With the sensex hovering over 12,000 as this magazine goes to press (12,366.91 on September 27), late starters like Sudharshan Nambiar (name changed) are not too sure about investing in mutual funds (MFs). "Is this the right time to invest in a fund?" ask Nambiar and his ilk. "And if yes, then which fund should we pick?"
"Anytime is a good time to invest in mutual funds," says Hemant Rustagi, CEO, Wiseinvest Advisors. "Investors cannot and should not try to time the market; they should discipline themselves and invest regularly to build wealth." The man is right: the sooner you start, the longer your money can work for you. And regularity helps: a systematic investment plan (SIP) is light on the wallet, ensures that the investor isn't timing the market and comes with the added benefit of rupee cost averaging. Still, the original question remains: what are the funds an investor should target?
Business Today trawled the MF firmament for funds that investors can invest in at any point in time, irrespective of how the market moves. These funds are perfect not just for investors like Nambiar, but also for high net worth individuals (HNIs) who aren't exactly new to the game. "They are dream funds," says Dhirendra Kumar, CEO, Valueresearch. "They rise more than their peers in a rising market and fall lower than others in a falling market."
Before we get on to these funds, some preliminaries: investors, especially first-time ones who aren't exactly acquainted with the basics, need to go through a few steps (recommended not mandatory). One, they need to determine their financial goals and time-lines (how soon they want to achieve these). Two, they need to understand their risk profiles and arrive at a debt:equity mix for the investments. For instance, a long-term investor who is not averse to risks should always pick equities: in the long term, returns from equity exceed those from any other investment option. In the third step, investors should shortlist the funds (which is what bt has done). There are significant risks involved in doing things the other way around. As a final step, investors should review the prospectus of all funds from the shortlist, and pick those that meet their financial goals and match their risk-profiles. "Choosing a fund is the last step in mutual fund investing," says Rustagi. Even after matching investment goals and risk profiles, there are things investors should look for. "Opt for a performer fund house that has given consistent returns across many schemes and whose management style, systems and processes have evolved and established credentials over a period of time," says R. Swaminathan, Associate Vice President and National Head (MFs), IDBI Capital Market. "Then, go for schemes from such a firm." The key mantras: consistency of performance, allocation to large-cap and mid-cap stocks, flexibility (changing fund allocation according to market dynamics) and balanced exposure to various sectors.
The four funds listed below (based on a survey of four experts; see Evergreen Funds) have a long history of picking winners and have earned consistent returns over time. "Superior returns compared to the average return of the peer group; lower probability of returns from the fund falling below risk-free returns; less concentration on a particular industry or company; investment in stocks with ample liquidity; and the size of the corpus are the key elements that make these funds an ideal part of every portfolio," says Vidur Verma, Country Investments Director, Citigroup.
HDFC Equity
Investment Objective: To provide capital appreciation through investments predominantly in equity-oriented securities.
Launch Date: December 24, 1994
Corpus: Rs 3,273.46 crore (on August 31, 2006)
Net Asset Value: Rs 131.653 (on September 22, 2006)
Investment Style: A mix of large-caps, mid-caps and small-caps.
Performance: In the last one year, delivered nearly 52 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top six stocks accounts for 40 per cent (Rs 1,306.4 crore) of the total portfolio of 30 stocks.
Investment Rationale: It is the only diversified equity fund that has outperformed the average return of such funds every year for the past eight years. It is a consistent performer and focuses largely on larger cap stocks. A combination of low risk and above-average returns makes this a compelling investment option.
DSP Merrill Lynch Opportunities Fund
Investment Objective: The primary one is to generate long-term capital appreciation; the secondary one is income generation and distribution of dividend, from a portfolio constituted of equity and equity related securities.
Launch date: April 10, 2000
Corpus: Rs 1,145.34 crore (on August 31, 2006)
Net Asset Value: Rs 48.96 (on September 22, 2006)
Investment Style: A well diversified portfolio dominated by large-caps, with ample representation of mid-caps and small-caps.
Performance: In the last one year, delivered 47 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top 10 stocks are large cap stocks that account for 35 per cent (Rs 402 crore) of the total portfolio of 59 stocks.
Investment Rationale: The fund is projected as a tactical fund that will maximise returns by investing predominantly in certain sectors and stocks. Its focus is to respond to the dynamically changing Indian economy by moving its investments amongst different sectors, such as lifestyle, pharmaceuticals, cyclicals and technology as prevailing trends change. Today, it has a well-diversified portfolio dominated by large-caps, with ample representation of mid- and small-cap stocks.
SBI Magnum Contra Fund
Investment Objective: To invest in under-valued stocks that may be currently out of favour, but are likely to show attractive growth in the long term.
Launch Date: July 3, 1999
Corpus: Rs 1,253 crore (on August 31, 2006)
Net Asset Value: Rs 32.91 (on September 22, 2006)
Investment Style: A well diversified portfolio dominated by large-caps and mid-caps.
Performance: In the last one year, delivered 51 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top 10 stocks are large cap stocks that account for 39 per cent (Rs 488 crore) of the total portfolio of 45 stocks.
Investment Rationale: It's the oldest among contrarian funds and has a proven track record. The fund focuses on investing in fundamentally sound companies that are overlooked by the market and are waiting for their value to be discovered. With equity markets at all-time highs, contrarian investing will help investors diversify and create wealth over the medium to long term.
Franklin India Bluechip Fund
Investment Objective: To achieve a high degree of capital appreciation through investments in well-established, large size blue-chip companies.
Launch Date: November 30, 1993
Corpus: Rs 2,313.2 crore (on August 31, 2006)
Net Asset Value: Rs 116.27 (on September 22, 2006)
Investment Style: Portfolio dominated by large-caps.
Performance: In the last one year, delivered 45.3 per cent return, compared to a 35.5 per cent return of diversified funds.
Portfolio Allocation: Top 10 stocks are large cap stocks that account for 54 per cent (Rs 1,251 crore) of the total portfolio of 32 stocks.
Investment Rationale: The fund focuses on steady and consistent growth by predominantly investing in well established large cap stocks.
There could be other good funds that do all that these four do and more. bt is not suggesting that investors should opt only for these four funds. Indeed, a mix of some of these funds, and others not named here could form part of an investor's portfolio, as long as it is in keeping with his or her financial goals and risk profile. However, those investors who are not very sure where to invest would do well to opt for these four, existing funds all, and with sound track records. Remember, the key to successful MF investment is those oft-repeated rules: define investment objectives, decide asset allocation on the basis of risk profile, and give each fund (and fund manager) time to perform.