Good and Well-Diversified Equity Mutual Funds
June 18, 2010
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 dilemma. (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 38 fund houses in India. Picking up the right equity fund from a host 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 Blog / 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 17,000 and 18,000. 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.
Please click on the images below for a better view >
Portfolio Concentration: From the above table, one can observe that some funds are maintaining concentrated portfolios – Franklin India Bluechip, IDFC Premier Equity Plan A, Magnum Multiplier Plus, Reliance Growth and UTI Opportunities.
Franklin India Bluechip traditionally has a large cap tilt and keeps number of stocks in the portfolio to the minimum. Even though its net assets are more than Rs 2,900 crore, the total number of stocks in the portfolio are only 39. This is one fund that always sticks to its original mandate.
Reliance Growth is a midcap oriented fund. Its net assets are more than Rs 7,200 crore and the total number of stocks is only 40. Magnum Multiplier Plus (midcap oriented fund) and UTI Opportunities (large cap oriented) also keep the total number of stocks to the bare minimum.
Mark Mobius, the fund manager of Templeton India Growth Fund, traditionally maintains a concentrated portfolio in this fund (now only 33 stocks).
Expense ratios of the funds are as follows: IDFC Premier Equity Plan A-1.19%; Canara Robeco Equity Diversified-2.34%; Templeton India Growth Fund-2.29%; and the remaining funds in the above table have expenses ratios between 1.80 and 2.00%.
Filters Used for Selection of Funds:
The following filters have been applied while arriving at the above set of funds:
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1) The reputation of the particular fund house is considered before picking up individual schemes of that fund house
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2) Experience and long-term track record of the fund manager
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3) Consistency of returns during bear phases as well as bull markets
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4) Long-term track record of the fund, say, more than three/five years
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5) Only growth plans of open-ended, diversified equity mutual fund schemes are considered
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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
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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. 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.
Please click on the images below for a better view >
Sunil Singhania's 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 20% 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.M
Before investing in an equity mutual fund, please check the following parametres:
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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.
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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.
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3) Fund Manager’s Track Record: Watch the track record of the fund manager across various funds and different fund houses (if any)
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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.
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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
Some caveats before investing in equity mutual funds:
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1) Read the Scheme Information Document (SID) and Statement of Additional Information (SAI) thoroughly before investing
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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!
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3) After selecting a few good schemes, watch the performance of the schemes against their benchmarks, peers or general market
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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.
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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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P.S.: Some other funds which have good track record and reputation are: Birla Sun Life Dividend Yield Plus, DSPBR Top 100 Equity, Frankllin India Prima Plus, HDFC Equity, ICICI Prudential Discovery, Kotak Opportunities, Magnum Contra, Principal Large Cap, Reliance Regular Savings Equity, Sundaram BNP Paribas Select Midcap, Tata Equity PE, Tata Pure Equity, Templeton India Equity Income and UTI Dividend Yield.
If one is interested in investing in Exchange Traded Funds, one can consider the following two ETFs based on NSE indices: Nifty BeES ETF & Junior Nifty BeES.
Data source: ValueResearchOnline
Ice cream photo courtesy: BBC
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(As this document contains several tables, it is better to read it in a reader-friendly PDF document.)
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