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.
|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.
|WANT TO INVEST IN MUTUAL FUNDS? HERE ARE SOME HELPERS|
|1.||How to choose best mutual fund|
|2.||Best way to build mutual fund portfolio|
|3.||Mutual fund managers share tips|
|4.||Invest in SIPs in volatile times|
|5.||'Lack of investor interest in MFs worrying'|
|6.||MFs with small assets under management do well|
|7.||What goes behind awarding an AMC licence|
|8.||Not a risk taker? Here's what you should invest in|
|9.||Don't want a fund manager to guide you? Here's what to do|
|10.||Invest in index funds for diverse portfolio|
|11.||Review your MF's performance periodically|
|12.||Mutual Fund Listing|
|13.||The Annual Report Card|