For The Less Adventurous

Tanvi Varma/Money Today        Print Edition: June 2011

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, VP and head - multi-manager investments, ING Investment Management.

"Such funds invest in companies with strong balance sheets, cheap valuations, high dividend yield, etc., lowering the probability of loss in adverse market conditions," says Bansal.

Funds in this category are dividend yield funds, contra funds and value funds. Over the last 3 years (from 28 April 2008 to 28 April 2011), on an average, dividend-yield funds have given an annual return of 15% with the minimum and maximum returns being 8% and 20%, respectively (See table).

Compared to this, the Sensex has delivered a return of 4% for the same period while the equity-diversified category has given a return of only 6%. Even during the financial meltdown of 2008, the dividend-yield funds, lost only around 44% compared to a 53% loss in the Sensex.

"These funds invest in companies that pay regular dividends and have better cash flows, hence have allocations in sectors like FMCG and public sector banks. Thus, these are defensive bets for conservative investors," says Swapnil Pawar, chief investment officer, Karvy Private Wealth.

Low Risk, Big Returns
FMCG companies form a huge chunk of investment of these funds. These stocks figure among the least volatile stocks within the Sensex universe. For instance, the Birla Sun Life Dividend Yield Plus fund which is the top performer in its category over the last 3 year (see table), has invested almost 13% of its corpus in the FMCG sector.

Most dividend-yield funds have also invested in the energy space with top holdings in PSU companies like ONGC, NTPC, BPCL, etc.


Funds focused on the defensive sectors like FMCG and Pharma, too, have done well in the last 5 years (see table). The top fund in the pharma category, Reliance Pharma, has returned 22% CAGR over the last 5 years.

"Ideally, for conservative investors, exposure to large-cap stocks (including Bluechip and core diversified funds) should be higher as they stabalise 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% over the last 3 years and 13% over the last 5 years compared to the Sensex return of 4% and 10% for the similar period.

For a conservative portfolio strategy look at funds that offer:

Sustained performance in the past:
Indicates strong fund management.

Less volatility of returns on a periodic basis: Standard deviation of returns and difference in the best and worst performance of a fund over time would indicate the volatility of returns of the fund.

Low beta: This is a measure of the correlation of the fund returns to the market returns. A lower beta indicates lesser volatility.

High Sharpe Ratio: This is an indicator of the risk-adjusted return of the fund. A higher Sharpe ratio implies possible higher returns for the same level of risk.
Also, in a conservative portfolio, one must ensure that the allocation to mid-caps is minimised to reduce risk. One can consider some exposure into P/E fund of funds.

"Given that the markets are at their highs and there could be an intermediate corrections, exposure to these funds will help reduce the downside," says Anil Rego, CEO, Right Horizons.


Asset-allocation plans provide a portfolio of a fixed or variable mix of equity, debt and cash equivalents. Some asset-allocation funds maintain a specific 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 difficult things for most people to do on their own," says Pawar.

Balanced funds are the most basic form of an asset-allocation fund. "However, their equity allocation is higher than 65%. If you want a more defensive play, you could look at investing into monthly income plans with 25% into equity," says Rego.

Many of the asset allocation funds are fund-of-fund schemes, which invest in various funds within their own fund-house. You could consider investing into multi-manager fund of funds.

According to Pawar, one should choose a fund depending on the debt-equity allocation whether it is line with one's requirement. 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 are diversified 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 shouldn't expect such funds to be the best performers at all times, especially in a serious bull run.

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6.MFs with small assets under management do well
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12.Mutual Fund Listing
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