Personal Finance: Reshuffling Your Equity Funds

PERSONAL FINANCE
Reshuffling Your Equity Funds

Check out the risk-return profile of the fund before adding it to your portfolio.

By Roshni Jayakar

Newton-he of the apple fame-said it many years ago: what goes up, must come down. For most part of 1999 and the first quarter of 2000, investors bet on the capability of the fund managers of aggressive (mostly tech-heavy) growth funds to deliver higher returns. The prevalent investing logic then was to choose a fund focused on either the (information) technology, media, and telecom (TMT) sectors or the tech, Fast Moving Consumer Goods (FMCG), and pharma sectors. Since the onset of summer, though, the stock market has lost more than half its value. And the very sectors responsible for the outrageous growth of equity funds are now weighing down their total return.

If you were one of those ungulate-investors who chose to go with aggressive equity funds, your returns for the year (as on October 31, 2000) could well have been negative, thereby making even the anaemic return on bank deposits look attractive. Thus, ING Growth Portfolio, where the top five Sensex stocks account for 73.14 per cent of the portfolio, recorded a return of -29.8 per cent for the six months ended October 31, 2000; and Birla Advantage, where TMT stocks account for 78 per cent of the portfolio, -23 per cent for the same period (See Are You Getting Enough Return With Aggressively Risky Funds?).

Things aren't that bad now, but the Sensex, analysts predict, could remain in the 4,200-4,400 rangefor the next few months. So, what's the optimal investing strategy for someone who has invested in equity funds? Commonly accepted wisdom would seem to suggest that they should jettison non-performing funds from their portfolio in favour of those that have performed reasonably well. In the current context, that could mean moving out of aggressive equity funds to diversified equity funds. A better strategy, however, would be to evaluate the risk-return profile of funds, and cut your cloth to suit your risk-propensity.

The Risk-Return Equation

Investors have to understand that there is a trade-off between risk and return even in mutual funds. The question to ask is: how much risk is being taken by the fund manager to deliver a certain return. Says Vijay Venkatram, Head, Private Banking, HSBC: ''A conservative fund isn't necessarily better than an aggressive fund. An investor has to analyse the risk-return profile of each of the funds (before making an investment decision).'' Based on this profile, HSBC has worked out a three-tier classification of funds: the high-risk, high-return cluster (Alliance Equity and Birla Advantage); the low-risk, acceptable-return cluster (Kothari Pioneer Blue Chip and Zurich India Equity); and the middle-cluster (Prudential ICICI Growth, Kothari Pioneer Prima Plus, and DSP Merrill Lynch Equity).

Funds in the middle-cluster should serve as a vehicle for diversification. Caveat: it may be worth your while to go through the portfolio of these funds before doing so; managers of some of the funds that term themselves diversified take the same amount of risk as their counterparts in the more aggressive funds. BT's recommendation: to actively manage a balance between risk and return, mutual fund investors should look at funds that are extremely aggressive at one end, and those that are very conservative at the other.

Hedging Through Diversification

The ideal long-term investing strategy is to choose a fund with a reasonably diversified portfolio. This will insulate investors from fad-driven market movements. Still, diversification for the sake of diversification may not always work. One, not all diversified funds do well. And two, definitions of diversifications vary (according to Birla Mutual, it is five different business-types within software).

Abhay Aima, the Head of HDFC Bank's advisory services has an interesting take: ''To be successful, a fund needs a talented stock-picker in the fund manager's post.'' If you feel like taking Aima's advice to heart-it may not be a bad idea-look at the managers behind the funds, and find out whether they are merely following a trend, rather than being the first to spot it. And before you make any decision on reshuffling your equity funds portfolio check out the quality of assets and the risk-profile. Last word: if you are an investor in a fund whose manager hasn't managed funds in a bear phase, bail out. Keep these in mind while reshuffling your deck, and the next time round you could well end up with a winning hand.

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