The Hindu Business Line : Fund Talk

I have invested in top performing funds but have negative returns over the past year. I started investing in mutual funds from March 2007. All plans are in growth option. They are not lump-sum investments. I keep on investing as and when I have enough money. I have invested in the following mutual funds: ICICI Pru Dynamic Plan (Rs 38,000), Reliance Growth Fund (Rs 75,000), Sundaram Select Midcap (Rs 16,000, Franklin India Prima Plus (Rs 26,000), SBI Magnum Global (Rs 16,000) Reliance Diversified Power (Rs 5,000). I have invested Rs 1,76,000 but currently its value is 1,56,732. These are the so-called top performing funds but have given negative returns over the last year. I want to know whether these funds are underperforming their benchmark. Apart from these, I have two lump-sum investments of Rs 25,000 each in Birla India Gennext Fund and Fidelity Equity Fund. How are these funds performing?

Do you suggest any exit and, if so, from which funds? I need Rs 1 lakh in another month. I also plan to start an SIP in one of the funds. Please suggest.

Anand

The stock market is back to levels at which you started investing (in March 2007). This is the reason why the gains you may have made have melted away. But fortunately, your fund choice has helped you combat the decline better.

You have a capital loss of about 7.5 per cent, a figure that should not bother an equity investor much, given your short investment period of just over a year. Even the top performing equity funds cannot avoid taking a hit in such a volatile market, unless they completely move to cash (most of the equity funds have restrictions on the amount of cash they can hold).

There are a few basic ‘entry factors’ that you have to keep note of as an equity investor.

- You should be prepared to take some element of risk. Your financial situation should also be conducive to this.

- The amount that you invest in equities should be a sum that you can spare for the long term.

- Investments in equities cannot be made with money that may have to be soon employed in other pressing needs.

- A period of less than three years, in our view, is a very short time-line to expect any sizeable returns from equities.

- Unless you are regular follower of the markets and can time your entry well, investing haphazardly as and when you have a sizeable sum can be a risky proposition. You may end up investing at the peak of a rally and later take a sharp hit on correction.

Now coming back to your investments, you have stayed invested in the market for just over a year — in a period marked by turbulence in the stock market. Hence, you may have to temper your return expectations from your portfolio.

Two, having invested a sum totalling to Rs 1.76 lakh beginning March 2007, your requirement of Rs 1 lakh in another month would significantly disturb a good 60 per cent of your portfolio and your overall investment style. You may have to resort to this if you are in dire need of cash and have very little alternative. You may have to end up selling good funds such as Reliance Growth as well, given the large amount that you need.

If you are willing to hold on to your investments, we can suggest a few changes.

Five of the six funds that you hold have performed in line with their respective benchmarks over the last one year. Sundaram BNP Paribas Select Midcap has even bettered the performance of its benchmark. On a year-to-date basis, many of the funds has also declined lesser than their benchmark, managing your money better especially after the first bout of correction in January 2008.

Only Magnum Global has significantly underperformed its benchmark and has shown signs of deteriorating performance vis-À-vis its peers as well. Reliance Diversified Power, being a sector fund, has taken a sharp hit given the declines witnessed by capital goods and engineering stocks. However, given your minimal exposure to this fund, which holds high potential, you may continue to hold it.

You can consider exiting Magnum Global. Prune your exposure to Reliance as your exposure of 40 per cent to a single fund is high. Moreover, Sundaram Midcap is likely to provide you with the desired mid-cap exposure. Reduce holdings in Franklin India Prima Plus to 10 per cent of total investments.

Consider adding HSBC Equity and DSPML Top 100 through SIPs. These funds, with proven track records, would be better choices for a core portfolio. Hold on to Fidelity Equity. You can hold on to Birla Sunlife India GenNext if you believe in the consumption story in India. The fund’s performance is in line with other FMCG peers. But the call now would be whether the hikes in interest rates will affect spending patterns in India Inc. in the near term.

VIDYA BALA

More Stories on : Mutual Funds | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page