Mint50

MONEY MATTERS 15

mint

THURSDAY, JANUARY 28, 2010, DELHI ° WWW.LIVEMINT.COM

MINT 50

50 curated mutual fund schemes to choose from With at least 1,000 mutual fund schemes in the market and fund houses pitching different awards and ratings, how do you choose the 6­10 funds you need to invest in? Turn to Mint 50. A unique portfolio of mutual fund schemes chosen for their consistent performance records and management styles B Y K AYEZAD E . A DAJANIA

How to use Mint 50

kayezad.a@livemint.com

························· iming the market—entering at lower levels and exiting at higher levels—is always a dream. But investors seldom get it right and usually either miss the bus or board from the wrong end—trip, fall and get hurt. What we need is a system that would encourage us to invest systematically and regularly. We need to invest across assets and in a way that meets our returns expectations, at the same time not getting exposed to too much risk. But with at least a thousand schemes in the Rs7.94 trillion Indian mutual funds (MF) industry, how do we choose the right fund? Money Matters bring you a choice of 50 schemes across equity and debt to help you zero in on a scheme that suits your needs and help you meet your investment goals.

Here’s what we like and why:

T

E

Equity Large-cap equity funds Apart from the fund management’s pedigree and style, we looked at two statistics: performance consistency and cash holdings. Performance consistency is crucial to choosing a good fund. There is a view that India’s funds industry is still in nascent stages, however, a number of funds have completed 10 years. Thirty funds—and still counting—out of 146 are more than 10 years old. We checked out the 10-year and five-year returns of each of these 30 funds to see the their long-term track record. Then, we checked out the performance in the falling market of 2008 as well as the rising market of 2009. A fund that does well in falling markets as well as rising markets is, typically, a good fund. It also shows the fund manager’s quick adaptability to changing markets.

For instance, HDFC Top 200 (HT200) lost 45% against 53% that the entire category lost in 2008. When markets rose in 2009, the fund returned 94% against a category average of 78%. “Consistency in returns lends comfort to investors because they pay fees to fund houses to successfully manage the money”, says Prashant Jain, chief investment officer, HDFC Asset Management Co. Ltd, and the schemes’ fund manager for at least 10 years.

One of the reasons why HT200 did well was its low cash allocation, as the fund house doesn’t believe in hording cash, even in troubled markets. “If funds are in cash and markets go up substantially, an investor can rightfully feel upset if he has done asset allocation at his end and has invested in equity funds with a long term view”, adds Jain.

According to the fund’s mandate, the common holding between its own holdings and

that of its benchmark index (BSE 200) should be at least 60%. For instance, if Infosys Technologies Ltd constitutes 5% of BSE 200 and 7% of the fund, the common holding is 5%. It’s a mandate that doesn’t hug the benchmark index, but also restricts the risks a typical equity fund can take on.

A high cash holding is not bad, though, if your fund manager is able to get his cash calls right; exit it before markets begin to fall and deploy it back in time before stock prices start to rise again, the way UTI Opportunities Fund (UOF) did in early 2009. From around 30% of cash in January and February 2009 when markets were down, UOF swiftly deployed its cash by the time equity markets started to rise in March and April. Fund manager Harsha Upadhyaya had also smartly reduced the fund’s allocation to mid-cap scrips from around 30% in August 2007, down to 17% in December 2007, when the markets were high. In more ways that one, UOF lives up to its name and is an opportunistic fund. It focuses on five to six sectors at a time and then invests in scrips within these sectors. Its tight portfolio of around 35 stocks makes it ideal for the fund manager to shift between sectors as and when he sees opportunities. Its timely investments in Hindalco Industries Ltd and Tata Steel Ltd, as well as its early investments in information technology sector helped the fund in 2009.

“We consciously invest in liquid scrips because it makes it easier for us to enter and exit quickly”, says Upadhyaya who also takes active exposures in the derivatives segment to hedge the portfolio.

Putting Mint 50 together

J

ust looking at returns while choos­ ing the next fund to buy is a sure way to lose money. What investors need is some measure of a fund’s per­ formance over the long term, while keeping an eye out on the fund man­ ager expertise and costs.

