7 Best MF Schemes

When the market is tipped to go up over the long term – albeit with some corrections thrown in between – can mutual funds remain far behind? So if you want to participate in the market rally, buying equity mutual funds (MFs) is the way to go. When you buy equity MF scheme, you are buying a bouquet of stocks and the appreciation in the value of these stocks during a rally is reflected in the appreciation in the NAV of the scheme. But first, let’s look at what MFs are all about and how to go about investing in MFs. Thereafter, we give you a Rs 10-lakh portfolio of seven handpicked MF schemes which are expected to perform well and are worth investing for the long term.

Any Time Is MF Time
One should not worry when to buy MFs - mutual funds can be bought at any time of the year. The important thing to note is that MFs should be bought for investment horizon of 3-5 years because MF schemes give excel-lent returns only over the long term. In other words, MF schemes are not for those who want to make a fast buck. Since MF schemes are for the long term, market volatility is not a concern for the MF investor as short term volatility is taken care of by the MF scheme’s long term investment objective. Talking of market volatility, an investor taking the systematic investment plan (SIP) route to invest in MFs beats the volatility much better due to the additional advantage of rupee cost averaging. This is because an SIP investor pays an average price for units over time by investing at regular intervals, which helps beat stock market volatility.

Why Invest in MFs?
The mutual fund unit represents a bouquet of shares (of various sectors and industries), debt and money market instruments. A retail investor with the limited resources cannot hope to have such a diverse portfolio of investments across asset classes, so when he buys a MF unit of Rs 10, he is actually buying a diverse portfolio of asset classes. That is called maxi diversification at micro cost! Also, he does not have to monitor the share price movements or scan financial results and analyze financial ratios to decide which shares, debt or money market instruments to buy or sell. For a small fee, the professionally qualified and experienced fund manager does it for him!

Which Fund To Buy?
This is a very common dilemma faced by prospective MF investors. There are large number of mutual fund houses offering diverse range of schemes catering to wide range of investors’ needs. The decision to invest in an equity MF should be driven by investment objective (tax planning, capital protection, wealth creation etc.), expected returns, risk appetite and investment horizon (short term vis-à-vis long term) which are bound to [PAGE BREAK]

vary. Mutual funds schemes offer diversification in asset classes such as equities, debt, gold, money market instruments, etc. which reduces the risk, and even within asset classes, the MF schemes offer variety of choices. So, in the equity category, there are schemes across market caps (large, mid and small), sectors (banking, power, infrastructure, etc.), investment philosophies (growth, dividend, etc.), tax saving and so on (See box: Types of MF Schemes). Lastly, investors should look at the background of the fund manager and his previous track record, including some basic checks on the investment team of the fund house, as also the historical track record of the fund.

7 Funds To Invest In
We have handpicked seven funds which have had an excellent track record of performance and hence we feel our readers can consider investing in these funds. These funds have been carefully selected based on their past performance, investment objective and investment philosophy so as to meet the diverse needs of our readers. Among the seven, four are equity diversified funds (IDFC Premier, DSPBR Small & Mid-Cap, HDFC Equity and HDFC Core & Satellite), one is sector-specific (Canara Robecco Infrastructure Fund), one is dividend yield (UTI Dividend Yield Fund) and one is an exchange traded fund (Nifty BeES). While the equity diversified funds invest in diverse portfolio of large, mid and small cap stocks, the UTI Dividend Yield Fund invests in high dividend yield stocks offering steady returns. Investors having a higher risk appetite and looking for long-term  returns can go for the Canara Robeco Fund which invests in infrastructure stocks. Nifty BeES invests in the 50 Nifty stocks giving same weightage as given in Nifty, so investors in Nifty BeES can expect returns depending on Nifty movement going forward.We have taken these MF schemes and constructed a portfolio of Rs 10 lakh giving them scientific weightage so that investors can invest in these schemes in the proportion given in the portfolio. So if you wish to invest Rs 1 lakh in all the seven schemes, divide the number of units given in the portfolio by 10 to arrive at the number of units to buy for your portfolio of Rs 1 lakh. And if you wish to invest Rs 20 lakh, multiply the units by two and you get your portfolio of Rs 20 lakh. Here, we have reviewed the performance of our recommendations in the ‘Fund of the Fortnight’ column during the last one year (See box: Performance of Fund Of The Fortnight in 2009-10). We are happy to note that our strike ratio has been 100 per cent as all the funds recommended have performed well. This clearly shows that our selection of funds has been quite good.[PAGE BREAK]

But Caution Is The Word
Since equity mutual funds invest in stocks, the performance of these schemes is subject to risks associated with the stock market. Investors must also bear in mind that past performance of any mutual fund scheme does not guarantee future returns and the fund performance may or may not be sustained in future. Also, mutual funds are not for traders as the NAVs are not as volatile as stock prices. The upward or downward movement of NAVs is slow and steady, so MFs are for investors with a medium to long-term view.

