Rama Krishna Vadlamudi November 17th, 2009
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Which is the most popular ice cream flavour in the world?
Not surprisingly, vanilla ice cream is still the most extensively consumed flavour in the world with a share of more than 30 per cent cutting across all ages. When we go to an ice cream kiosk, a variety of flavours are available on the platter. The variety puts us in a quandary. (It seems more than a thousand flavours are made available by Baskin-Robbins, the leading ice cream manufacturer in the US.) After looking at the choices for a few minutes, we end up buying mostly the vanilla variety or at best a chocolate or a strawberry flavour.
Though picking up mutual funds (MFs) is not so easy; keeping it simple is the best strategy as far as selecting equity MF investment is concerned, through a selection of well-diversified equity MFs. The all-time favourites are the plain vanilla version of equity MFs, i.e., well-diversified equity schemes providing consistent & steady returns in all market phases.
There are more than 500 equity mutual fund schemes from 39 fund houses in India. Picking up the right equity fund from a bevy of schemes to meet one’s investment objectives is apparently a difficult job, if not a Himalayan task.
Diversified equity mutual fund schemes offer good diversification, sound money management skills, experienced money managers, good investor-friendly practices, advantage of thorough research teams and others. As such, investors will be better off considering diversified equity mutual funds for their equity portfolio within their overall asset allocation, risk profile and risk appetite.
For the benefit of my SCRIBD readers, I’ve done some number crunching of more than 500 diversified equity mutual funds to arrive at some good schemes worth considering for an investment horizon of three to five years even when the Sensex is hovering between 16,000 and 17,000. A number of factors have been considered while selecting these funds. The important parameters considered are: the experience of a strong fund management team, the track record of the fund manager in different market cycles and the methodology and processes followed by the fund house, among others.
The selected list is given in the next page:
CONTENTS PAGE
1) List of good and well-diversified equity mutual funds 3
2) Filters used while selecting the list of good equity MFs 4
3) Profiles of some top-notch mutual fund money managers 4
4) How to choose equity mutual fund schemes 7
5) Some caveats before investing in equity MFs 8
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TOTAL READS RUNNING TOWARD 16,000!
From A Total of 60 Documents in just 11 weeks
LIST OF GOOD AND WELL-DIVERSIFIED EQUITY MUTUAL FUNDS
Sl.No. NAME OF THE FUND LARGE/MID CAP RISK GRADE NAV as on 16.11.09
Rs
1 Birla Sun Life Frontline Equity Plan A Large 71%, Mid 29% AVERAGE 77.37
2 DSPBR Equity Large 42%, Mid 40% LOW 52.78
3 DSPBR Top 100 Equity Regular Large 91%, Mid 9% LOW 88.05
4 Fidelity Equity Large 69%, Mid 22% LOW 29.10
5 Franklin India Prima Plus Large 51%, Mid 40% LOW 185.94
6 HDFC TOP 200 Large 71%, Mid 28% LOW 178.63
7 ICICI Pru Infrastructure Large 73%, Mid 22% Above Average 27.79
8 IDFC Imperial Equity Plan A Large 86%, Mid 14% LOW 17.36
9 Magnum Contra SBIMF Large 67%, Mid 27% AVERAGE 53.00
10 Quantum Long-term Equity Large 42%, Mid 41% LOW 17.67
11 Reliance Growth Large 45%, Mid 41% Below Average 402.64
12 Tata Pure Equity Large 55%, Mid 45% LOW 87.29
13 UTI Opportunities Large 80%, Mid 20% Below Average 23.26
Notes: 1. All are growth plans and NAV is for growth plans – all are open-ended schemes
2. All are diversified equity schemes
Sl.No. NAME OF THE FUND AAUM as on 31.10.09 CAGR No. of stocks
Rs crore 3-year % 5-year % 7-year %
1 Birla Sun Life Frontline Equity Plan A 1,304 16.28 29.13 35.89 58
2 DSPBR Equity 1,521 17.35 32.57 42.37 82
3 DSPBR Top 100 Equity Reg. 2,198 16.96 29.55 NA 42
4 Fidelity Equity 2,849 13.27 NA NA 62
5 Franklin India Prima Plus 1,742 12.00 27.23 36.22 67
6 HDFC TOP 200 5,298 18.28 31.59 41.80 66
7 ICICI Pru Infrastructure 4,293 15.56 NA NA 41
8 IDFC Imperial Equity Plan A 352 14.07 NA NA 27
9 Magnum Contra SBIMF 3,188 13.22 34.13 45.53 80
10 Quantum Long-term Equity 43 14.99 NA NA 25
11 Reliance Growth 6,162 16.22 33.13 47.03 38
12 Tata Pure Equity 418 13.38 27.16 38.58 44
13 UTI Opportunities 787 18.27 NA NA 38
Notes: AAUM-Average Assets Under Management
CAGR-Compounded Annual Growth Rate
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FILTERS USED FOR SELECTION OF FUNDS
The following filters have been applied while arriving at the above set of funds:
1) The reputation of the particular fund house is considered before picking up individual schemes of that fund house
2) Experience and long-term track record of the fund manager
3) Consistency of returns during bear phases as well as bull markets
4) Long-term track record of the fund, say, more than three/five years
5) Only growth plans of open-ended, diversified equity mutual fund schemes are considered
6) Thematic, sectoral, fund of funds-FOFs and balanced funds are not considered as the scope of this article is confined only to diversified equity mutual fund schemes
7) Individual MF scheme size of more than Rs 100 crore (the only exception is Quantum Long-term Equity Fund due to its good, steady and long-term performance)
Quantum Mutual Fund charges heavy exit loads of up to four per cent if investors redeem their units within one year from the date of purchase. This is to prevent frequent churning of mutual fund schemes by some investors. Now, most of the mutual funds are charging higher exit loads as the entry load is banned by SEBI.
You can choose a combination of the above schemes to meet your investment needs within the timeframe selected by you. Stick to only three or four funds – in extreme cases, five funds. More funds means more trouble of tracking their performances and more paperwork for you!
PROFILES OF SOME FUND MANAGERS
The fund manager plays a major role in portfolio selection and construction, diversification and risk containment in order to deliver superior returns for the investors. Due to the advent of new fund houses, there is a big demand for good fund managers who quit quite often for better opportunities. As such, it’s also important to select funds based on the strength of investment processes of a particular fund house. The following is a list of fund managers who have delivered consistent and superior returns over different time periods:
1. Apoorva Shah: He’s a fund manager with DSP BlackRock MF, formerly known as DSP Merrill Lynch. He is a commerce graduate and did his MBA from IIM, Ahmedabad.
He’s performed well during different market cycles and the first three funds given below have delivered superior returns for the investors. He’s overweight on energy, financials and FMCG stocks now.
He manages, DSPBR Equity, DSPBR Balanced, DSPBR Top 100 Equity, DSPBR Micro Cap and a few other funds.
2. Kenneth Andrade: He is the Chief Investment Officer of IDFC Mutual Fund. He is a commerce graduate from Bombay University. He was earlier with Standard Chartered MF which was taken over by IDFC and renamed it as IDFC MF. He manages Enterprise Equity, Imperial Equity and Premier Equity funds. He is known for protecting the downside.
He remained cautious well before the bull market frenzy peaked in January 2008 and he saved the blushes for his investors during the meltdown of 2008. As the total fund size with him is lesser than other fund managers with large MFs, he maintains lesser number of stocks in his portfolio.
3. Mahesh Patil: He’s an experienced fund manager with Birla Sun Life MF. He’s done his BE and MMS from ICFAI.
He is managing equity funds – Birla Sun Life Equity, Birla Sun Life Frontline Equity, Birla Infrastructure and Birla Intl. Equity schemes. At present, he holds around 12 per cent cash in Birla Sun Life Equity plan.
His funds have delivered consistently well during all phases of the market movements.
4. Prashant Jain: He is the Executive Director and the Chief Investment Officer (CIO) with HDFC Mutual Fund. He was earlier with Zurich AMC which was merged with HDFC MF in 2003. Since then, he’s remained steadfastly with HDFC MF. He’s got more than 17 years of rich experience with the mutual fund industry. He’s completed his B.Tech, IIT and MBA, IIM. He’s renowned in the MF industry for his research-based methodology. However, HDFC MF last year had invested in some real estate companies’ instruments which went sour in their fixed maturity plans and other debt schemes.
He’s delivered consistently good returns for the investors. The fund manager is overweight on financials, pharmaceuticals and energy stocks now. He doesn’t usually keep huge cash levels in the schemes even during bear phases. He’s known for his disciplined approach to investing.
He now manages the following equity schemes, in addition to some MIPs – HDFC Equity, HDFC Top 200, HDFC Prudence (a balanced fund) and HDFC Infrastructure (a closed-ended fund). The first three funds have delivered superior returns across all market cycles keeping the long-term investors happy.
5. Sandeep Kothari: He’s a fund manager with Fidelity MF. He’s a chartered accountant. He is a bottom-up stock picker and follows a fundamental approach while investing in stocks. Fidelity is known for its downside protection in bear markets. Veteran US fund manager, Peter Lynch, is an inspiration for them here.
The fund manager has delivered good returns from the above funds. Now, the fund manager is overweight on financials, energy and health care stocks. He doesn’t hold much cash in his funds.
He manages the following equity schemes: Fidelity Equity – with S Balakrishnan, Fidelity Growth – with S Balakrishnan, Fidelity Intl Opp – (holds 4.96 per cent stake in unlisted National Stock Exchange); and Fidelity Tax Advantage (ELSS tax savings scheme). Fidelity Equity and Fidelity Tax Advantage funds have done very well in the last two to three years providing consistent returns.
6. Sankaran Naren: He is a fund manager with ICICI Prudential MF. He manages ICICI Pru Discovery, ICICI Pru Dynamic, ICICI Pru Growth, ICICI Pru Indo-Asia, ICICI Pru Infrastructure jointly with other fund managers.
He had done his B.Tech from IIT, Madras and MBA from IIM, Calcutta. The fund manager is bullish on RIL and Bharti Airtel, in addition to sectors – energy, financials and metals.
