Business Today

The best mutual funds

It has not been easy to beat this five-year bull market consistently. Here are four funds that did it.

Clifford Alvares        Print Edition: June 29, 2008

It requires a consistent performance in bull markets to build a track record. So, if you are looking for equity funds, check the funds that have outperformed the markets consistently on a yearly basis. You might think that the long bull market made it easier for fund managers to pick stocks, but which are the ones that consistently beat the rest?

When picking a fund, it is a good strategy to see which funds fine-tune their investing strategy according to the changing market conditions. Stock markets are constantly changing, as stocks and sectors move in and out of favour.

Strategies that may have worked, say, this year, may not work next year. For instance, mid-caps were the hot favourites just two years ago, but since then, have been left out of the bull race. A fund loaded with mid-caps may have found it difficult to beat the indices over the last two years.

Consider this: during 2003-04, when this bull run began, 76 out of 94 equity funds that existed then (80 per cent of the universe) managed to beat S&P CNX Nifty. That year, many stocks in the market participated in the bull market, which made it easier for a large number of funds to outperform the Nifty. In the subsequent financial year, the list got whittled down to 70 funds. The overall bull market still made stock picking look easy during that financial year.

As we headed into the next year of the bull market, fewer funds were able to beat the market. In 2005-06, the list got further pruned to 52 funds, or about 55 per cent of the 94 equity funds at the beginning of this bull market.

In the 2006-07, the list shrank further. Only 10 funds managed to do better than the Nifty. Since then the rally in the stock market was concentrated in very few sectors like oil & gas and capital goods. Fund managers that did well to buy these stocks were the ones that came out ahead. Again, in 2007-08, the market’s upside was a result of an increase in the stock prices of a few large companies. As a result, funds that moved early into them managed to do better. And as we head into the 2007-09 financial year, only four funds remained from our original list. In graphics: The steady movers

Star performers

All these four funds are actively managed, and their mandates allow them a bit of aggressiveness as well. These funds can load up on cash levels when the markets are down, thus, protecting investors’ wealth. Among the top four funds, DSP Merill Lynch has two funds, DSP Top 100 Equity Fund and DSP Equity Fund. Says Anup Maheshwari, Executive Vice President and Head of Equities, DSP Merrill Lynch Mutual Fund: “This is a market where you have to be active. Just a buy-and-hold strategy may not work. We have managed to identify sectors early, and moved out of the down sectors early as well.”

Another fund that has done well is SBI Mutual Fund’s Magnum Equity Fund. Says Jayesh Shroff, Fund Manager (Equity): “Our fund is selective, focusses on a few good companies and invests aggressively in them. It’s a bottom-up selection fund.” As the fund focusses on a few stocks and sectors, the strategy can also backfire if the sectors in which the fund has invested aggressively get badly hit. Says Shah: “Aggression can hit you on the downside, but we have got the fund back on track." In graphics: See how funds fared each year since April 2003

Another star performer throughout the bull market has been the Reliance Growth Fund. Says Sunil Singhania, Executive Vice President Equity, Reliance Mutual Fund: “We don’t hold stocks for any fixed period. We are opportunistic investors, and follow a bottom-up investing strategy.” That strategy has worked for the fund over the last five years. As of now, the fund has increased its cash levels to 25 per cent of its corpus.

Says Singhania: “Whenever we get an opportunistic price, we will deploy our cash.” In a market that is dynamic, and where styles and sectors are constantly changing, the better managed funds are the ones that have their fingers in the pudding. It’s, perhaps, better to follow them. Active fund managers have to strive to beat the indices on a regular basis.

Active fund management is different from passive management, in which funds imitate an index’s portfolio and mirror its performance. The former requires fund managers to use different strategies to design portfolios. It’s here that the skill of the fund manager and research staff comes into play if funds have to do well, and beat the benchmarks consistently.

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