Franklin Prima Fund: Hold

A weak macro economic environment and high interest rates do not bode well for mid and small-cap stocks. They are also among the worst hit in the equity markets during such times.

Such handicaps notwithstanding, quite a few midcap funds managed to better the CNX Nifty over a one-year period through astute stock and sector selections.

In this environment, Franklin India Prima, a mid-cap focussed fund, is one among the few that contained losses better than the Nifty.

Based on its improved performance, we suggest that investors retain their holdings in the fund. But fresh investments can be put on hold till the fund proves itself in a rallying market as well.

The fund, over three- and five-year periods, delivered compounded annual return of 23 per cent and 5 per cent, respectively, and outpaced its benchmark CNX 500 by a good 11 percentage points and two percentage points.

In the run-up to 2008 as well as the first phase of correction in 2008, the fund's three-year record (then) was lacklustre. It underperformed its benchmark as well as peers.

This resulted in our giving a switch call on the fund. Post our recommendation in July 2008, the NAV slid by Rs 72 (from Rs 168) until the 2009 recovery. This is quite substantial for a mutual fund scheme.

With its recent improvement in performance, the fund may warrant a hold strategy.

Performance

The fund shed 4 per cent of its NAV in the last one year as against the 12-per cent fall in its benchmark. However, for the same period, it trailed peers such as SBI Emerging Businesses and IDFC Premier Equity.

The fund invested 40 per cent of its assets in large-cap stocks with market capitalisation above Rs 7,500 crore. This could have also helped it to stem losses.

A positive aspect of the fund is that it does not take cash calls, unlike a few of its peers. It has stayed almost fully invested in equities amidst this correction and has resisted the temptation to move into cash. Hence the fund holds higher chances of participating fully in any market recovery.

Portfolio Strategy : The fund has a well diversified portfolio of 54 stocks as of April. The top ten stocks accounted for 37 per cent of the assets.

The top three sectors are banks, pharma and chemicals.

While many large-cap banking stocks lost value, the fund took bets on mid-cap stocks such as Yes Bank, Federal and Indus Ind Bank and gained well.

That said, the fund has, over the year, gradually reduced its exposure to the banking sector, thus cutting exposure to underperformers.

While several funds preferred to keep away from interest-sensitive sectors, the fund placed faith in auto and auto ancillaries and allocated 8.6 per cent of the assets. Some of the stocks, such as Eicher Motors and Bosch, paid rich dividends for the fund.

Before 2008, it appeared that the large asset base was a drag on its performance during the 2008 meltdown. But the current compact asset size appears to allow the fund greater manoeuvrability.

The fund is managed jointly by Mr R Janakiraman and Mr K.N. Sivasubramanian.

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