Mutual Funds

Fund Talk : Funds for a first-timer

Aarathi Krishnan | Updated on February 12, 2011

Avoid investing too much in one fund-house, to sidestep the risks of attrition, ownership change or limitation of just one selection style.

I would like to start systematic investment plans (SIPs) in a few mutual funds to meet some of my long term goals. I may need these funds only after 10-15 years. Can I invest Rs 1,000 in each of the following ten funds? Mid/small cap funds: IDFC Premier Equity, Reliance Growth, ICICI Prudential Discovery, ING Dividend Yield. Large Cap Funds: HDFC Equity, HDFC Top 200, Reliance Regular Savings – Equity, UTI Dividend Yield, UTI Opportunities, Quantum Long Term Equity. Would you suggest selecting funds from different houses?

Mohan Kannan, Bangalore

With the Sensex declining 13.6 per cent so far in 2011 and stocks outside the index falling even more, this is a good time to start systematic investing in equity funds. It may even be a good time to invest a lumpsum in equity funds with a long-term perspective. So, what are the good funds to invest in, assuming you are a first-time investor?

Though you have mentioned a list of small/mid-cap funds, as well as large-caps, we would advocate that first-time investors start with a portfolio of funds that focus on large-caps or Exchange Traded Funds that track the index.

The ‘large-cap' funds you have mentioned look to be fairly good choices, with just two suggested changes. Reliance Regular Savings Equity may have a great five-year record, but its recent performance (last one year) merits some caution. UTI Opportunities Fund too would not be among our top choices, based on its five- or one-year records. We would suggest replacing these two funds with Birla Dividend Yield Plus and maybe ICICI Pru Dynamic Plan. This will also ensure that your portfolio is diversified across fund-houses. Do go ahead with investments in HDFC Equity, HDFC Top 200, UTI Dividend Yield and Quantum Long Term Equity.

Coming to your shortlist of mid-cap funds, our analysis of long-term returns shows that it is extremely difficult to find consistent performers within the ranks of mid-cap funds. Given the extreme volatility that mid-cap stocks go through in the Indian context, small/mid-cap funds that do well in one bull market may take a bad hit during a market fall and may not even participate in the next upturn. If you are looking at a 15-year investment, you may thus have to constantly churn your portfolio of mid-cap funds based on their relative performance.

Your current list suggests that by investing Rs 1,000 each in every one of the ten funds you will end up with a 60:40 mix between large and mid-cap funds in your portfolio. That may expose your wealth to significant volatility, not to mention the need to constantly monitor it.

We would, therefore, suggest reducing that to 70:30 and taking on your mid-cap exposures mainly through the index or Exchange Traded Fund route.

Benchmark's S&P-500 Fund, an open-end fund that tracks the CNX 500 index, is a good option for monthly SIPs. If you are willing to invest in a monthly mode through the stock exchanges, consider buying units of Benchmark Junior BEES (it tracks the Junior Nifty index) or Motilal Oswal's Midcap 100 ETF (CNX Midcap), on a regular basis.

If you find the exchange route cumbersome, Sundaram Midcap and CanRobeco Emerging Equities are two mid-cap funds you can consider on the basis of their 1-, 3- and 5-year performance records.

Finally, yes, you should diversify your holdings across fund-houses because of two reasons. Both fund managers and fund sponsors in India tend to be in constant churn.

By putting too much of your investment into one fund-house, you may be exposing your wealth to the risk of attrition (a talented fund manager quitting), ownership change (where the sponsor sells out to a new one) or even a specific style of stock or sector selection, which may not deliver consistently through all market conditions.

Queries may be e-mailed to >, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Published on February 12, 2011

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