The Hindu Business Line : Fund Talk

I am a small investor. I have saved Rs 50,000 in the last one year. I want to invest this money in diversified open- ended mutual fund schemes. I have selected the following mutual funds. Please let me know your opinion on the same: DSP ML T.I.G.E.R, Franklin Templeton Prima, Tata Infrastructure, UTI Infrastructure, Kotak Opportunities, DSP ML Equity fund, SBI Magnum Mid Cap, JM Basic, SBI Contra, Reliance Growth.

I also want to invest Rs 3,000 per month through SIPs. How can I identify which funds are suitable for investment? What is high, below average and average risk? How should I identify risk? Is it good to invest in SIPs in new fund offers?

Ajay

The set of funds you have identified have a good performance track record in their respective categories. But the portfolio you have constructed for yourself is suitable only for those with an aggressive risk appetite. Out of the 10 funds you have identified, four are infrastructure-related theme funds and three are mid-cap funds. As you are a small investor starting your investment in mutual funds, such an aggressive portfolio may not be advisable.

The majority of your assets must be invested in diversified funds such as DSP ML Equity, Kotak-30, Birla Sun Life Frontline Equity, which are large-cap biased funds. You can perhaps consider a mid-cap fund such as Reliance Growth. Since the sums you plan to invest are small, you can limit your portfolio to about five-six funds. This will make your portfolio easy to monitor and manage, compared to a large portfolio of over ten funds.

You appear to be really keen on an exposure to the infrastructure space. Most top performing diversified funds might already offer you some exposure to this sector. If you want to take more focused exposures, you can consider investing in infrastructure theme funds. However, you can limit your exposure to one infrastructure fund, as there tends to be overlap between portfolios of different infrastructure funds. Of the funds you have identified, UTI Infrastructure or DSP ML T.I.G.E.R might provide a leg-up to your portfolio returns.

However, we would caution you to moderate your return expectations. Infrastructure theme is a long-term story, but the expensive valuations that these stocks command currently might cap returns. Avoid new fund offers, as there are existing funds that ride this theme.

Identifying risk

The simplest way for you to identify a fund’s risk profile is to first understand a fund’s objective as defined in its offer document or fact sheet. Funds that intend to take concentrated exposures to sectors or to stocks or certain themes are more risky than typical diversified funds. A quick look at the top holdings will also give you an idea of a fund’s investment style. If the top ten stock holdings add up to 50 per cent or more or the top three sector holdings to more than 40 per cent, the portfolio is aggressively managed. This means that the fund’s performance is highly dependent on a handful of stocks or one sector outperforming the market.

Portfolio strategy apart, one key measure of a fund’s risk profile is its ability to contain downside or market volatility. Portfolios that are heavily biased towards mid-cap and small-cap stocks (stocks with a market capitalisation of less than Rs 5,000 crore) would be more risky, as these stocks are subject to greater volatility.

While checking out a fund’s track record, look at its performance vis-À-vis its benchmark and peers over periods of high volatility such as the kind in May-June 2006 and the recent correction in January. A fund that has demonstrated an ability to contain downside relatively better than its peers would be typically less risky.

However, no equity fund can or does promise capital protection. All equity funds are subject to downside risk. It is only the extent of downside that varies depending upon the fund’s risk control measures and investment strategy.

Shanthi Venkataraman

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.)

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