OVER 2,600 stocks are now traded on the Bombay Stock Exchange and the market is abuzz with new stock `ideas'. To any active investor, this would suggest a market brimming with investment opportunities. But seasoned mutual fund managers have a different view.
Leading fund houses say they prefer to track no more than 200-300 stocks in the listed universe, as management quality, liquidity concerns and other considerations rule out many of these stocks as investment candidates.
"We track about 200 stocks now, most of the others may not be worth looking at," says Mr Sandip Sabharwal, Head of Equity at SBI Mutual Fund. "One of the lessons we learnt from the 2000 (crash) was that you should invest only in the companies and managements that you know thoroughly. This becomes difficult when you track too many stocks."
Is SBI Mutual missing out on good investment opportunities by ignoring many of the listed stocks? Not at all, says Mr Sabharwal. "All you need is six or seven really good stock ideas in a year to deliver a good performance."
Many of SBI's equity funds have been top performers over the past year, managing to more than double in value.
Mr Sashi Krishnan, CEO of Chola Mutual Fund, says concerns about liquidity prompt his fund to stay away from many of the small and mid-cap stocks that individual investors buy.
"Liquidity in some of these stocks is bound to be high when the market is rising; but volumes can dry up in a trice during a reversal," he says, citing examples of some technology stocks which left investors high and dry in the crash of 2000.
Chola Mutual Fund tracks an investment universe of 200-250 stocks at this point in time. Before inducting any new company, the fund evaluates its business model. "A lot of companies manage to do well during a booming business cycle. But you need to have a sound business model to weather a downturn," says Mr Krishnan.
Mr Sanjay Sachdev, CEO of Principal PNB Asset Management, echoes this view. He says that though the universe of traded stocks has risen sharply over the past year, Principal adopts a cautious approach to mid-caps because of concerns about management quality.
Franklin Templeton holds a different view. It says a growing fund size has indeed prompted its research team to look at more stocks. The number of stocks that it tracks internally has risen from about 200 to 300 over the past couple of years. Its analysts are encouraged to look for new stocks, but any stock that comes from outside the investment shortlist has to be stringently researched from scratch.
While fund houses are not in a hurry to expand the number of stocks they cover, they do put in extra efforts to identify new stocks when they roll out specialised theme funds. Sundaram Mutual Fund's research team, for instance, says it made 70-80 company visits in the run-up to the launch of the Capex Opportunities Fund, so that it had several investment ideas in hand before the fund's rollout.
The Chola Global Advantage and Magnum Comma Fund launches were also preceded by special research efforts to identify new stocks that fit into these investment themes.