Mutual funds for long-term investors - Part I

Mutual funds for long-term investors - V

There are mutual funds and then there are more mutual funds. If an ordinary investor has to sift through all the mutual funds and then make her/ his decision s/ he would take almost an eternity to put her/ his money in the right funds.

And then, there is the volatility witnessed in the Indian stock markets, especially in these times when India's benchmark 30-stock index, the BSE Sensex is nearing 20,000 points, a level never ever seen before.

Does the current situation mean the markets are risky and investors should stop putting their money in search of reasonable returns? Of course not.

Here's an analysis of 25 mutual funds by Value Research that will create long-term value for you. In a five-part series that begins today, we present the first five mutual funds with the rest to follow on subsequent days.

Individual needs may vary so view them in conjunction with your overall portfolio and risk profile.

# 1: Birla Equity Plan -- Swift moves

Equity: Tax Planning

You won't catch the fund manager napping here.

Aggressive portfolio churning, swift moves and strategically timed entry and exit into opportunistic sectors are what this fund is all about. The fund has displayed an uncanny ability to sense an opportunity at the right time. It did so during the third quarter of 2006 by timing its entry in banking stocks to perfection.

Moreover, the fund manager does not mind going against the herd.

For instance, the fund has maintained its position in the automobile sector at a high of over 13 per cent through this bear phase while the average category exposure to the sector has hovered around 7 per cent.

Despite frequent fund manager changes (the current one is the fifth), the fund has not skipped a beat and continues to outshine the pack. Barring one year, the fund has consistently beaten the category returns over the past five years.

But the latest fund manager change has brought about a visible alteration in the portfolio. From the earlier 35 stocks, scattered evenly across market cap segments, the portfolio has expanded to 44. This may dilute the risk, but also the returns. In a more concentrated portfolio, each stock has a significant impact on the fund's returns.

Perhaps, these are early signs of a shift in strategy towards a more conservative bend. But aggressive investors should not jump ship just yet. Going by the past performance, excellent stock picks and the track record of the fund house, it would be wise to adopt a wait-and-watch approach.

# 2: Birla Mid Cap -- Style statement

Equity: Diversified

It's tough to nail down this one's style.

Consider this. The fund invests aggressively in small companies, but ensures that a larger part of its portfolio is invested in relatively bigger mid-caps. At Rs 4,051 crore, the weighted average market capitalisation of its portfolio is pretty high.

The fund manager does churn the portfolio considerably and frequently tries out new stocks. Yet, stocks that are held for a period of 30-odd months at a stretch do make an appearance.

He brazenly sticks to his convictions and goes against the herd, as suggested by some of his sector bets. Yet he walks down the path of high diversification. His portfolio now has 65 stocks, up from the 40-45 range. None of the stocks account for more than 3 per cent of the assets.

But going by the fine numbers he has been putting in, there's reason to think he knows what he is doing. Over the last three years, Birla Mid Cap has delivered an annualized return of 53 per cent (as on October 11, 2007) to command a place in the top quartile of the category. It has never fallen below a four-star rating in its 24-month rating history.

Being quite small vis-a-vis other mid-cap funds, it is nimble offering with just Rs 493 crore. The increase in corpus over the past 12 months (from Rs 159 crore) is probably the reason for the portfolio diversification.

In a nutshell, the fund does not display characteristics of being highly aggressive, especially given the amount of diversification and the kind of mid-caps it invest in. This is probably as safe as you can get with a mid-cap fund.

# 3: Birla Sun Life Equity -- Steady evolution

Equity: Diversified

This erstwhile Alliance fund seems to be regaining its days of glory but without the brashness of its youth. After a dazzling performance of 280 per cent (1999) and a miserable two years (2001, 2002), it now seems to be back on track.

Like a chameleon, this one constantly changed its colours. In its initial years, it was a dangerously focused offering with extreme concentration in few technology stocks, followed by a stream of small holdings.

It paid off handsomely before falling in the doldrums. What followed (since 2003) wee smaller portfolios of 30-35 stocks with the top five holdings consuming 35 per cent of assets. This brought in the much-needed sectoral diversity.

A good move at this time was the identification of the mid-cap rally early enough.

In September 2005, Birla Sun Life acquired the fund. The natural consequence was a significant toning down of the aggression. The number of stocks gradually rose to around 50 and the top five holdings now add up to just around 20 per cent of the assets, which remain evenly spread across large-and mid-caps. What's more, the fund manager does not hesitate to shift a considerable part of assets to cash at the first sign of trouble.

Despite this ongoing transformation, the fund has evolved to be a steady, well-diversified, multi-cap offering that has consistently beaten the category average. With erratic performances and concentrated portfolios being a trend of the past, this fund is suitable to be among the core holdings of your portfolio.

# 4: DSPML Balanced -- Bankable choice
 
Hybrid: Equity-oriented

Though it has delivered above average performances, and even managed top quartile returns in a few years, DSPML Balanced does not turn heads.

Its tactical asset allocation has done little to deliver impressively. Over the past 21 months, the equity exposure has fluctuated in a wide range of 9 percentage points. According to the September 2007 portfolio, the fund has parked 72 per cent of its assets in equity.

The tilt towards mid- and small-cap stocks from December 2006 is here to stay. This automatically gives the fund a riskier tilt. To balance the effect, the shift was accompanied by an increase in the number of stocks from 60 to as many as 75.

Clearly, the fund shies away from taking big sector or even stock specific bets. So don't expect trailblazing returns from such a portfolio. But then one does not look for such returns in a balance fund.

Our grouse is that even in bearish phases, the fund's track record is not consistent. The instances of the fund losing much less than the category average have been offset by times when it fell much harder than the average. In the recent lean quarters of June 2006 and March 2007, the fund lost as much as the average player. So investors cannot even count on the fund to limit downside risk.

Having listed the weak points, what you can expect from this fund is stability and consistency of returns. The fund will not knock the lights out, but its performance will be in line with the category average.

All in all, the fund may not be the first choice but it is definitely worth a second look.

# 5: DSPML Equity Fund -- Multi-faceted

Equity: Diversified

This fund has been putting its best foot forward lately.

From a large-cap focus, it shifted to stocks of smaller companies in 2005 to coincide with the mid-cap rally. Now it displays the characteristics of a true multi-cap fund. In the recent past, it has also developed the ability of holding up well in the face of the bear.

One thing that sets the fund apart is its high Sharpe ratio, which is suggestive of a favourable risk-reward ratio. The sixth highest in the category, it indicates that for the amount of risk taken, the fund is able to deliver much higher returns than the average diversified equity fund.

The current year-to-date return of 38.20 per cent is ahead of the category average of 33.40 per cent. Neither has it been a slouch over the long term. In the last five years, it has under-performed the category in only three quarters.

The fund believes in a high degree of diversification. The number of stocks in the portfolio hovers around 70, with the top holding rarely accounting for more than 5.50 per cent. Half of its holdings account for less than one per cent of the portfolio.

It is difficult not to like this fund. With no market-capitalisation or sector bias, this diversified equity offering goes about generating returns in a very consistent fashion.

Its versatility and consistency makes it a suitable core holding for conservative as well as aggressive investors. Little wonders that its asset size has growth to cross RS 1,000 crore.

Mutual funds for long-term investors - II