In How to invest in mutual funds, we spoke about how individuals can build a mutual fund portfolio by investing various mutual funds.
We also spoke about having core and non-core funds in your portfolio. Today, we explain these concepts in detail and tell you which funds fall under each category.
What we are talking about
1. We are only referring to equity mutual funds (funds that invest in shares of companies).
2. The portfolios recommended are meant to be held for a period of at least three to five years.
During this time frame, you are advised to monitor your fund's performance at least once in the year. See if there are any alarming declines in the fund's returns. Compare this with other funds in the category. Look at other factors, such as a change in the fund manager or an acquisition by another Asset Management Company (fund house).
3. The Net Asset Values and returns are as on October 21, 2005. All data refers to the growth schemes. In such schemes, dividends are not distributed from the profits but are invested back into the scheme resulting in a higher NAV.
Core funds
Core funds should be at the heart of any portfolio. They should account for a chunk of your total mutual fund investments.
Core funds are those that offer stability coupled with returns.
Selecting core funds
Large-cap stocks fit the bill. Hence, funds that invest in such stocks would be core funds.
However, when we look at the track record of funds in India, we notice that being less volatile or doing well in a falling stock market is more to do with the ability of the fund manager than whether he has invested in large-cap or small-cap stocks.
Most large-cap funds invest in mid-caps as well.
Hence, it is wise to choose core funds depending on the fund manager's ability, which is reflected in the fund's performance record over a long-period of time.
Ideal core funds would be those that have performed well in both bull and bear markets and have invested in mid-caps from time to time.
We looked at the performance of the funds during 1998-2003, a time when the Indian stock market went through a complete cycle. A fund manager who managed his fund well during these years leaves little doubt as to his ability.
Based on the above, these are core funds we suggest.
The winners
Franklin India Bluechip
NAV: 77.55
1-year return: 45.42%
3-year return: 55.29%
5-year return: 30.45%
Franklin India Prima Plus
NAV: 76.79
1-year return: 45.22%
3-year return: 52.86%
5-year return: 31.10%
HDFC Capital Builder
NAV: 45.915
1-year return: 63.89%
3-year return: 64.31%
5-year return: 32.91%
HDFC Equity
NAV: 89.217
1-year return: 61.99%
3-year return: 63.56%
5-year return: 37.20%
HDFC Top 200
NAV: 67.043
1-year return: 56.62%
3-year return: 63.35%
5-year return: 37.64%
Pru ICICI Power
NAV: 46.37
1-year return: 53.14
3-year return: 58.21
5-year return: 28.72
Reliance Vision
NAV: 106.63
1-year return: 55.53%
3-year return: 64.12%
5-year return: 43.47%
Sundaram Growth
NAV: 40.1029
1-year return: 41.58%
3-year return: 51.43%
5-year return: 26.52%
Templeton India Growth
NAV: 43.81
1-year return: 44.35%
3-year return: 54.71%
5-year return: 31.34%
Non-core funds
These are racy, volatile funds that have the ability to generate fabulous returns but also carry a greater risk. When the stock market dips, these funds show a substantial fall in value. On the flip side, they have the ability to emerge as top performers during a bull run.
The funds mentioned here have done exceptionally well over the last three years. However, for various reasons - like not having a long-term record, amongst others - they currently do not fall into the core funds category.
The winners
DSPML Equity
NAV: 32.45
1-year return: 68.67%
3-year return: 64.92%
5-year return: 28.59%
DSPML Opportunities
NAV: 33
1-year return: 55.73%
3-year return: 64.67%
5-year return: 33.23%
Franklin India Opportunities
NAV: 14.54
1-year return: 53.54%
3-year return: Launched March 2004
Franklin India Prima
NAV: 150.39
1-year return: 72.19%
3-year return: 77.11%
5-year return: 50.87%
HSBC Equity
NAV: 44.1169
1-year return: 44.15%
3-year return: Launched in December 2002
Magnum Contra
NAV: 21.77
1-year return: 86.87%
3-year return: 78.54%
5-year return: 48.03%
Magnum Global
NAV: 24.25
1-year return: 93.90%
3-year return: 76.95%
5-year return: 31.12%
Sundaram Select Midcap
NAV: 48.244
1-year return: 67.44%
3-year return: 70.23%
5-year return: Launched in July 2002
Equity-linked saving schemes
These are diversified equity funds that offer a tax benefit under Section 80C.
Core funds
Franklin India Taxshield
NAV: 82.45
1-year return: 51.53%
3-year return: 54.47%
5-year return: 27.77%
HDFC Taxsaver
NAV: 94.168
1-year return: 94.83%
3-year return: 75.60%
5-year return: 41.43%
Sundaram Taxsaver
NAV: 16.928
1-year return: 68%
3-year return: 60.27%
5-year return: 31.09%
Non-core funds
HDFC Long Term Advantage
NAV: 63.638
1-year return: 63.65%
3-year return: 72.08%
5-year return: Launched in December 2000
Magnum Taxgain
NAV: 44.68
1-year return: 118.77%
3-year return: 86.40%
5-year return: 28.42%
Prudential ICICI Tax Plan
NAV: 63.79
1-year return: 88.17%
3-year return: 76.05%
5-year return: 40.29%
How much should you invest in each fund?
Deciding which core and non-core funds you want to invest in is the first step to building a mutual fund portfolio.
The next question is how much you should allocate to each category.
Here are some tips:
