Mutual Funds

Tata Ethical Fund: Buy

Bhavana Acharya | Updated on November 22, 2014


Following Shariah principles has helped this fund avoid banks, stay with cash-rich companies and rake in returns

A mandate to invest according to Shariah principles is what sets Tata Ethical Fund apart from other multi-cap equity funds.

This means it does not invest in sectors or companies that aren’t deemed ethical by Islamic principles — these include alcohol, tobacco, select consumer companies and banking and financial services, among others. Tata Ethical also stays away from companies heavily loaded on debt for the same reason.

Not investing in the banking sector has worked very well for the fund in the past year with the sector’s stocks seeing a thorough rout. With its one-year return at 20 per cent, the fund has topped the charts for both diversified multi-cap and large-cap peers.

Tata Ethical adopted Shariah compliance in September 2011. Until then, it was Tata Select Equity. Its performance record in its current mandate is, therefore, limited. Even so, in this period it has bettered its benchmark, the CNX 500 Shariah, more than 70 per cent of the time.

Investors keen on following the Shariah principles of investing can buy units of this fund. Taurus Ethical, the only peer, does not match up to the track record of Tata Ethical. The Shariah index fund from the Goldman Sachs stable is the only other Shariah-compliant investment in the mutual funds space.

Strategy and performance

Tata Ethical has weathered the uneven markets of the past three years quite well. In the 2012 upswing, the fund’s 26 per cent return beat the CNX 500 Shariah by a good margin of 5 percentage points. Similarly, in 2013’s directionless market, the fund stayed ahead of its benchmark most of the time.

Its two-year annualised return of 13 per cent beats the benchmark’s 10 per cent. The fund’s large-cap orientation lends it some stability, though it invests across market capitalisations. It maintains a compact portfolio of around 30 stocks and largely follows a buy and hold strategy.

Software is the current top sector pick, which it gradually built up from mid-2012 onwards. Pharmaceutical stocks have always been favoured as well.

Stake in the other preferred sector FMCG, added in 2011, has been pared from July last year owing to the sharp run-up in valuations. Tata Ethical also has holdings in sectors with the potential to pick up once the economy turns around — these include capital goods, cement, and mining, with stocks such as Thermax, Shree Cement, and GMDC.

But with diversified funds’ pet sector, banking and financial services, making up more than a quarter of the CNX 500 by value, a recovery of this sector as the economy improves could see diversified funds push ahead of Shariah-compliant funds in the long run. The Tata Ethical fund can hence be used only as a satellite fund in your portfolio.

Published on March 09, 2014

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