Mint 50 uses a two­step process to filter out schemes. Some risks are quantitative and therefore they can be mathematically arrived at, while a few others are qualitative and need a subjective approach. Among the

former is a number called downside risk that measures a fund’s return per unit of risk. The higher the risk­ad­ justed return, the better the fund because it shows that the fund has average to above­average return, along with lower risk.

Mint 50 uses ratings from mutual fund tracker Morningstar to generate a shortlist of funds. Morningstar gives star ratings on the basis of risk­ adjusted returns, going from a low of 1 to a high of 5. Mint 50 picks up all

Though DSP BlackRock Top 100 (DT100) did well when equity markets fell in 2008 (46% loss against a category loss of 53%), it was a little slow in deploying its cash in March and April when equity markets started to rise. Besides, this is a strictly large-cap fund that limits its investments to the 100 largest companies in the market and does not invest in mid-caps; a segment that also did well in 2009.

For investors who don’t like too much risk and do not want to trust fund managers, there are exchange-traded funds (ETFs) such as Benchmark Nifty BeES that give a smart option. No fund manager risk and buying all the scrips in exactly the same proportion, as the index chosen gives investors index returns at a tiny cost. As ETFs are listed only on the stock market, you can’t go for a systematic investment plan (SIP) yet. Enter index funds, and we suggest Franklin India Index Fund–Nifty if you wish to do an SIP. Mid- and small- cap equity funds It’s a good strategy to invest in mid- and small-cap funds once you’ve got your large-cap investments in place, as it pays to have a returns kicker to your portfolio. We’ve kept Birla Midcap (BMF) and DSP BlackRock Small Midcap (DSM) fund in our portfolio as both are consistent performers. Despite aiming to invest in midcap scrips whose market capitalization is in the range of the highest and lowest market capitalization scrips in CNX Midcap index and also in the funds with a threshold three­star rat­ ing. Funds can have off­periods in their life and drop off the 4­ or 5­star threshold. A three­star rated threshold gives us a universe of 292 funds.

Next are the qualitative parameters where we con­ sider fund mandates, returns consistency, port­ folio analysis and fund manager audit. The analy­ sis looks at portfolio performance across rising and falling market peri­ ods to see how a fund navigates mar­ ket volatility. A portfolio analysis

SHYAMAL BANERJEE/MINT

range of Rs3,500 crore and Rs4,000 crore, BMF doesn’t take unnecessary risks.

It holds a diversified portfolio and 50-60% of its portfolio is steady. Mint 50 has two DSP BlackRock’ funds in the midcap space, but we suggest you choose one out of them.

While DSM aims to invest in scrips below 100th largest company by market capitalization, DSP BlackRock Equity Fund invests around half of its portfolio in large-cap scrips too. With returns of 53% and 145% in the last six months and one year, respectively, DSM was one of the best performing equity funds, thanks to its successful holdings in Cadila Healthcare Ltd, EID Parry (India) Ltd and Gujarat State Petronet Ltd. What’s common between BMF and DSM is that they lower your risks by holding a diversified portfolio, typically around 50-60 scrips. “Between all our funds, we try not to limit our stake in a company to 5%, hence we restrict buying big quantities”, adds fund manager Apoorva Shah, DSP BlackRock Investment Managers Pvt. Ltd. Equity ELSS A must for any portfolio, ELSS schemes give the section 80C tax break of Rs1 lakh deduction. Apart from long-term performers, we have included Religare Tax Plan (RTP). This is a dark horse, since Morningstar has not rated it yet as the fund did not complete three years till the end of December.

But we like the fact that the fund protected the downslide gives insights into what the fund manager is really doing behind the net asset value number. The fund’s cash policy and its ability to stick to its mandate, etc., are also factored in.

We carefully look at how a fund performs in bull and bear market cycles since we need funds that do well in both.

