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7 Best MF Schemes

If one has to point out the single most important factor that is currently a key concern for equity markets the world over, it is volatility. The Indian equity market is no exception to this. The Sensex swings a few hundred points quite effortlessly, and in the process, there are many investors who have seen their wealth being eroded. Until a few years back, it was more of the local factors that were the prime movers of the equity market.

However, this has changed now, and there is a confluence of many domestic and international factors which is adding to the daily volatility of the market. Globally, equity markets are increasingly becoming more correlated, and any disturbance in one part of the world like Greece or Iran impacts our own market too. In these conditions, it becomes very difficult for an investor to decipher the ever-changing economic situation, judge its effect on the equity market and take investment decisions accordingly.

Therefore, it is wise to entrust your money to someone whose job is to read between the lines of these fluctuating economic cycles and the investment climate, and thereby make profitable and safe investments on your behalf. Mutual funds are an investment avenue where you can park your funds with the expertise and market knowledge that fund managers bring to the table, in exchange of a fee. It is not that these mutual funds are immune to any of the swings in the equity market, but they are better prepared to tackle the situation than a common investor who does it all by himself or herself. These are professionals whose job is to man-age money, and who are supposed to take more informed decisions that help in providing potentially better returns.

Making investments through mutual funds also helps one to choose a fund scheme according to one’s needs, and offers much-needed diversification to one’s portfolio. Therefore, investors can make their own portfolio depending upon their specific needs and risk appetite. If an individual is interested in capital appreciation and has a good risk appetite, he/she can invest a major chunk of investible funds (as much as 70 per cent) in growth schemes, 20 per cent in balanced schemes and the rest in income funds. What is important to note is that an investor with a very low investible corpus can also achieve diversification in his/her portfolio by going the mutual fund way. Moreover, the well-regulated market for mutual funds adds an added level of comfort for an investor.

Another significant point while considering mutual funds as an investment avenue is that of taxation. There is no tax to be paid on dividends received from equity mutual funds. However, normal capital gains tax is applicable once you sell your mutual fund units. In case of a debt fund, you have to pay 12.87 per cent tax on the entire dividend received.

Having said all of this, there are almost 900 mutual fund schemes to choose from, making the task of selecting the right schemes difficult for retail investors. This is where we come into play. We have selected schemes from the equity diversified segment, as they are the ones that are supposed to give more stable returns in volatile conditions such as the current one.

These funds are selected on the basis of their excellent past performance, giving more weightage to the long-term performance (i.e. three-year returns), and at the same time, giving due consideration to the risks taken by fund managers to produce such returns. What this means is that the risk-adjusted returns were also one of the criteria for fund selection. In addition to this, factors like the size of the fund and the fund manager’s performance across schemes were also looked into before arriving at the final list.

Presented ahead are seven equity diversified mutual fund schemes that, we believe, would add value to your portfolio going forward, without put-ting you through those sleepless nights you spend worrying about where the market would end tomorrow.[PAGE BREAK]

ICICI Prudential Focused Bluechip Equity Fund
FOCUSSED ON GAINS


Warren Buffett, the legendary investment guru known for concentrating his assets in a few key opportunities, has said that extreme diversification makes sense only for those who know nothing about the markets. This is precisely what ICICI Prudential Focused Bluechip Equity Fund believes in, and is following. The fund has not gone in for extreme diversification, and remains invested in a few good stocks. Though the mandate of the fund provides leeway to pick from the top 200 stocks in the equity market in terms of market capitalisation on the NSE, the fund manager has limited his selection from among the top 100. Within that, he has invested in only 36 stocks so far, some of which have been held since the fund’s inception.

The fund follows a bottom-up approach. It invests in large established companies that are available at below their intrinsic value, and hence, have the potential to grow over time, and are also relatively stable. All this is reflected in the fund’s performance that has managed to beat its category and benchmark (S&P CNX Nifty) in all the time durations, be it three months, six months or three years. In the last three years, the average annual return generated by the fund is 36.44 per cent, compared to 23.66 per cent by its category and 25.42 per cent by its benchmark. Even in this falling market, the fund has managed to fall less than its peers and the bench-mark. Year-to-date, the fund’s NAV is down by 9.79 per cent, against a 15.86 per cent decline witnessed by its category.

