Currently, there are two tribes taking stands on the stock market.
One considers it inevitable that the bull run is unstoppable, the other is convinced a fall is round the corner.
If you are not sure whom to believe but still want to invest in the market, maybe you should consider this new fund option.
Launched two days ago, Birla Top 100 targets stocks that are more stable than the mid-caps that are causing the current stock market mania.
Why Birla Top 100?
Indeed. Why look at large-caps now, when mid-caps are causing the party to swing on Dalal Street?
If the number of shares in a company is multiplied by its current price, the result is market capitalisation. Based on this, companies are categorised as large-cap, mid-cap or small cap.
By their very nature, large-cap stocks are more stable. They have greater liquidity and lower volatility than small-cap stocks.
A large market cap indicates a highly liquid stock.
Liquidity refers to the ease with which an instrument can be converted into cash at a reasonable price. A stock with high liquidity means that individuals can easily buy and sell it as there are always sellers and buyers for these stocks.
It also indicates that large amount of shares can be bought and sold without significantly impacting its price. So, even mutual funds and institutional investors can hold huge chunks of these shares and it will not have an adverse affect on the stock's liquidity.
By virtue of their size, they are more stable than the smaller players. Hence, they are not very volatile.
So, if you do not want a company showing a great performance in one year and plummeting the next, this one is your cup of tea.
The price of the stock too is not as volatile as a mid-cap could be.
If you don't want your investment plummeting 15% one day and rising 10% the next, should not invest in mid-caps. This makes large-caps a favourite with conservative investors.
Undoubtedly, mid-caps have the potential to deliver very high returns. But it is important to realise that high returns always come with high risk.
The mid-cap (and, in particular, the small-cap) companies are more susceptible to the vagaries of the business cycle than larger companies. So their profits and earnings could really dip.
Also, since they are smaller, it is difficult for large investors to get in (buy) and out (sell). If you want to sell, you may not get a good price. Ditto if you want to buy.
Where will your money go?
Broadly speaking, Birla Top 100 will operate just like a diversified equity fund where the fund manager will select his stocks from various sectors.
However, the companies will predominantly be the top 100 companies (measured in terms of market capitalisation).
Out of the total amount of money available for investment, 65% will be invested in large-cap stocks (the top 100 mentioned above). The balance will be invested in mid-cap stocks.
Totally, the fund manager will invest in only 25 to 30 stocks. The reason: they don't want a portfolio too diversified or too concentrated.
Why an SIP makes sense
If you plan to invest in this fund, here are a few reasons why you should do so via a Systematic Investment Plan.
1. Bypass the entry load
If you opt for a one-time, lump-sum investment, you will have to pay a steep entry load of 2.25%.
An entry load is a fee you pay when you buy the units of a mutual fund. It is a percentage of the total amount invested.
So, if you invest Rs 10,000, you will have to pay Rs 225 as the entry load.
Some funds do not charge any entry load when they come out with a new fund offering. It is levied once the launch is over and the fund units are available for buying and selling.
A smart way of bypassing this entry load is by opting for a Systematic Investment Plan.
The SIP of this fund does not have any entry load.
Unfortunately, a number of mutual funds have started levying an entry fee on the SIP option too.
HSBC Mutual Fund set the trend and Franklin Templeton Mutual Fund, HDFC Mutual Fund and Kotak Mahindra Fund have followed suit.
Though lesser than the fee on the one-time investment, it is still a disincentive.
The good news is that you do not have to pay any entry load for this mutual fund SIP.
2. Smart way to invest
In Mutual funds give great returns, we explained how investors can get better returns by investing in a SIP instead of opting for a one-time, lump sum investing.
The figures of 34 mutual funds evaluated over 10 years (July 1995 to June 2005) indicate that an investor would have made more via a SIP.
The average annual returns of these funds over this period stood at 13.41%. But it shoots up to 20.37% for an SIP.
3. You can invest small
Another good advantage of the SIP is that you can invest small amounts. The minimum investment for a one-time investor is Rs 5,000. But if you invest via an SIP, then you can do so with just Rs 500 and pay the remaining Rs 4.500 in equal installments through the next 11 months.
Or, you can opt for six installments of Rs 1,000 each.
Should you?
If you have already invested in some mid-caps funds or sector funds and are looking for a diversified equity fund with stability, you could consider this fund.
Or, if you want to invest in the stock market but are wary of taking too much of a risk with your money, then this one is a safer bet than the others.
Birla Top 100 Fund
Minimum amount: Rs 5,000
Price per unit: Rs 10
Opened for subscription: August 30, 2005
Closes on: September 28, 2005