Fine Balance - HDFC Prudence Fund

This fund has one important virtue: it manages to lose less than the category average in periods of downside. Couple this with its tendency to top charts & you get a safe & sure fund in HDFC Prudence

This fund treats its investors well. Be it in protecting the downside or generating great returns, it has delivered magnificently.

During the lean years of 2000-2001, the fund lost less than the average balanced fund. In the recent past as well, the fund has done a commendable job of protecting the downside. During the quarters of June 2006 and March 2007, when the average category loss stood at (-) 7.97 per cent and (-) 3.23 per cent respectively, HDFC Prudence managed to return a loss of (-) 6.58 per cent and (-) 3.18 per cent during the respective quarters.

Furthermore, the fund has been amongst the most efficient in pulling out of each such slump and ensuring that the momentum is not lost.

Being a chart topper was a habit for this fund. Till last year, at least. While that in itself is not a disturbing fact, it tends to nag when compared with this year's performance, which is short of the category average. We can't find a fault with its stock or sector moves. But where we did find significant change was in its diversification. Owing to a rising corpus (increase of 100 per cent since January 2006) combined with a mid-cap orientation, the count of stocks has increased from 30-35 (early 2006), to as many as 50 scrips. This has been accompanied by a steady decline in the concentration of holdings.

While this will help the fund retain its low risk grade, it looks like returns have been compromised. But going by the fund's long term track record, we prefer giving the fund manager the benefit of the doubt. We stick to our verdict that this is among the best choices around.

(by value research)

Taxing Queries Answered

Tax Planning Benefit
For how many years will I get the tax benefit by investing in an equity-linked saving scheme?
The tax benefit under Section 80C (exemption from income tax for investments in ELSS and other instruments) for investments of Rs 1 lakh is applicable for only one financial year. It's applicable only for the year in which the investment is made. So if you invested Rs 20,000 in a tax planning fund in FY 2006-07, you cannot use this to avail a tax breather for FY 2007-08, even if you didn't use the benefit in 2006-07.

Capital Gains on ELSS
What is the tax payable on profits of an ELSS fund after the three-year lock in period?
Zilch! You don't pay any tax on the capital gain at the end of the three-year lock in. However, if these tax provisions change in the future, you may be in for a surprise.

No Limits
Can I invest in tax planning funds even though I have exhausted the Rs 1 lakh limit?
Yes, you can. However, given the three-year lock in, it makes more sense to invest in an open-ended, non-ELSS diversified equity fund. In case of a change in fund management, slackened performance, poor market conditions, emergency requirement of money etc. one has the option of redeeming units. Moreover, when it comes to picking a good performing fund, investors today are spoilt for choice.

So it is better to avoid a restriction of a three-year lock in on your investment.


(by value research)

Markets Fairly Valued

An old war horse, Pankaj Kaji has more than 30 years of experience in foreign exchange and fund management. A post graduate in commerce, he has worked for global financial powerhouses like Deutsche Bank's global market arena and ANZ Grindlays' treasury division. One of the most experienced fund managers, Kaji joined ICICI Prudential's investment team five years ago where he manages the debt funds.

Deven Sangoi has been associated with ICICI Prudential AMC for the past two years. Sangoi had previously worked with Alchemy Stocks and Shares Limited. He has been managing ICICI Pru Balanced since October 2005. He is also managing some other equity funds at the AMC including ICICI Pru Emerging Star and ICICI Pru Growth. Sangoi is an electronics engineer and an MBA.

Do you see a market crash in the near future?
We do not see the market crashing in the near future. The fundamentals in the Indian market look good on the back of strong earnings. The monsoons have also been above average, which further strengthens the situation. Thus the market is fairly valued in the current scenario. However, there might be some correction if the money flows slow down. Investors should look at SIP as a long-term investment tool as it helps ride the volatility by mitigating the risks.

What is the strategic and tactical orientation of your fund?
We focus on bottom-up investment with significant bias towards large-cap companies. We also have a judicious mix of mid-cap companies that have sustainable long-term growth potential.

Which are your top sector preferences?
Financial Services
Capital Goods
Financial Services, because of the growth in the Indian economy and a spectrum of new offerings, resulting in high consumer spending, backed by increasing salary levels. Capital goods because of increase in capital expenditure required for building India, its infrastructure etc.

This interview appeared in the October 2007 issue of Mutual Fund Insight.

(by value research)

Polls Will Trigger Fall

Venugopal has wide experience as an equity analyst. He has the experience of managing several funds at Tata AMC like Tata Midcap, Tata Contra, Tata Equity Opportunities, Tata Balanced, Tata Young Citizens, Tata Pure Equity, Tata Capital Builder and Tata Infrastructure. Venugopal is a mathematics graduate and also holds an MBA degree with specialisation in finance

Do you see a market crash in the near future?
If polls are announced in India there could be a sharp correction. But it is unlikely to be a crash.

What is the strategic and tactical orientation of Tata Balanced?
The Tata Balanced Fund invests 65-75 per cent in equities at all points of time. The rest of the assets are invested in quality fixed income securities or money market instruments. Within equities, the fund follows a strategy of growth at reasonable price. The endeavour is to identify strong growth opportunities ahead of time and patiently let these play out. The strategy adopted in managing this fund is also a mix of top-down and bottom-up, in the sense that, first sectoral opportunities are identified and then stocks are selected from within the sector. The fund also seeks to finely balance exposure to large- and mid-cap stocks and, depending on the market condition, exposure is skewed a little to either of these segments. Over the last few years, the fund has remained patiently invested in some high pedigree stocks, market/technology leaders in there respective segments. The equity portfolio is fairly diversified at all times with 30-40 stocks. Also, there is a fair bit of sectoral diversification.The fund has rarely invested more than 5 per cent in any single stock. As fund manager, my focus and effort has been to maintain consistency of returns at all times while giving the fund as much fire power to deliver higher returns.

Which are your top sector preferences?
Industrial Capital Goods
Ferrous Metals
The fund is also bullish on power, construction and cement.

This interview appeared in the October 2007 issue of Mutual Fund Insight.

(by value research)

Showing Talent - Tata Balanced Fund

A lot of intelligent stock picking and exposure to particular sectors has seen the fund outperform itself quite often. Find out what makes Tata Balanced is a worthwhile representative of its type

This year, this perennial outperformer has found itself near the head of the pack. A combination of low exposure to auto stocks, holdings in financial services and its long-term strategy in the basic-engineering, metals and energy space paid off. In the technology space, losses were minimised by astute stock picking and leveraging on smaller companies.

By and large, the fund plays it safe and does not make any adventurous moves. This was not the case earlier though. Last year, when the market corrected, it got badly hit and lost 25 per cent in a single month (May 12-June 13, 2006). The outcome was a swift move to large caps from a dominant mid-cap portfolio. This was a well timed lesson because large caps began to rally soon after. Over the past one year, it has been doing well and frequently outperforms the average.

Initially, one was advised to go with this fund if they were willing to nap during the bear phases since it performed dismally during market downturns. Not so after its portfolio revamp. This year, we were pleasantly surprised to find that the fund lost a mere (-) 1.55 per cent at the end of March 2007 (category loss: -3.23 per cent).

However, it has been very erratic in rebalancing its portfolio, swaying from a 65 per cent to 74 per cent exposure to equities.

Though one of the smallest of the four funds featured here, its size seems to have worked to its advantage. With its excellent performance this year, we are very bullish about the future of this fund.

(by value research)