Many schemes get fil­ tered out at this stage as a bull mar­ ket lifts all boats. The result of these filters is Mint 50. We do hope you make money.

in falling markets and did well when markets swung back upwards again. In 2008, RTP lost just 50% against 55% that the category lost on an average. If fund manager Vetri Subramaniam leverages his past track record and plays his cards well, this could emerge as a steady option. But take a minimal exposure to this fund if you must invest in it. HDFC TaxSaver is making a silent comeback and did well in 2009, thanks to a chunk of its investments in selective mid-cap scrips.

Hybrid These are funds that invest in a mix of equity and debt instruments. While some funds invest as much as 65% in equities and the rest in debt (Morningstar classifies these funds as moderate equity allocation), others invest between zero to 40% in equities and the rest in debt. Among the ones that invest a substantial portion in equities, we like fund houses that come with good pedigree and good management in equities. While the debt portion of these funds carries very low average maturity since they primarily provide cushion, the equity portion is used to provide a returns kicker.

Among the funds that invest zero to 25% in equities—also referred to as monthly income plans (MIP)—we like HDFC MIP and Reliance MIP. While the debt component of these plans aims to give steady returns, the equity portion gives the returns kicker.

Birla Sun Life MIP Savings5 is also a fund you can look at.

The fund lost heavily in 2009 when the government securities market had a sharp fall in February. But we think the fund is back on track. Against a 1.57% return it clocked in calendar 2009, it clocked a oneyear return of 10.13% between March and December.

With an exit load of 1% before a year, the fund now aims to avoid large and corporate investors.

Debt Stick to short-term bond funds as interest rates are expected to inch upwards this year. Even among this lot, it’s

ven 50 schemes is too many for a retail portfolio of funds.

Treat Mint 50 as a universe of funds from which you will pick the ones that suit your particular investment needs and risk appe­ tite. Greater ability to take risk would mean greater allocation to equity, while the risk­averse should go more towards debt­ori­ ented funds.

Ideally you need 6­10 funds to build a well­diversified portfolio.

The 50 funds selected here offer a variety of management styles and risk levels so that you get to pick and choose those that suit your style and needs.

First, decide how much you want to put into equity and how much into debt. You can build an all­equity portfolio out of the large­cap, equity­linked saving scheme and mid­cap funds and do your debt investing in govern­ ment­guaranteed products such as Employees’ Provident Fund and Public Provident Fund.

For investors wanting a hybrid product, that has both debt and equity, go for the balanced funds. A moderate allocation fund, with a maximum of 75% equity allocation, is good for those who seek a safe­ ty cushion in their equity funds. A conservative equity alloca­ tion with a max­ imum of 30% in equities is good for conservative investors who also seek some sort of a month­ ly income from investments.

Next, look at “core” funds as those at the heart of a good port­ folio and soak up a large chunk of money. Select out of “satellite” funds to add a returns kicker to the portfolio.

If you are already invested in a scheme and it doesn’t figure in Mint 50, no need to panic. Not all schemes that are outside the Mint 50 are bad. However, our selection is based on the schemes that are better than what exists in the mar­ ket. So don’t exit at once, but look at returns and ratings for the funds you own in the context of Mint 50. Some poor performers may be better sold than held.

Mint will update the portfolio on the Web with live feeds of net asset value (NAV), returns and rat­ ing at www.livemint.com/mint50.

The portfolio will be audited once a quarter for rogue funds and man­ agers. And we churn the portfolio once a year.

Look out for Web chats with fund managers each week on Livemint.com and a scheme update every Thursday in this space. best to look at funds whose average maturity is on the lower side. Kotak Short Term Debt Fund prefers to invest 60-65% in instruments that earn the fund a steady interest and the rest in scrips above six months’ maturity where fund manager Laxmi Iyer expects to earn a returns kicker. Iyer takes focused bets on non-banking finance companies where she feels the risks are lower but with a potential to earn a slightly higher yield. Of late, the fund has become conservative and has aggressively brought down its average maturity. A lower expense (0.62% against the category average of 0.83%) also bodes well for you as expenses eat into your fund’s returns.

Disclaimer: The articles and data in Money Matters aim to help readers with their money­related decisions. Each person will have a unique solution that would fit his personal situation, and we advise you to work with a certified financial planner before you buy a financial product.

