Business Today

Down, but not out

Both sectoral and diversified funds have taken a beating. But, this is a good opportunity to invest in top-rated funds.

twitter-logo Manu Kaushik        Print Edition: November 30 2008

Consider these facts: the stock market has fallen to its lowest levels in three years. Like everything else associated with the market, equity funds, too, have been hit hard in the meltdown but not harder than the indices, at least not all of them. For example, Rs 100 invested in a pharma fund a year ago is down to Rs 71.80 today, but the same investment in the BSE Sensex has fallen even further to Rs 51.75. The market remains extremely volatile and, therefore, direct investment in stocks is fraught with risk. But remember: India is expected to ride out the global economic recession better than most other countries.

This builds a compelling case for entry into the stock market through equity funds with a 3-5-year time horizon. Says Jayesh Shroff, Fund Manager, SBI Mutual Fund: “The recent selling has been indiscriminate due to panic in the global markets and valuations have touched record lows. As a result, quality stocks are now available at attractive valuations, and long-term investors can use this opportunity to enter the markets through equity funds.”

So, which equity funds should you choose? One way of doing that is by looking at the performance of various types of equity funds over the last one year. Though a majority of them has given dismal returns, some like diversified and thematic/sectoral funds have done less badly than others. Says Sukumar Rajah, Chief Investment Officer (Equity), Franklin Templeton Investments: “Though most equity funds have been impacted by the downtrends in the market, those with a momentum-oriented investment style have been hit relatively harder. However, certain funds, which focussed on sectors with long-term fundamentals and with balanced exposure to FMCG and healthcare—which were earlier out of fashion—have been able to restrict losses due to the sectors’ relative out-performance.”

Another way of zeroing in on the right funds is by assessing one’s risk appetite and the market conditions and then looking for products that are best aligned with one’s investment needs. Big fund houses offer a variety of actively managed products such as diversified, specialty, thematic, sectoral and exchange traded funds, which have been designed to meet specific requirements.

Diversified funds
In the current market conditions, diversified equity funds are good entry points. These have the flexibility to invest across sectors. Says Anup Maheshwari, Head (Equity), DSP BlackRock Investment Managers: “Investments in diversified funds should be made with a long-term perspective. If you invest for 3-5 years, then the possibility of getting better-than-market returns increases substantially.” You should opt for funds that have the highest exposure to large-cap stocks, as these are expected to outperform all others when the tide turns. Therefore, you must check the top 10 holdings of the scheme you plan to invest in. Adds Anurag Mehrotra, Head (Wealth Management), Edelweiss Securities: “Make sure that the fund you invest in follows a bottom-up selection approach for companies that have high earnings visibility, low dependence on fresh capital and positive leverage to lower commodity prices and lower interest rates.”

Currently, there are 212 diversified equity fund schemes in the market and all have given negative one-year returns of 30-70 per cent. As on November 3, 2008, ICICI Prudential Infrastructure, which had assets under management (AUM) of Rs 2,524.61 crore as on October 31, 2008, has given a negative return of 44.50 per cent (compared to BSE Sensex’s 46.78 per cent negative returns) over the last one year. Similarly, Sundaram BNP Paribas Select Focus, which had an AUM of Rs 790 crore as on October 31, 2008, has given a negative return of 43.31 per cent over the same period.

Sukumar Rajah, CIO (Equity), Franklin Templeton Investments
Sukumar Rajah
Pharma funds

Of late, pharma funds have been hot with investors, as their net asset values (NAVs) have recorded the second-lowest fall after FMCG funds over the last one year. This could be due to the fact that pharma stocks did not participate in last year’s runaway rally and, hence, did not fall as sharply when the markets got pummelled. Analysts see pharma sector funds performing better than other funds over the long term. Says Maheshwari: “India is a major destination for contract research and manufacturing services due to its low costs, skilled manpower and manufacturing capabilities. Moreover, most pharma businesses are cash-rich and do not need additional capital to grow.”

Till November 3, 2008, Reliance Pharma, which has 92.39 per cent of its portfolio made up of pharma stocks, has given a negative return of 28.43 per cent over the last one year. Likewise, UTI Pharma & Healthcare has given a negative return of 20.02 per cent over the same period.

Auto funds
Auto funds have been lacklustre since the beginning of this year. Their woes have stemmed from depressed passenger car sales on account of higher interest rates, inflationary pressures and fuel price hikes. This has impacted the valuations of some auto giants. But now, with interest rates and crude prices headed south, the auto sector is expected to perk up. In the long term, the rising penetration levels of passenger vehicles in India will drive the growth of the auto sector. As on November 3, 2008, UTI Transportation and Logistics, and JM Auto Sector have given negative returns of 41.23 per cent and 20.02 per cent, respectively, over the last one year.

Anup Maheshwari, Head (Equity), DSP BlackRock Investment Managers
Anup Maheshwari
Technology funds

The performance of technology funds over the past few months has been disappointing. Says Maheshwari: “With rising worries over cutbacks in technology spending and the financial sector in turmoil, it might be time to step away from the domestic IT services companies for now. We are already seeing projects being postponed and bill rate pressures on companies.” On the positive side, though, the rupee’s depreciation against the dollar is expected to improve the profitability of tech exporters. Also, the financial crisis has made many western IT companies attractive for acquisition by Indian tech companies.

FMCG funds
Always considered the most defensive of funds, FMCG funds have looked particularly attractive during the current turmoil. The average one-year trailing returns of FMCG funds today stand at a negative 26.94 per cent, far lower than the Nifty’s returns of a negative 47.03 per cent. Analysts believe the sector is poised for sustained growth over the medium and long term due to favourable demographics, low penetration, proliferation of modern trade channels, strong rural growth backed by higher agricultural incomes and the consequent increase in the purchasing power. Fund managers recommend selective investment in FMCG funds.

Jayesh Shroff, Senior Fund Manager, SBI MF
Jayesh Shroff
Banking funds

The monetary tightening by RBI to arrest inflationary pressures had adversely impacted the NAVs of banking funds, which have recorded negative returns of 40.75 per cent. But the recent rate cuts and liquidity infusion are expected to boost credit off-take. Another positive trigger could be the imminent reforms in the insurance and banking sectors. Says Maheshwari: “After the massive correction in October, valuations in the banking space have become quite attractive. Taking into account all the factors, we are extremely positive on the sector.” As on November 3, 2008, Reliance Banking Fund, which has over 80 per cent of its investments in financial services stocks, has given a negative return of 29.66 per cent over the last one year. During the same period, UTI Banking Sector Fund has given a negative return of 41.39 per cent.

mosimage Diversified vs sectoral
Financial planners view sectoral funds as a high-risk, high-return investment proposition. Says Sanjay Matai, Promoter, Wealth Architects: “Sectoral funds are risky as their returns largely depend on the performance of a particular sector. Such funds are not complete investment solutions.” Sectoral funds should always be used as add-ons to an already diversified portfolio. “If you want to invest in sector funds, look for sectors that are in a downturn in the market cycle but whose stocks have attractive valuations. Investing at this point will give high returns when the sector turns around,” adds Matai.

Given the current market situation, experts recommend that investors should invest 50-60 per cent of their corpus in large-cap funds and 20-25 per cent in midand small-cap funds. Also, their exposure to sector funds should not exceed 5-10 per cent of their portfolio. “Investing through the systematic investment plan route is ideal for investors as it inculcates discipline and makes market volatility work in their favour,” says Rajah.c

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