Coming to its portfolio, the fund currently holds 21 stocks in all, with an average market cap of Rs 72444 crore, and the PE of the portfolio stands at 16.58x. If we look at the sectoral expo-sure of the fund, it is tilted towards financials, with a weightage of 22.43 per cent, which is lesser than the 26.4 per cent weight that the sector carries on the Nifty. In terms of scrips, Bharti Airtel and Infosys occupy the top two positions, with the total holding standing at 13.55 per cent of the net assets. Looking at the current portfolio mix and the fund manager’s preference to stay invested in good stocks, we believe that the fund will continue to out-perform its benchmark and category going forward. Investors can look at making this fund a part of their core portfolio.

UTI Opportunities Fund
POSITIVELY REWARDING


UTI Opportunities Fund is a diversified equity fund that focuses mainly on large and mid cap stocks. The fund has a corpus of Rs 1650 crore at the end of September 2011.

Launched in the year 2005, this fund has created good wealth for investors who have been invested in it over a longer period of time. Managed by Anoop Bhaskar, it has invested around 75 per cent of its net assets in Large-Cap stocks, while the rest has been invested in Mid-Caps.[PAGE BREAK]

The focus of this scheme is to capitalise on opportunities arising in the market by responding to the dynamically changing Indian economy. It achieves this by moving its investments amongst different sectors according to changes in trends. The fund manager also has a mandate to concentrate on stocks of companies which are in special situations, such as mergers, splits, turnaround cases and new product launches.

The focus of the fund is quite justified if we compare the holdings of the fund on a YoY basis ending September 2011. In September 2010, the energy sector carried maximum weight in its portfolio (23 per cent). The fund quickly reduced its exposure to this sector to 13 per cent in September 2011, in view of the gloomy scenario surrounding the energy sector as a whole.

As of September 2011, the financial sector has maximum weight in the fund (18 per cent), followed by FMCG (15 per cent). The fund manager’s briskness in reallocating the funds has been justified, as since its inception, the fund has outperformed its bench-mark BSE 100 Index by 192 basis points. The icing on the cake is that the portfolio turnover ratio is as low as 0.57x.

Financial services, FMCG and energy are the fund’s top three sectors, and the top 10 stocks carry a weight of 44.86 per cent in the portfolio. With its consistent record of creating wealth, this fund looks to be a good bet from a longer-term perspective and an ideal candidate for your portfolio.

SBI Magnum Emerging Businesses Fund
GREAT POTENTIAL


Under R Srinivasan, the Magnum Emerging Business Fund with a corpus of Rs 429 crore, at the end of September 2011, holds the distinction of the only fund that have given poisitive returns in the last one year. In the last one year, the fund has yielded a positive return of a 1.46 per cent, while the BSE 500 Index was down 15 per cent over the same period on an absolute basis. The fund basically focusses on Mid- and Small-Caps stocks, and has distributed its portfolio evenly between them. To be precise, the allocation in Large-Caps is 3.55 per cent and that in Mid- and Small-Caps is 43.77 per cent and 50.15 per cent respectively. The remaining 2.52 per cent is allocated to Micro-Cap stocks.

Since its inception, the fund has provided a positive return of 23.39 per cent on an annualised basis, and its three-year returns stand at an impressive 37.99 per cent. The objective of the fund is to participate in the growth potential presented by various companies that are considered emergent, and have an export orientation or outsourcing opportunities, or are globally competitive. The fund also evaluates emerging businesses that have growth potential and a domestic focus. Financial, Services,  FMCG, Textiles and Consumer Durables constitute the top five sectors, and these comprise more than 60 per cent of its net assets.