16 MONEY MATTERS

mint

THURSDAY, JANUARY 28, 2010, DELHI ° WWW.LIVEMINT.COM

MUTUAL FUND SCHEMES TO INVEST IN

Here's a list of mutual fund schemes that made it to Mint 50. The net asset value (NAV) figure tells you the price per unit of each fund. The returns are across four time periods and equity investors would do well to look at five- and 10-year performances and then look at at the one-year return to see if the fund is still ahead. Morningstar rating gives an indication of the risk-adjusted return. The expense ratio tells you how much of your money you lose to charges each year. And finally, our take on each fund as the last column in this table.

Scheme

LARGE-CAP

NAV

1-year return

3-year return

Rs

5-year return

10-year return

Morningstar rating

%

Expense ratio

Our view

%

CORE Birla Sun Life Frontline Equity A Gr DSP BlackRock Top 100 Equity Gr Fidelity Equity Gr Franklin India Index NSE Nifty Gr Franklin India Prima Plus Gr HDFC Equity Gr HDFC Top 200 Gr Kotak Sensex ETF4 Nifty BeES ETF4 Reliance Regular Savings - Equity Gr UTI Opportunities Gr

78.54 88.63 29.49 39.53 194.01 226.19 175.48 170.06 504.93 28.13

101.02 80.64 95.69

14.69 14.77

28.20 28.64

10.71

NA2

NA1

Done well in falling as well as rising markets. Takes selective exposures to mid-cap scrips.

NA1

2.32 2.06

NA2

1.89

Tends to diversify across many holdings in true Fidelity style. Gives consistent performance across market cycles.

1

The year gone by was tough due to wrong cash calls and its large-cap mandate. Recovered in second half of 2009.

85.02 88.21

6.60 10.48

21.32 27.16

NA 20.19

1.00 1.99

An index fund that invests in Nifty scrips in exactly the same proportion as they are in the index.

125.60 107.67

14.20 15.66

30.27 29.82

24.51 23.19

1.86 1.89

Did well in the falling markets of 2008 and 2009 market run-up. Sound fund management and low downside risk.

92.36

NA6

NA6

NA6

0.50

The lowest tracking error exchange-traded fund based on the Sensex.

7.88 19.84

22.29 NA2

NA1

0.50 2.19

India first exchange-traded fund and one with the least tracking error. This one is on the Nifty.

NA2 NA2

2.32

Follows a top-down strategy and focuses on 4-5 sectors at a time. Showed good fund management in 2009.

86.35 128.76

NA7

A consistent, long-time performer that invests significantly in large-cap scrips.

Conservative fund that follows its benchmark closely but doesn't hug it. A good long-term equity fund investment.

An opportunistic fund that invests in scrips across market capitalization. Focus mainly on large-cap scrips.

23.48

99.83

17.48

NA2

43.97

90.19 71.29

8.80 10.94

27.46

NA1

1.90

Consistent performance, but focuses on the infrastructure sector. Theme focus makes it risky.

23.81

NA1

2.44

Diversifies in stocks across market capitalization. The fund has stablized in recent years.

30.37 NA2

NA1

2.30 1.86

Its hoarding of defensive sectors failed in 2007, but helped in 2008. A fund that can attain highest cash level.

NA2

NA2

NA2

2.49

India's first no-load fund. Follows a value styled approach. Meant for conservative investors.

25.95 27.04

1

NA NA1

2.11 2.50

Prefers to concentrate around 20-30 scrips and has done well across market cycles.

25.97 25.52

20.96 22.57

2.50 2.33

Takes selective exposure to mid-caps like it did in 2009. A consistent performer.

Was a bit late in deploying cash in 2009 but recovered. Picks companies with sustainable cash flows.

SATELLITE DSP BlackRock India Tiger Gr DWS Alpha Equity Gr ICICI Pru Dynamic Gr ICICI Pru Infrastructure Gr Quantum L/T Equity Gr

71.17 91.88 28.44 18.39

Sundaram BP Sel Focus Gr Tata Infrastructure Gr

83.67 32.60

Tata Pure Equity Gr Templeton India Growth Gr

89.39 107.42

UTI Dividend Yield Gr BSE 200 India Peer group average

27.14

94.81 79.77 109.93

10.52 14.01 13.22

Its slightly tactical defition of “infrastructure” apart, this is a good pedigreed fund.