IDFC Premier Equity Plan
Creating Wealth
There are only a handful of schemes that can manage to yield high returns with a low risk factor and it makes sense to grab them early. IDFC Premier Equity Plan A is one such scheme, creating wealth for investors since its inception in September 2005. With a corpus of Rs 1,786.44 crore, benchmarked against the BSE 200, and currently managed by Kenneth Andrade, the scheme has been consistently beating the category average over the last five years. Out of its total corpus, over 92 per cent is invested in equity with most of the balance in debt. On the fund allocation front, it has 16.35 per cent for large-caps, 73 per cent towards mid-caps, and the balance 10.81 per cent for small-caps. The scheme seeks to generate long-term capital growth by focusing on buying good quality small and medium-sized businesses. What makes this scheme unique and attractive is that its fund manager has been able to generate consistently high returns by betting on a defensive sector and isn’t averse to taking maximum exposure to that sector. This can be seen from the fact that he has allocated a massive 31.54 per cent to the consumer non-durable sector. However, the drawback is that it increases the risk level for the scheme if the theme doesn’t work out. The other top four sectors include transportation, consumer durables, power, and fertilisers, all of which collectively account for 61.64 per cent of the fund allocation. Meanwhile, one has also to accept that the fund has indeed outperformed quite consistently. This can be seen from the fact that in its five, three, and one-year periods the scheme has yielded returns of 32 per cent (category 18.75 per cent), 19 per cent (category 5.57 per cent), and 51 per cent (category 41 per cent) respectively. This we believe is a much better performance when compared to similar small and mid-cap peers such as Magnum Midcap which has given returns of 15.80 per cent, negative 7 per cent, and 34 per cent respectively and Tata Dividend Yield whose returns have been 23 per cent, 14 per cent, and 46 per cent respectively during the same period. Though the scheme looks aggressive, it’s actually isn’t. However, it has been successful in generating noteworthy returns [PAGE BREAK]

for investors and hence it makes sense to opt for it.

DSPBR Small And Midcap
A Consistent Player
Looking at creating higher returns for themselves then there can be no better choice than DSPBR Small And Midcap - a scheme that seeks to generate long-term capital appreciation by investing in the mid and small-cap stocks. Launched in October 2006, this open-ended scheme with a total corpus of more than Rs 1,104 crore and benchmarked to the CNX Midcap has been a consistent out performer. As on September 2010 nearly 94.40 per cent of the corpus has been invested in equity while the balance has been parked in debt. A small portion of it is in cash. As for fund allocation, almost 30 per cent of the funds are in mid-caps and 61.72 per cent for small-caps, and 3.36 per cent for large-caps.  The scheme is currently being managed by Anup Maheshwari and Apoorva Shah. Its fund managers’ ability to deliver high returns by taking below-average risk and gauge the right sectoral trends can be seen from the sectoral allocation of this scheme. Its 12.81 per cent of the funds are allocated for FMCG, 8.63 per cent for pharmaceuticals, 6.81 per cent for capital goods, and 6.63 per cent and 6.14 per cent for finance and software sectors respectively. Thus the top five sectors make for about 41 per cent of the assets under management (AUM). While this has helped the scheme generate good returns and lend stability to the portfolio, the extra push to the returns has come from the scheme’s selection of sectors beyond the popular such as fertilisers, chemicals, pesticides, gas, textiles, auto ancillaries, etc.This can be gleaned from its performance over three, two and one-year periods when the returns have been 14.66 per cent (category 5.78 per cent), 76.68 per cent (category 61.92 per cent), 53.04 per cent (category 37.48 per cent) respectively. This is a much better performance than similar mid and small-cap-focused peers such as Reliance Long Term Equity which has given returns of 9 per cent, 61 per cent, and 43 per cent respectively and Magnum Global whose returns have been at 2.20 per cent, 62.57 per cent, and 36.42 per cent respectively during the same period. Thus it is the consistency, smart selection of theme, and low risk that makes this scheme so essential for one’s portfolio.

