Considering the volatile nature of equity, a conservative approach in equity funds sounds like an oxymoron."The only way of being conservative in equity funds is by investing in funds that fall less in a sliding market,"says Arvind Bansal, Vice President and Head, Multi Manager Investments, ING Investment Management. "Such funds invest in companies with strong balance sheets, cheap valuations, high dividend yield - lowering the probability of loss in adverse market conditions."
Funds in this category are dividend yield funds, contra funds and value funds. In the past three years - from 28 April, 2008 to 28 April, 2011 - on an average, dividend-yield funds have given an annual return of 15 per cent with the minimum and maximum returns being eight per cent and 20 per cent, respectively (see Low Risk, Big Returns). Compared to this, the Sensex has delivered a return of four per cent for the same period while the equity-diversifi ed category has given a return of only six per cent.
Even during the recession in 2008, the dividend-yield funds lost only around 44 per cent compared to a 53 per cent loss in the Sensex. "These funds invest in companies that pay regular dividends and have better cash fl ows, hence have allocations in sectors like FMCG and public sector banks. Thus, these are defensive bets for conservative investors," says Swapnil Pawar, Chief Investment Offi cer, Karvy Private Wealth. FMCG companies form a huge chunk of investment of these funds. These stocks fi gure among the least volatile stocks listed.Low-Risk Sector Funds
|A conservative portfolio plan looks at funds that offer|
Sustained performance: Indicates strong fund management
Low volatility of returns: Standard deviation of returns and difference in the performance of a fund over time indicates the volatility of returns
Low beta: Beta is a measure of the correlation of fund returns to market returns. A lower beta indicates lesser volatility
High Sharpe Ratio: This ratio an indicator of the risk-adjusted return of the fund. A higher Sharpe ratio implies possible higher returns
Funds focused on the defensive sectors like FMCG and pharma have also done well in the last fi ve years. The top fund in the pharma category, Reliance Pharma, has returned 22 per cent CAGR over the last fi ve years. "Ideally, for conservative investors, exposure to large-cap stocks should be higher as they stabilise the returns when the markets fall," says Pawar. Franklin Bluechip Fund has been among the best performing funds in the large-cap category, posting an annual return of 12 per cent over the last three years and 13 per cent over the last fi ve years compared to the Sensex return of four per cent and 10 per cent. Also, in a conservative portfolio, the allocation to mid-caps should be minimised to reduce risk.For the more conservative
Asset-allocation plans provide a portfolio of a fixed or variable mix of equity, debt and cash equivalents. Some asset-allocation funds maintain a specifi c proportion of asset classes over time, while others vary the composition depending on future outlook of each asset class. "Asset-allocation funds suit conservative investors as they help to diversify and manage risk, which are diffi cult things for most people to do on their own," says Pawar of Karvy. Balanced funds are the most basic form of an asset-allocation fund.
"However, their equity allocation is higher than 65 per cent. If you want a more defensive play, you could look at investing into monthly plans with 25 per cent into equity," says Anil Rego, CEO, Right Horizons. According to Pawar, one should choose a fund depending on the debt-equity allocation. Further, portfolio composition within each asset class should be looked at. For instance, equity holding in the funds should ideally be in large-cap stocks and diversifi ed across stocks. Though conservative funds should be an integral part of an investor's allocation as when markets change and these portfolios provide the cushion, one should not expect such funds to be the best performers at all times, especially in a serious bull run.
Courtesy: Money Today