Diversified equity funds march ahead

Updated: Oct 30 2005, 05:30am hrs
Equity funds have drawn phenomenal attention in recent times. Existing funds have rewarded investors and there has been a plethora of new funds, which have garnered huge subscriptions. So far this year, 40 new diversified equity funds have been introduced. This means 30%of the existing funds are less than one year old. Together, they command more than one third of the category assets. At least 25 more funds are set to be launched in the next few months. Of the five largest funds, four are less than six months old. Diversified equity funds are the second largest category among all fund categories, with cash funds at the top.

While the debate continues on whether this money is here for the long term or just to take advantage of the recent bull run, one thing is clear that investors seem to recognise equities as the only vehicle suited for the long-term capital appreciation.

Incidentally, the phenomenon of new fund launches coincided with the revival of equity markets since May last year. Since then, it has gathered pace, just as the equity markets did. In March 2005, the mania was at its peak (Sensex too was at a new high) as new equity funds collected a whopping Rs 4,500 crore in the month.

New flavours

While opportunities and mid-cap funds dominated the new fund launches, Indian investors have been introduced to a variety of 'caps'. Today, they have a choice of diversifying between junior, mid-, or large-cap funds. If you are unsure, you have flexi- and multi-cap funds as well. In all, seven mid-cap and five opportunity funds were introduced last year.


The first half of 2004 was disappointing for equity fund investors, given the correction in January 2004 and the panic reaction to communist politicians' utterances immediately after the results of the general elections came out in May 2004. But since then, markets have staged a strong comeback-against an average 13.10% loss in the first half, diversified equity funds gained 45% during the second half of 2004. Let us look at the performance of funds in the last six months.

A dull first quarter

After a ballistic second half of 2004, Indian equity markets paused for a breather in the first quarter of 2005. The Sensex shed 1.66%, while the mid-cap barometer CNX Midcap 200 managed 7.20%. During this period, an average diversified equity fund bettered the Sensex marginally with gains of 0.89%, while nearly half of them posted negative returns. Funds that rallied during this period include Magnum Emerging Businesses (11.73%), Magnum Contra (9.60%), Magnum Global (9.26%) and Taurus Starshare (9.08%). A high allocation to mid and small-cap stocks led to such performance. For instance, Magnum Emerging Businesses and Magnum Global gained due to a portfolio mostly devoid of large-caps. Magnum Contra and Taurus Starshare too had an average 67% and 86% allocation to small and mid-cap stocks. On the contrary, a large-cap dominated portfolio led to losses for funds like UTI PSU (-5.55 per cent), LICMF Equity (-4.75%) and Templeton India Growth Fund (-4.09%).

Second quarter recovery

Equity markets had a poor start to the second quarter. The Sensex skidded from a high of 6,605 points on April 1, 2005, to touch 6,154 points at the end of the month. However, it staged a strong comeback and ended the second quarter with a bang by touching a historic high of 7,194 points on June 30. Equity funds took full advantage of the rally and surged 7.62%. This time, large-caps fared better than mid-caps-the Sensex gained 10.80% as against 7.54% rise in CNX Midcap 200. However, once again mid-cap dominated funds raced ahead. The list of top second quarter gainers include Alliance Buy India (23.88%), Taurus Discovery Stock (19.27%), BoB Growth (17.69%) and Magnum Emerging Businesses (16.82%). All these funds had mid-cap oriented portfolios. In the year to sate ending October 26, 2005, an average diversified equity fund has gained 25.57%.

Final word

Lately, the Indian mutual fund market has been flooded with new offerings. While having an array of options is a good thing, investors might also face a problem of plenty. We advise investors to ignore short-term worries and take an informed decision. While we don't know how far we have succeeded in our mission, we would like to reinforce once again our oft-repeated statement-go for continuous investing. Choose the systematic planning route. There's a great value in a disciplined approach to investing. For example, had you continued investment through the SIP route in the last three, five or seven years, even the worst equity fund could have protected your principal. Diversify your investments over two to three diversified equity funds. And finally, invest for the long term. In this issue, we have short-listed seven diversified equity funds that have excellent five-year trailing returns to demonstrate the benefit of long term investing. Some of these funds will stand investors in good stead going forward too.

The author is with Value Research