The fund manager has been vigilant in increasing its exposure to certain sectors like textiles and manufacturing, which have given the fund the mileage to perform better as compared to its benchmark. In the last three years, it has beaten its category by a whopping 1462 basis points. In the last one year, the fund has remained in the positive as compared to its category, with a return of 0.18 per cent as against a negative return of 17 per cent by its category.

It is quite clear that this fund has been able to create wealth for its holders over the long term. Going forward too, it is likely to perform better and has good potential, which makes it worthy to find a place in one’s portfolio from a longer-term perspective.[PAGE BREAK]

Reliance Equity Opportunities Fund
GUARANTEED BENEFITS


Taking the BSE 100 as its bench-mark, the Reliance Equity Opportunities Fund has been able to garner good returns and create value for its investors. Managed by Sailesh Raj Bhan, and with an AUM of Rs 3192 crore, at the end of September 2011, the fund has beaten its bench-mark index by 562 basis points since its inception. To add to this, it has also fared well in the last one year on an absolute basis. It has yielded a negative return of 11 per cent as against a negative return of 18 per cent by its benchmark in the same period. The fund has a Multi-Cap focus, which can be seen in the net asset allocation of the fund that is distributed between Large- and Mid-Cap stocks. Large-Caps have a weightage of 42 per cent, while Mid-Caps carry 49 per cent weight in its portfolio. The rest is invested in Small-Cap companies. More than 90 per cent of the fund’s corpus has been invested in equities, while the rest consists of investment in debt instruments, derivatives and cash in hand. If we look at the portfolio, we find that it has been distributed well over sectors. Services has the maximum weight in its portfolio (13 per cent). The fact that the fund is overweight on software reflects the capability of the fund manager to be ahead of the curve, in terms of handling market circum-stances. Software is one sector which is a non-interest sensitive sector, and should see lesser volatility going forward.

The fund has increased its allocation to the software sector from 12 per cent to 13 per cent on a YoY basis for September 2011. The top three sectors – Services, Healthcare and Technology – consist of 36.59 per cent of its total portfolio. We are of the opinion that the fund is likely to perform in line with its historical performances, and will create value for its holders on a long-term basis. One should look at the fund and consider buying with a longer-term perspective to garner better returns.

IDFC Premier Equity Fund – Plan A
IMPRESSIVE RETURNS


The presence of this fund for consistently second year speaks for itself. IDFC Premier Equity Fund is one such fund scheme that has been able to provide impressive returns, on a longer as well as a shorter term, as compared to its benchmark index. In the last one year, the fund has given a negative return of a eight per cent, as compared to a 20 per cent de-growth in the BSE 500, the fund’s benchmark index. The fund has created wealth for investors over the longer term since its launching in 2005. Managed by Kenneth Andrade, it has a Rs  2338 crore corpus.

The fund seeks to invest in businesses with good long-term potential, which are available at reasonable valuations. In its lifetime, the fund has outpaced its benchmark index during  bull phases of the market, and has managed to contain the downside during market corrections. During the 2008 meltdown, it moved one-fourth of its assets into debt, thus checking the fall. This fund invests in small and medium-sized businesses with good long-term potential, which are avail-able at cheap valuations. Although the portfolio sports a Mid-Cap bias, the fund picks stocks that are leaders in their sectors and have attractive valuations. Since the fund manager tries to position the fund ahead of the chain, he does not shirk from contrarian stands or bold sector bets.[PAGE BREAK]

The fund has allocated 76.86 per cent in equity and 21.11 per cent in debt, while the rest is in cash. The focus of the fund has clearly been Mid-Cap companies, where it has allocated 73 per cent of its corpus that goes into equity, while Large- and Small-Cap constitute 20.83 and 6.69 per cent of the net assets invested in equity respectively. FMCG, services and chemicals are the top three sectors where the fund has invested. However, it has been overweight on consumer non-durables and transportation, which may raise some eyebrows. The portfolio of the fund has been very compact, comprising around 25 stocks in all. The top 10 stocks account for over 40 per cent of the net assets. One can buy into this fund, and may also opt for an SIP mode to invest in this scheme.

