of January, to 24 times now. The top sector exposures in this index at present are petroleum products, banking/financial services, telecom services and capital goods. Investors can take exposure to the basket of Junior Nifty stocks, through the passive exchange traded fund-Junior BeES, in the secondary market.

Sundaram Capex Opportunities: Despite their premium valuations, stocks of capital goods companies appear likely to remain out-performers, given their domestic focus, highly visible earnings prospects and a likely acceleration in government spending this year also points to strong earnings.

Sundaram Capex Opportunities Fund is a thematic fund that is sharply focused on companies that supply products/services to the basic industries that feed infrastructure growth. The fund has a large-cap tilt and buys stocks with a two-year view; but takes concentrated exposures to its top stocks. This strategy has helped lend the fund a leading slot among the infrastructure theme funds.

Reliance Banking Fund: Strong earnings growth, a more benign interest rate scenario that may lead to higher credit offtake and pockets of attractive valuation, suggest that stocks from the banking and financial services sector could outperform broad markets over the next couple of years. A banking theme fund will help investors acquire a diversified portfolio of private sector banks, PSU banks and companies in the consumer credit and broking businesses; holding any one of these businesses may be more risky.

Reliance Banking Fund has managed a compounded annual growth of 37 per cent since inception and 49 per cent in the past year. A significant 21 per cent cash holding in end-December may help the fund capitalize on recent declines to add to its portfolio.

In addition to the above equity-oriented funds, here is another thematic fund which may make a good diversifier to your portfolio:

DSPML World Gold Fund: Higher uncertainties on the global economy due to the US sub prime crisis and the prospect of a US recession which may weaken the US dollar, suggest that year ahead may be a good one for gold as an investment option. The DSPML World Gold Fund is a unique play on gold, which invests in gold mining and precious metal companies across the world.

This fund redirects investments into the World Gold Fund managed by the global natural resources team of Merrill Lynch. Given that the fund invests in stocks of precious metal companies and not directly in precious metals, returns may be higher during periods of high gold prices.

The fund had a 80 per cent exposure to gold-related sectors and a 8.9 per cent exposure to platinum-related sectors in December. Investors should consider this fund, not because it may offer higher return potential than equity funds, but because it may provide good returns at times when equities fail to perform.

Some alerts

In the end, a couple of caveats to qualify the above recommendations:

As each of the above funds is focused on a specific theme, they do carry a higher risk profile than a plain vanilla diversified equity fund. Erosion in the NAV, in the event of a reversal in the focus sector or theme, can be sharp. Thus, these funds are best suited to investors who already have a core portfolio built around diversified equity funds or those who have a portfolio consisting mainly of direct stock market investments.

Theme funds can strongly outperform the markets over short time frames and may require investors to time their entry as well as exits well. While lumpsum investments can be made, these can be phased out to take advantage of volatile phases in the market. Investing in the dividend options of the above funds, wherever available, may help investors cash in on periods of exceptional returns, whenever they arise.

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