HDFC Core & Satellite
Wise Placements
HDFC Core and Satellite Fund is an open-ended growth scheme that aims to generate capital appreciation [PAGE BREAK]

through equity investment in companies whose shares are quoting at prices below their true value. It will invest in the ‘core’ group comprising well-established and predominantly large-cap stocks and ‘satellite’ group companies which are predominantly small and mid-cap companies that offer higher potential returns but at the same time carry higher risk. It has two options viz. growth and dividend. This scheme has a track record of a little over five years. In 2006 and 2007, it underperformed the BSE 200 by a substantial margin of 10-20 percentage points. This is because of a lower proportion of mid-cap stocks in the overall portfolio (25 per cent) at that point of time. However, realising the potential of the mid-cap stocks, the fund manager increased the exposure to mid-cap stocks to around 35 per cent (less than Rs 7,000 crore market capitalisation). Secondly, the fund was overweight on sectors such as software and automotive that did not have as spectacular a run as capital goods, power, and metals. But from 2008 the fund has put up a good show. In the protracted correction of 2008-09, HDFC C&S managed to contain the downsides better than its benchmark BSE 200. In the subsequent rally over the last one year, the fund has managed an out performance of 40 percentage points over its benchmark. Over the last one year, the fund has invested in sectors such as banking, software, automotive and ancillaries, and pharmaceuticals. These sectors led the market upswing from the multi-year lows that it had touched in 2009.The AUM of the fund has witnessed growth of 39 per cent at Rs 474.92 crore from Rs 341.59 crore in September 2008. The fund has the highest expo-sure to the banking sector that constitutes 20.77 per cent of its holdings followed by software which constitutes 13.52 per cent of its holdings. The fund has decreased its exposure to sectors like as pharmaceuticals and media & entertainment from 15.01 per cent and 12.54 per cent respectively in September 2009 to 8.09 per cent and 6.50 per cent respectively in September 2010. In fact the portfolio turnover ratio in the last one year has come down to 36.03 per cent from 55 per cent in September 2009. From the above discussion we feel that the fund is an ideal candidate to find a place in one’s mutual fund [PAGE BREAK]

portfolio for a longer term perspective.

HDFC Equity Fund
Gaining Lost Ground
It pays to be persistent and stick to one’s investment in quality companies. HDFC Equity is one of such funds that has followed this principle and is reaping the benefits of that. HDFC Equity lagged in performance vis-a-vis its category and benchmark index during the best bull run phases of 2006 and 2007. But the following three years (including 2008) were quite spectacular with the fund managed to beat the category returns and the benchmark index (S&P CNX 500) by a good margin. The same reason that led to the lacklustre performance of the fund during the bull run helped it to perform in the following years. The fund had a very low exposure to the hot sectors of that time (bull phase of 2006-07) such as real estate and construction,and had higher exposure to defensive sectors such as healthcare. However, the cold performance of these hot sectors in the next three years and the good performance of the defensive sector helped the fund to recover quickly. In the last five years the fund has yielded returns of 26.38 per cent compared to the return of 20.67 per cent provided by the category and 18.83 per cent by S&P CNX Nifty. An important characteristics of the fund is that it provides downward protection of the capital, as demonstrated during the dotcom bust of 2000 and 2001 when the fall in the NAV of the fund was far less than the category fall. In 2001, the fund’s NAV dropped by 2.81 per cent compared to 16 per cent by S&P CNX 500. Even in the last fall (2008) its slippage of 50 per cent was only marginally lower than its category average (54 per cent).  Its focus on value and not on direction of the price movement resulted in the fund being fully invested in the down markets of 2008-09, helped it to take full advantage of the rise in the stock market post-March 2009 when the return posted by the fund was 106 per cent, 23 per more than the category return. With the market already trading close to its all-time high, it makes sense to make this fund a part of your portfolio. The AUM of the fund has increased by 71 per cent CAGR since 2000 and is currently close to [PAGE BREAK]

Rs 8,000 crore, making it one the largest equity diversified funds. This increase in the AUM also led to an increase in the number of stocks in the fund to 56 from 20 a few years back. Currently the fund has more exposure to the financial sector and this constitutes a quarter of the total fund value followed by energy and technology. The reason for this overweight on financials was attractive valuation and growth in the sector as the ROEs for these companies are getting better. Also, they play a part in both the rise in consumption and the investment cycle. It is expected that the next leg of the bull run will mainly be driven by the investment cycle and we feel that the fund has good exposure to those sectors to be able to reap the right advantages. Hence it is clear that though this fund is suited for all kinds of investors it is more apt for conservative investors looking for capital protection.

Canara Robeco Infra. Fund
Good Risk Management
To balance our portfolio we wanted to recommend a sector fund. And while in the process of choosing one, we considered a very important factor – the ‘India growth story’. Fortunately the infrastructure sector has now been given its due importance by the government. Taking this into consideration, we have chosen Canara Robeco Infrastructure Fund. What are the reasons backing this choice?  To begin with, it has managed to give the best risk-adjusted returns (Sharpe Ratio of 0.42) among all the infrastructure sector schemes. Further, it has been a consistent performer except for FY08 which was a difficult year for all the fund managers. Here the underperformance was on account of heavy exposure to the metal stocks that tumbled during the time of recession But in April 2008 the fund was taken over by fund manager Anand Shah who corrected the stance by reducing this exposure to the metal sector. Since then the performance has been consistent. In fact it has outperformed the category returns on a regular basis.The three-year returns work out to negative 0.95 per cent (category return negative 2.27 per cent) while the one-year return is of 26.36 per cent (category return of 21.49 per cent). Shah has a good track record and he has not only done well with this fund but his other funds have also managed to beat the category by fair margins over the long run. Regarding the strategy, the best part is that despite the agility that a small fund offers (total size of Rs 168 crore), this one opts for a large-cap bouquet, refrains from frequent churning, and tilts towards a buy-and-hold approach. Thus, this fund stands out in managing its risk well. As for its portfolio, in September 2010 this fund had a fairly compact portfolio of 28 stocks primarily invest-ed in the energy sector (36 per cent of the net asset). It invested nearly 61 per cent of its [PAGE BREAK]