HDFC Mid-Cap Opportunities Fund
CREATING OPPORTUNITIES


It is common knowledge that Small- and Mid-Cap stocks are more volatile than Large-Cap stocks, and therefore, they tend to fall more in a falling market and rise faster in a rising market. However, the HDFC Mid-Cap Opportunities Fund is one of those funds that has defied this logic, and has managed to contain its losses much better than the broader market index as well its benchmark index, the CNX Midcap Index. The fund’s NAV has dropped 8.68 per cent year-to-date (till October 25, 2011), compared to a 17.8 per cent fall in the Sensex and a 14.82 per cent decline in the category as a whole.

Launched in 2007, the fund has managed to stay ahead of its peers in longer and shorter time horizons, barring in calendar year 2007, when it yielded a return of only 94 per cent (you read it right, this is not a typo-graphical error!). In a three-year period, the fund has managed to beat its category’s returns by 504 bps, and for the one- and two-year periods, it has out-paced its category returns by 811 and 875 bps. It has also managed to beat many of the equity-only funds over the long-run, and has provided the best risk-adjusted returns in the balanced fund category, with a Sharpe ratio of 0.68. One of the reasons for such a stellar performance in the previous years was its then closed-end status.

In addition to these factors, the fund needs sound portfolio calls and smart stock selection to record such impressive statistics. Despite a falling market, many stocks in its portfolio have yielded positive returns year-to-date, and a couple of them, namely Bata India and Amtek India, have nearly doubled in the same time. Beside this, the fund had very low exposure to the financial sector, which ended up being one of the worst performers on a year-to-date basis. At the start of the year, the total exposure of the fund towards the financial sector was only 13.08 per cent, which has increased marginally to 13.73 per cent at the end of September 2011. The fund invests in shares where there is room for the PE multiple to expand if the company transitions from being a Mid-Cap to a Large-Cap counter. Looking at all these attributes, the fund seems as a good bet for aggressive investors, who should take exposure to this fund through an SIP.

Mirae Asset India Opportunities Fund
ON THE ASCENDANT


The Mirae Asset India Opportunities Fund was launched in the first quarter of 2008, when the fund house was started. It was expected to collect around Rs 1000 crore, but could man-age only one-tenth of that due to the worsening stock market conditions. However, since then, the fund has seen a continuous rise in its AUM, and at the end of September 2011, its net assets stood at Rs 185.7 crore, growing at a CAGR of around 30 per cent.[PAGE BREAK]

This growth has been backed by the superior performance of the fund, which has consistently outperformed its category and benchmark. In the three-year period, it beat its category returns by a whopping 1327 basis points, while its NAV has declined 9.19 per cent year-to-date compared to the 12.18 per cent drop registered by its category. Even if we take the yearly performance of the fund (calendar year) into consideration, we find that it has outperformed both its bench-mark as well as its category’s returns each time. For example, in the year 2009, the fund surpassed its category returns and the broader market index, Nifty, by 2082 and 3357 basis points respectively.

Such a performance is backed by sound allocation of its net assets among sectors, as well as correct stock picking by its fund manager. Consumer cyclicals, including FMCG, which form a part of its portfolio, have helped the fund to post an alpha return. As compared with its category that normally invests around eight per cent of total funds in consumer cyclicals, Mirae Asset India Opportunities Fund has invested almost double of that (15.2 per cent) in these stocks as of September 2011 end. Similarly, it has been largely underweight on the energy sector, which has largely underperformed the market. When it comes to stock selection, the fund manager normally applies a bottom-up approach, and at the same time, sets a price target and books profits once the target is achieved. If we look at last month’s portfolio churning, we find that the fund has increased its exposure to pharmaceuticals, which we believe is a good move in such a volatile market.

Given the fund’s allocation towards Multi-Cap stocks and its superior performance, we recommend that you stagger your investment in the fund over the next three months.

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