Equity Funds on a High

The BSE Sensex crossed the 18,000 mark yesterday and since then there's excitement all around. Right from Dalal Street to each household invested in stocks, this milestone and infact every 1k being achieved is an occasion for celebration like Yuvi's six sixes. It took Sensex just 14 trading session to travel from 16k to 18k and the rally has been smooth with very few volatile days. Considering the percentage gains, the BSE Sensex gained 4.5 per cent yesterday. This is far below the highest single day gain of 13.14 per cent on March 24 1992, caused by the Harshad Mehta euphoria.

But now as we move ahead, it would be the percentage gains that matter, as a 1k leap is hardly a change for markets at 18000. The Sensex just needs another 4.05% of gains to touch the 19k mark and who knows the level would have already been breached by the time you would be reading this.

A close look at the mutual fund NAVs reveals that 127 of the 238 equity diversified mutual funds (including open ended, closed ended and ELSS) achieved their all-time high NAVs yesterday. But what about the all time highs of other BSE Sectoral indices? Many indices are still recovering and are away from their all time highs. Far away is the BSE IT index which stands at 4890.18, still 43.2% lower than its all time high of 8613.53 achieved in the year 2000. Other indices like FMCG, Auto and Health Care are still 6-9% away from their all-time highs. Most technology oriented mutual funds like Tata Life Sciences and Tech is still 3.92 per cent lower than its all time high NAV. The other sectoral mutual funds like banking & auto are still lagging behind.

Even now the Sensex is on its way up. With the top 5-6 stocks contributing to the rally of the last 1,000 points there is room for gain for funds even if the market consolidates.

(Source: Value Research)

Sustainable Growth

Krishna Sanghvi has been managing three schemes at Kotak since January this year: Kotak 30 (equity), Kotak Balance (balanced) and Kotak Income Plus (hybrid MIP). In his stint with different group companies - Kotak Mahindra Primus, Kotak Mahindra Finance and Kotak Mahindra Old Mutual Life Insurance - he has gained experience in credit appraisal and risk. He also had a two-year stint with IDBI. Sanghvi is a commerce graduate, cost and work accountant and holds an MMS (Finance) from NMIMS, Mumbai and CFA from ICFAI.

Do you see a market crash in the near future?
Considering the Indian economic growth at a CAGR of over 8 per cent during the past five years and the likely sustainability of this growth rate over the visible future, we expect India to remain an attractive investment destination for global capital seeking equity assets. We also believe that domestic investors will continue to participate in equity markets either directly or through mutual funds and insurance companies.

Given the expectations of strong economic growth along with a better visibility that will attract investors, we do not expect any major crash in the equity markets. The crash, if any, may be on account of any event (domestic political or international economic). While the recent run up in stock prices has been quite rapid in terms of the time period, we should be ready for a correction that may be more in nature of a consolidation rather than correction.

What is the strategic and tactical orientation of your fund?
The fund continues to focus on its strategy of having a large-cap orientation with a relatively less exposure to the mid-cap segment (usually not exceeding 20 per cent). We believe that this strategy has worked for the fund over a longer period and we expect to maintain this approach.

Which are your top sector preferences?
Infrastructure (Capital Goods, Engineering, Infrastructure Developers)

(Source: Value Research)

Fund Ratings & Rankings

I have been investing in Mutual Funds for the past 2 years using the Value Research 5 star and 4 star ratings as a basis. I have noticed that a 5 star rated fund like HDFC Equity is ranked in the bottom half: HDFC Equity ranks 103/162 in the 1 year rank category. I am confused in relation to the ranks (1 year, 2 years, etc) and the ratings (4 star, 5 star, etc).

I also request your guidance on the following:
• Do you consider the fund's performance over the past 1-2 years when you rate the fund as a 4 or 5 star fund?

• Do you think there is a high probability of getting 15% returns if I continue to invest in 5 star and 4 star rated funds?

• Should I track a 5 star or 4 star fund for a particular period of time before investing in it?

