Mutual Funds Investment Picks - 2010

The year 2009 started off on a subdued note for equity investors but by year-end both the BSE Sensex and Nifty were trading 80 per cent higher. With the markets trading at a price-earning multiple of well over 21 times from 11 times at the start of year, the upside in the indices may be limited from here on. So equity investing in 2010 may require greater stock selection skills. Why not select actively managed diversified funds for your portfolio?

In emerging markets such as India there are several diversified funds that have managed to deliver better-than-index returns. However, these funds, even if they deliver better returns, may also, at times, take on higher risk.

While comparing the top performing equity schemes whose returns are identical, investors can look at additional factors such as beta and expense ratio to gauge the risk return profile. Investors planning to take exposure to equity funds should, of course, pick funds with a proven track record over an entire market cycle.

Here there are three funds from the large and mid-cap space that investors can consider for long-term wealth creation.

HDFC Top 200: This fund is among the few to consistently remain on the buy list due to its steady returns across market cycles. Its performance over the year has validated our recommendation.

HDFC Top 200, which invests in the top 200 companies by market capitalisation, despite its ever growing asset size (Rs 5,781 crore) continued to maintain its tempo and beat its benchmark BSE 200 by a wide margin.

For instance, over a three- and five-year period, the fund outpaced its benchmark by 10 percentage points. Even during the market meltdown in 2008 the fund contained the losses better.

In 2008 when most of the funds preferred to move in to cash to protect their portfolios, the fund had the grit to stay invested. This helped in a neat recovery from the market lows; the fund went on to generate returns of 96 per cent over a one-year period and was one among the top ten performers over this time frame. In its November portfolio, the fund's preferred sectors were banks, pharma and consumer non-durables. Despite its huge asset base the fund adopts a buy and hold strategy. To prop up its return, the fund invests 10-15 per cent of the assets in mid-cap stocks (with market capitalisation less than Rs 7,500 crore).

DSP BlackRock Equity: DSPBR Equity and DSPBR Top 100 more or less has similar investment strategy in selecting sectors. But the former invests sizable assets in mid- and small-cap stocks while the latter sticks to its mandate of investing in large caps. The advantage of DSPBR Equity is that the fund prefers to stay invested in equities irrespective of the market condition and despite the presence of the mid and small-cap stocks (this segment being more prone to volatility). This demonstrates the fund's conviction in its investment strategy. Even during 2008, with reasonable exposure to mid and small-cap stocks and lesser cash position it withstood the market correction and contained losses. Clearly, stock-picking strategy has held the key. Though the fund is benchmarked against Nifty, one-third of the assets are invested outside the Nifty basket.

For the risk it has assumed the fund compensated its investors and concurrently outpaced its benchmark by over 10 percentage points over three and five-year periods. Good stock selection strategy and a lower beta than its peer DSPBR Top 100 were key reasons for DSPBR Equity being a better choice for your portfolio. In its November portfolio the fund's top sectors were software, consumer non-durables and pharma.

Birla Sunlife Midcap: A consistent performer across the market cycles, this fund outpaced its benchmark over a three and five-year period by a good margin and can lend support to one's portfolio returns. It is therefore worthy of a place in your core portfolio.

Having said this, some large cap funds with lower risks generated returns as good as the top performing mid-cap funds over the past five years. Midcap funds such as Birla Midcap generated very good returns during the bull phase of the market compared with lesser “beta” stocks, implying that they have the ability to identify the winner ahead of market rallies.

The fund also dilutes its holding risky sectors once there are signs of over-heating and moves to defensive sectors to protect its portfolio.

The fund's one-year performance emphasises that it has timed its sector calls well during this ongoing rally. However, given the extraordinary gains that this fund generates during bull phases, investors would do well to occasionally book profits to cash in on such rallies. In its November portfolio the top three sectors were banks, power and finance which together accounted for less than 30 per cent of the assets. The fund has a well diversified sector allocation and its assets are spread across 22 sectors.

via BL