The Hindu Business Line : Diversified funds — It’s all in the selection

If the two-year round trip of stock market proves anything for your mutual fund investments, it is that a lot hinges not just on your fund selection but also on the fund manager’s stock and sector selection. An analysis of the performance of diversified equity funds over the last two years only confirms this.

Only 35 funds from a total of over 124 have held on to their gains despite the hammering in the broad market. More than half the remaining funds trailed the Sensex return, which is a good 5 percentage points in the negative.

The performers

IDFC Premier Equity Fund topped the chart, with 33 per cent absolute returns. Known to invest in small and medium-sized businesses, this fund could have returned higher but for its year-to-date loss of over 47 per cent. Other funds, such as DSPML Top 100 Equity Fund, HDFC Growth Fund and Sundaram BNP Paribas Select Focus, posted double-digit returns, backed by a large-cap portfolio.

DWS Investment Opportunity Fund however, recorded a reasonable performance without the large-cap strategy. Large-cap favouritism appears to have come to the rescue of even other funds such as IDFC Imperial Equity, Kotak 30, HSBC Equity and DWS Alpha Equity.

The laggards

Not surprisingly, the worst performers were those with a significant mid- and small-cap bias. Funds such as JM Emerging Leaders, DBS Chola Contra, Birla Sun Life India Opportunities and Canara Robeco Emerging Equities were at the lower end of the returns chart, having delivered negatively in the 27-38 per cent range.

Large-cap focus did not turn out to be a panacea as even some funds with a significant large-cap focus plummeted, highlighting the need for funds to pick the right stocks and sectors at the right time.

Principal Growth, whose NAV declined by 23 per cent in this period, is a case in point. Early in March this year, the fund stepped up its exposure to construction and financials sector, both of which have taken a serious hit since then.

Another case in point is JM Equity fund, which lost over 22 per cent of its NAV in two years. However, here it was the fund’s asset allocation strategy and not wrong sector choice that was the reason for the downturn. While the fund started systematically pruning its overall equity exposure already in October 2007, following the subsequent rally in the market, it stepped up its equity exposure once again in January and February.

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