assets in large-cap stocks that provides it with stability. We also appreciate the move of the fund manager to reduce the fund’s exposure to telecom player Bharti Airtel, realty player Phoenix Mills, and petroleum marketing player BPCL. Our recommendation to investors is to buy this one and if needed they can also opt for a SIP in the scheme.

UTI Dividend Yield
Making The Right Choices
UTI Dividend Yield is one of the few funds that invest on the basis of a strategy popularised by Michael O’Higgins’ ‘Dogs of the Dow’ theory according to which an investor selects annually for investment the ten Dow Jones Industrial Average stocks whose dividend yield is the highest. On the same lines UTI Dividend Yield also works on the mandate of investing at least 65 per cent of the portfolio in equity shares that have a high dividend yield. This strategy has yielded good results for the fund. In the last three years the fund has beaten both category returns and the broader market index by a huge margin. The total return posted by the fund in the last three years is 17.33 per cent compared to 8.11 per cent by category return and 3.56 per cent by S&P CNX Nifty. Even in stock market crash of 2008, the the fund’s fall was less as compared to that of the Sensex and the category averages of the multi-cap and dividend yield segments. It was the allocation towards debt and cash that helped cushion the fall. But somehow this strategy limited the returns post March 2009. The fund's equity allocation was seriously build up only from June 2009 onwards and missed a major rally between March and May, unable to deploy cash quickly enough, though was able to beat its category and the broader market index on a yearly basis. The fund selects stocks on the basis of a combination of top down and bottom up approach and has built up a well-diversified portfolio with equal importance given to sectors as well as scrips. The weightage of the fund’s investment is on the energy sector contributing 22.22 per cent followed by financials and technology. This is due to optimism about the ongoing oil sector reforms and the recent petrol deregulation and expected diesel regulation. The companies included are PSU upstream and downstream, gas trans- mission, LNG re-gasification, etc. Even in the financial sector the expectation of a pick-up in credit off-take and the diminishing incidence of NPAs were the reasons for the fund’s preference for this sector. We believe that the strategy that has worked till date will continue to provide satisfactory returns to its investor. Our recommendation is to make this fund a part of your portfolio.

Nifty BeES (NIFTY Benchmark Exchange Traded Scheme)
In Tune With Incredible India
Investors might be amazed to see an Index ETF as one of our mutual fund recommendations. The question in [PAGE BREAK]

the minds of the investors will be about why one should invest in a mutual fund which is passively managed and will only generate the returns to the extent of what the index will produce. To some extent this query holds true as mutual fund investments are managed by experts who have the capability to generate higher returns. However, we are recommending an ETF to provide stability to the portfolio. Further, more than providing an extraordinary return, we are looking at a fine balancing act. This is because usually the actively managed funds tend to underperform when the markets get caught in a downtrend and this index fund can then provide a safety net. Historically it has been proved that passively managed funds outperform the others over a long-term period. Additionally, if someone is bullish on India the equity indices are bound to follow the path of the growth story. Going ahead, with strong expected economic growth, the long-term scenario seems to be good and hence we expect the indices to reciprocate. Nifty BeES of Benchmark Mutual Fund looks at providing returns that correspond to the returns of the securities as represented by the S&P CNX Nifty Index. With Nifty BeES tracking the Nifty Index and priced at 1/10th of the S&P CNX Nifty Index, we feel that it would be convenient for the investors to have exposure to the whole index. In terms of performance, on a long-term basis it has marginally outperformed the S&P CNX Nifty Index returns. While its five-year returns work out to 21.82 per cent (Nifty provided 20.90 per cent), on a three-year basis it provided 6.79 per cent (6.27 per cent) and on a one-year basis it provided 27.52 per cent (27.24 per cent). The little variation is on account of the fund at times investing a marginal amount in money market instruments and other securities. Another reason for selecting Nifty BeES is its longer performance track record of 12 years whereas the other index ETFs are relatively new. As regards the portfolio, it is decided on the basis of weightage being provided to the counters in the index. Looking at the India growth story our recommendation is to buy this ETF as it will provide an exposure to the country’s progress that lies ahead.