• Please give your views on ICICI Prudential Tax Plan. This fund has not been performing well compared to other tax planning funds. Should I switch over to Magnum Tax Gain?

- Prabhuram

Fund ratings and Star Ratings are two different concepts. Both of these are computed differently and cannot be related.

Fund Ranking is a technical concept that changes on a daily basis according to the change in NAV of the fund. The trailing returns that you see on the Snapshot page of a fund are the returns generated by the fund in the last one year and not exactly in a particular calendar year. For the returns generated by a fund in the past years, on a year to year basis, one can refer to the Annual Returns section under the Performance tab.

Fund Ratings at Value Research are a composite measure of both risk and returns. Before arriving at the rating, we take into account essential factors like the past 3-5 years of a fund performance versus the peers and the category averages. We also compare the return with a risk free return. These ratings are generated through a complex assessment system which considers various factors and not just the past one year performance.

For years now, these ratings are trusted by investors and have helped them take informed investment decisions.

To know in detail how these ratings are calculated - Click Here

Talking about future returns is always a tough job, as it's almost impossible to do so. But if you remain invested in well performing equity diversified mutual funds with a long term view, you can expect an annual return in the range of 15-20 per cent.

The ICICI Prudential Tax Plan is a relatively new ELSS Fund and has been a poor performer of late. There are some better Tax Saving funds like SBI Magnum Tax Gain and HDFC Tax Saver where you can consider investing.

(Source: Value Research)

Retirement Planning

What funds must I invest in for retirement planning? What funds are ideal for my children's education planning?

Mutual funds are ideal investment options for retirement and child planning. However they must form only a part of such portfolios. Here's why. Capital protection is one of the foremost requirements of a retirement or education fund. And there is not a single mutual fund that carries a capital guarantee on your principal amount. For this reason you cannot afford to ignore instruments such as the Public Provident Fund (PPF), National Savings Certificate (NSC) and the like. These instruments offer a decent risk-free return on investment. However, these may not suffice for your post retirement or child planning needs. For this reason you could look at equity-oriented mutual funds to boost returns. But when considering equity instruments, take cognizance of one's time horizon of investment. The longer you can stay invested, the more equity allocation you can afford. Hence, if you are 27 years old and plan to retire at 60, you can invest the bulk of your portfolio in equity oriented schemes. This is true for planning children's education as well. If your child is 16 years old and you need the money in two years, you should completely avoid equity funds.

As you near your goal, you ought to start redeeming your equity investments and re-invest these in safer debt-oriented instruments. Hence when you are about 56-58 years old, you can institute a systematic withdrawal plan and re-invest the money in safer instruments. The category of balanced funds is especially useful for such life stage planning. These funds invest at least 65 per cent of the corpus in equity and the rest is in debt instruments. Hence when the equity segment of the fund does exceedingly well, the fund rebalances the portfolio, booking profits in equity and transferring to debt. Thereby your risk exposure is kept in check.

(Source: Value Research)

Reliance's Rating Goes Down

In the latest issue of Mutual Fund Insight dated 15 Oct - 14 Nov, 2007, wherein the Top 25 Funds are listed, the Reliance Vision Fund is shown as part of the list on page 4 and page 26. However, on page 14 and page 106, where the top rated funds are listed, Reliance Vision Fund is shown having a 4 star rating with a down arrow, whereas the Reliance Growth Fund has been given a 5 star.
Can you let us know the reason for this apparent discrepancy?
-Suresh V Rao

The list of the 25 first class funds picked by us is based on in-depth analysis and research carried out by our team at Value Research. The list was not based solely on the fund ratings assigned to each fund, but also on the various other fund attributes.

Regarding the fund rating given to the Reliance Vision Fund, the Value Research Fund Ratings are updated on a monthly basis. Reliance Vision, which was previously a 5 star rated fund for almost 5 years, was assigned a 4 star rating on 30th September 2007. Due to this, you can see the down arrow next to the fund name in the magazine, which signifies that the star rating of the fund has fallen as compared to the previous month.

(Source: Value Research)