79.31

10.15

92.54 92.61

9.66 12.16

122.92 88.08 103.13 88.96

15.98 18.14 7.77 7.84

NA2

NA2

2.09

21.16 22.99

12.92 16.22

2.03

142.73 140.57 178.75

15.89 11.64 16.43

28.76 NA2 23.32

NA1 NA2 NA1

2.32 2.09 1.00

Consistent track record, well diversified. Sticks to its mid-cap mandate. Avoids concentration.

1

A large-cap oriented fund that focuses on the infrastructure stocks. Theme focus makes it risky.

Follows a value-oriented approach of investing and done well in falling markets.

SMALL/MID-CAP CORE Birla Sun Life Mid Cap A Gr DSP BlackRock Small Midcap Gr3 Junior Nifty BeES ETF4 Tata Equity P/E Gr

104.47 15.03 103.35

One of the stars of 2009, diversifies across multiple holdings to reduce risk.

India's only mid-cap-oriented ETF. Good for conservative investors seeking mid-cap exposure.

43.64

120.26

18.49

27.44

NA

2.50

Since the fund invests in scrips whose P-E multiple is less than that of Sensex, it gets into in mid-cap scrips.

52.12

96.33

15.63

30.61

19.11

2.11

Splits its portfolio between large- and mid-cap scrips. An alternative for actively managed pure mid-cap funds.

121.48 114.85

12.27 6.94

22.25 22.53

15.56

na 2.32

18.01 196.35 41.79

96.64 115.14 83.75

11.81 9.33 12.75

NA2 26.96 27.29

NA2 21.91 20.99

2.11 2.06 2.25

Doesn't take aggressive cash calls. Prefers investment across 50-70 scrips. Follows a bottom-up strategy.

15.08

95.08 103.13 94.04

13.19 7.77 6.77

NA2 21.16 21.63

NA2 12.92 16.48

NA7

2.50 na 2.31

Done well in rising and falling markets. Fund manager has a good track record.

76.94

102.86

27.75

45.13

NA1

na

1.78

A sectoral fund that focusses on one of India's most promising sector. This is a high-risk, high-return fund.

267.63 58.88 174.16 74.25

76.21 69.07 100.37 85.28

14.26 14.34 14.20 13.29

22.37 22.69 25.92 22.78

15.84 15.86 22.41 16.60

2.47 2.08 1.91 2.50

Aggressively managed. Average maturity of debt can go up to 1.5-2 years.

43.43

59.31 62.77

8.83 8.29

19.25 17.37

14.89 13.38

2.35 1.74

Can consider an exposure only after allocating to the “core” funds. Good fund management.

33.85 26.91 26.21 20.75 16.06 20.00 18.44

19.22 19.76 20.67 34.04 19.47 26.52 18.09

10.22 11.03 8.09 11.80 7.43 12.74 10.00

10.37 14.47 9.29 13.63 8.12 13.93 9.66

10.73 11.22 NA1 NA1 NA1 NA1 NA1

2.20 1.68 2.04 1.82 2.24 0.80 1.40

Good track record and can invest up to 15% in equities.

16.38

8.41 16.34

12.34 7.06

9.76 8.45

NA2 8.82

0.24 1.75

Suffered in early 2009 on acccount of a exposure to government securities. Changed focus to suit retail investors.

3-month return

6-month return

1-year return

2-year return

SATELLITE DSP BlackRock Equity Div5 CNX Midcap Peer group average

ELSS (TAX SAVINGS) CORE Fidelity Tax Advantage Gr HDFC TaxSaver Gr Sundaram BP Taxsaver Gr

Apart from an occasional glitch and a dissappointing 2007, the fund has a good, long-term track record.

Metamorphosed into a large-cap-oriented fund, from being mid-cap earlier. Done well in the falling markets.

