7 investment truths

Everybody says, mutual funds are the best way to de-risk your portfolio. But the Money Today-Value Research list of India's Most Wanted Stocks over the past two years proves that this is a widely accepted fable. Here is the new set of investment truisms.

     Print Edition: November 27, 2008

The best way to de-risk your portfolio is to invest through a mutual fund. This is the advice that everyone has given to the small investors in the past two years. Even Finance Minister P. Chidambaram has reiterated this several times. But after the current stock market crash has trashed even the blue chips, the Money Today-Value Research list of India’s Most Wanted Stocks over the past two years proves that this is a widely accepted fable. Here is the new set of investment truisms.

1. Experts can get it wrong
Beyond the fundamentals, the art of stock-picking is based on luck. It’s purely by chance that fund managers discover value picks. Ten months ago, ICICI Bank was being added to fund portfolios at Rs 1,200. But recently, it was down to Rs 400. Similarly, IT bellwether Infosys was the preferred choice of funds at Rs 1,768 and, later, it was available for Rs 1,320 despite the fact that dollar had strengthened from Rs 40 to Rs 47 during the same period. One would have assumed that the fall of the rupee would have increased Infosys’ valuation since a stronger dollar benefits export-oriented firms. A similar trend has been witnesssed in mid-cap and small-cap stocks. Crompton Greaves was picked for Rs 129 when the Sensex touched 10K the first time, and is taken for Rs 232 now that the Sensex has touched 10K again.

2. Funds have limited choices
Like any small investor, mutual funds too have a limited stock universe. Although there are 5,103 listed stocks on the BSE, and the mid-cap and small-cap indices comprise 274 and 494 companies, respectively, the portfolios of actively managed funds don’t go beyond 100 stocks. It amounts to less than 2% of stocks that fall under the fund managers’ radars.

3. Favourites can change
Today, in a falling market, when the Sensex is at 10,000 levels, 14 mutual funds hold Ipca Labs with a total exposure of Rs 234 crore. Two years ago, in a booming market, when the Sensex had touched 10K, this small-cap stock was held by nine funds with an exposure of Rs 125 crore. So, even the experts have their flavours of the month, just like you and I do. While only 89 funds had the most preferred Reliance Industries in their pickings when the Sensex first touched 10K, it now finds significant holdings in 160 funds.

4. Funds can own unknown duds
Ever wondered why relatively unknown stocks such as BS Refrigerators, GCI Solutions and Mukerian Papers get into an expert’s portfolio? The answer: even mutual funds can purchase duds and make wild investment decisions. And these are only a few of the misplaced bets from the list of 100 stocks that several prominent mutual funds hold currently.

5. Mid-caps aren’t necessarily the future large-caps
Even attractive mid-cap stocks can turn out to be mistakes. Aditya Birla Nuva, a mid-cap company, was promoted to the large-cap category in December 2007, with mutual funds holding stocks worth Rs 1,382 crore. Three months later, it was back to being a mid-cap, and mutual funds’ combined holding had dwindled down by 34% to Rs 903 crore. Another mid-cap, Divi’s Lab, was relegated to the small-cap status by the end of March 2008 after the stock had taken a huge beating on the back of a sustained fall in the markets after January this year.

6. Mutual funds also follow the herd
Everyone, even the so-called smart and savvy investor, likes to be a part of the crowd. If you, as a small investor, buy what the funds buy, the funds go after stocks that their competitors own. In the MF universe, 60 funds have Reliance Industries as their most wanted stock. The top three holdings of over 100 MFs are part of the top five most wanted stocks.

7. Checking MF portfolios can be a good bet
We get to know what a fund has purchased after a lag of nearly one month, as new additions in a mutual fund portfolio are released in the first week of every month. But if you invest in these new stocks even at that stage, you are likely to earn good returns from them.

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