The Hindu Business Line : Three funds to accumulate

With stock selection likely to become more challenging in the year ahead and liquidity likely to remain tight, investors should stick with exposure to funds with a proven track record over both a bull and bear market.

Aarati Krishnan

The stock market is down substantially from its January high, with the BSE Sensex now trading 40 per cent below its peak value of 21000. The price-earnings multiple for the Sensex over this period has corrected from 28 to 15 based on trailing earnings, which is well below the 10-year average of 18.

If you are planning to make stock market investments with a five-year perspective, this makes it a good time to initiate investments in diversified equity funds. Investors who already have equity funds in their portfolio should view this as a good time to overhaul their portfolio.

We suggest weeding out laggards (check out the three-year returns to do so) and replacing mid-cap oriented funds with those that have a large-cap orientation. With stock selection likely to become more challenging in the year ahead and liquidity likely to remain tight, we think investors should stick with exposure to funds with a proven track record over both a bull and bear market.

These may hold greater potential to participate in a market recovery, as and when it materialises. Here are three funds that investors can accumulate for the long term.

DSP ML Top 100 Fund: This Rs 1000-crore fund’s mandate is to invest in stocks drawn from India’s top 100 companies by market capitalisation. It features a well diversified portfolio, with low concentration, exposures to even top stocks are capped at 6 per cent. The fund sports a five-year return (compounded annualised) of 31 per cent, 3-year return of 21 per cent and has seen its NAV declined by 19 per cent in the last one year, against a 26 per cent decline in the CNX Nifty. Hindustan Unilever, Infosys, Bharti Airtel, Reliance Industries and Crompton Greaves marked the top stock choices in the August portfolio.

Frontline software, pharma and banks were the top sector preferences, with the fund also using Nifty futures quite actively to trade a range-bound market and contain downside.

Kotak 30: Kotak 30 is a mid-sized fund (Rs 650 crore assets), which favours a compact 30-40 stock portfolio drawn mainly from the index and to some extent, the large-cap basket. The fund tends to take fairly concentrated exposures to the top sectors and stocks, using derivatives as well to obtain exposures. Reliance Industries, ONGC, Bharti Airtel, Infosys, and Larsen & Toubro make up the top stock choices as of August.

Energy, banks and software make up the fund’s top sector preferences. Annualised returns stand at 32 per cent, 17 per cent and a negative 22 per cent for five, three and one-year periods.

Sundaram BNP Select Focus: A large-sized fund with a Rs 974 crore corpus, Select Focus has consistently maintained high cash/equivalents in its portfolio to manage downside risk. True to its name, exposures to the top sectors are fairly concentrated, but risk is reduced through very low stock-specific exposures. Oil, frontline software and telecom were the top sector choices in August, while the top holdings were Reliance, ONGC, ICICI Bank, Reliance Communications and Infosys. The fund sports five-year returns of 30 per cent, three-year returns of 21 per cent, and a negative one-year return of 23 per cent.

Investors need not own all three of the above funds as their portfolios do carry a substantial overlap. Lump sum investments in the above equity funds can be considered given relatively low market levels.

However, given the extremely uncertain near term outlook for the market, lumpsum investments should be made in a phased manner. Investors can, for instance, begin investing now and put in additional sums at every 500 point decline in the Sensex.

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