SATELLITE Religare Tax Plan Gr BSE 200 India Peer group average

POWER Reliance Diversified Power Sector Gr

MODERATE ALLOCATION, up to 75% in equity CORE Birla Sun Life 95 Gr DSP BlackRock Balanced Gr HDFC Prudence Gr Tata Balanced Gr

Performance, pedigree and persistence are the scheme's hallmarks.

Well-diversified, good pedigree and fund manager stability. Can outperform diversified equity funds.

Well-diversified and consistent track record.

SATELLITE FT India Balanced Gr Peer group average

CONSERVATIVE ALLOCATION, up to 30% in equity CORE Birla Sun Life Monthly Income Gr Canara Robeco MIP Gr FT India MIP A Gr HDFC MIP L/T Gr HDFC MIP S/T Gr Reliance MIP Gr UTI MIP Gr

Can invest up to 20-25% of its corpus in equities and has a well-diversified equity portfolio.

Follows a high-risk, high-return strategy in asset allocation although its equity component is well diversified.

Good pedigreed fund that has delivered consistent returns over a long term. Invests up to 25% in equities.

Good pedigreed fund with performance. Prefers to limit its equity investments to 15% of its portfolio.

Low expense ratio. Takes measured exposure to government securities. Prefers restricted exposure.

A well-diversified portfolio with good quality debt scrips

SATELLITE Birla Sun Life MIP Savings 5 Gr Peer group average Scheme

SHORT-TERM BOND Birla Sun Life S/T Gr DWS Short Maturity Gr HDFC High Interest Gr Kotak Bond S/T Gr Reliance S/T Gr Templeton India S/T Income Gr Peer group average

NAV Rs

16.49 16.43 18.20 17.57 17.26 1,825.97

%

0.94 1.56 2.28 1.65 1.73 2.41 1.24

2.05 2.53 3.42 2.55 2.75 4.22 2.12

Morningstar rating

Expense ratio

Our view

%

4.92 8.82 9.39 8.44 8.67 11.46 5.83

6.69 10.07 10.75 9.59 10.30 10.38 7.66

0.73 0.92 1.87 1.27 0.63 0.93 1.04

Managed in a very conservative way by limiting the portfolio's average maturity to up to 6 months.

Fund has delivered steady returns, good quality portfolio and an exit load to deter very short horizon investors.

One of the two short-term funds from HDFC mutual fund, this is an an agressively managed short-term fund.

Invests in government securities also, but takes active calls on interest rates.

One of the lowest expense ratios in the category and a good long-term track record.

One of the largest short-term funds and consistently limits its average maturity.

The above schemes are a part of MINT 50; a concise list of 50 mutual fund scheme recommendations, that merit your attention, out of some thousand-plus schemes floating in the industry. MINT 50 is a guide for fresh investments only; for existing investments, keep reading our regular MF pages Funds are rated on a three-year basis ; NAV and returns are as on 22 January ; Morningstar rating is as on December 2009-end; returns over a year are annualized; less than a year are absolute; NA1: the fund has not yet completed 10 years; NA2: The fund has not yet completed 5 years; 3: DSP BlackRock Equity Fund is classified by Morningstar as a large-cap fund, but since the fund invests a significant portion of its assets in mid-cap scrips, we felt it best to classify it as a mid-cap fund; 4 : an exchange-traded fund, you need a demat account to buy it as they are available only on the stock exchanges; 5: the fund's dividend option is accounted for in the ratings as the growth plan is less than 3 years; NA6: the fund is less than 3 years old; NA7: Morningstar has not yet rated this fund as it did not complete three years as on cut-off date; na: not applicable; core portfolio: a sigifnicant chunk of your portfolio where you should have solid long term performers; sattellite portfolio: one that is used to get a returns kicker or funds that have a seasonal flavour such as thematic or sectoral funds; moderate allocation funds invest up to 75% in equities; conservative allocation funds invest not more than 30% in equities; P-E: price-earnings; funds are listed alphabetically

Source (NAV and returns): Morningstar India

Graphics by Yogesh Kumar/Mint