7. Sukumar Rajah: He’s the Chief Investment Officer-Equity with Franklin Templeton Mutual Fund. He’s got more than 15 year experience in MF industry having joined Kothari Pioneer MF in 1994 which was later merged with Franklin Templeton MF in 2002. He’s done his BE from Roorkee Univ and done his MBA from IIM, Bangalore.
At present, he’s overweight on financials, energy and services stocks. Usually, the fund manager doesn’t keep much cash levels in the schemes. The performance of his funds has slipped a bit in the last few months compared to the category average.
He manages the following equity schemes: Franklin India Prima Plus – with Anand Radhakrishnan, Fraklin Fexi Cap – with K N Siva Subramanian, Franklin Asian Equity – with Roshan Jain; and a few index funds and FOFs – with others.
8. Sunil B.Singhania: He is a leading fund manager from Reliance MF, India’s biggest mutual fund by assets – average AUM of more than Rs one lakh crore. He’s done his CFA (of the US) and FCA. He’s delivered decent returns as a fund manager with a large fund with a corpus of more than Rs 6,000 crore, that is, Reliance Growth fund. He has been managing this fund for the past five years.
He’s delivered superior returns for the above fund. What’s noteworthy is that with such a large corpus, he maintains a relatively concentrated portfolio with just 38 stocks in Reliance Growth fund as of October 31, 2009. However, he is holding 16 per cent cash as 31.10.09 in this fund.
His other funds include Reliance Banking, Rel. Diversified Power, Rel. Infrastructure and Rel. Long-Term Equity (closed-ended). The fund manager has been showing a tendency to hold large cash holdings of 10 to 25% in his funds. Reliance MF protected investors during last year’s bear phase with high cash levels. But, the fund house could not deliver superior returns in 2009.MUTUAL FU
HOW TO CHOOSE EQUITY MUTUAL FUNDS
Before investing in an equity mutual fund, it would be better if investors take a hard look at the following five parameters:
1) Sustainable Performance: Consider the performance of the fund during several time periods – in a bear market as well as a bull market. Don’t consider only the recent performance. Take into account the returns over three/five year time periods.
2) Suitability: The investment objective of the fund must match with the objective of the individual investor. Mid-cap funds may not be suitable for some risk-averse investors. Likewise, investors with higher risk appetite may like to invest in mid-cap oriented funds.
3) Fund Manager’s Track Record: Watch the track record of the fund manager across various funds and different fund houses (if any)
4) Diversification: Check for the number of stocks and concentration of the portfolio. Too large a number of stocks or too less may not provide optimal returns for the investors in the long run.
5) Risk parameters: Look for Sharpe Ratio – which is statistical tool measuring risk-reward ratio. This ratio measures the amount of excess return for each unit of risk taken by the fund.
For a detailed article on picking up good equity mutual funds, just click:UTUAL FUN http://www.scribd.com/doc/20712330
Some Caveats before investing in equity mutual funds
1) Read the Scheme Information Document (SID) and Statement of Additional Information (SAI) thoroughly before investing
2) MF performance is subject to market risk. During 2008, some good funds had lost only 40 to 45 per cent against the loss of around 50 to 52 per cent by the market. However, there are some funds which managed to lose more than 85 per cent of their NAV in just one year!
3) After selecting a few good schemes, watch the performance of the schemes against their benchmarks, peers or general market
4) Lesser number of funds the better: The tendency of investors is to overload on a number of schemes. They confuse mutual funds with stocks. Every mutual fund holds usually between 40 to 60 different stocks and offers good diversification. As such, it’s not advisable to hold more than three or four mutual fund schemes in one’s portfolio.
5) At the same time, avoid overloading schemes from the same fund house
6) In general, avoid sectoral or thematic funds unless you’re an expert stock picker with high risk appetite or you’re too sure about the performance of that particular sector.
7) Time you keep your money in the market is more important than TIMING the market
8) The longer the time horizon of your investments, the lesser the risk
9) Regular investments in the market during the bull as well as the bear phases will give better returns for long-term investors
10) Check out the portfolio of stocks owned by the fund, assess the strength of the portfolio and the extent of churning by the fund manager
11) Find out whether the fund is having too much exposure to a particular sector. Well-diversified funds need to have true diversification; otherwise, the fund will entail higher risks for investors
12) Investors should invest a part of their savings or surplus as per their asset allocation. Asset allocation is a process whereby every investor shall allocate (depending on their own risk appetitie, risk profile, age, time horizon, investment objective, etc) funds to different asset classes, like, fixed deposits, PPF/NSC, equities, mutual funds, real estate, gold and others; in addition to life insurance and medical insurance
13) Before jumping into equities or equity mutual funds, consult your certified financial advisor and get his/her advice based on your investment objectives and needs
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Data source: ValueResearch Photo Courtesy: BBC
AUTHOR’S DISCLAIMER: This should not be construed as a recommendation by the author. The author holds a small stake in a few mutual fund schemes and as such it’s safe to assume that the author has a vested interest in general market going up. The views of the author are personal. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.
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