Equity Diversified Funds: Positive Signals

Updated: Jul 28 2002, 05:30am hrs
By the end of 2001, we almost gave up equities on its ending free fall for almost two years. The weather has changed a bit since then, and it looks positive if not very bright for equities. The reason — big drop in fixed income yield, symptoms of economic recovery and reasonable stock valuations. But these factors combined still do not make a compelling case for equities. Understandably, the market hasn’t gone anywhere in 2002 based on its key barometer — Sensex.

Notwithstanding the day-to-day noise around stock market, equity remains the best choice for your long-term investments. And all the above reasons have added to their attractiveness now. But some caution would surely serve you well. By its design, definition and style equity is a volatile asset class.

But a longer investment horizon reduces your risk substantially. For instance, the 22-year history of the Sensex shows that the annual returns on the benchmark index for a one-year holding period has moved in a wild range between -52% and +265%. But a five-year holding period, the average annual return range is far superior — -5% and +55%. But it remains a very risky asset for a short-term investor.

Diversified equity funds, due to their inherent diversification tend to reduce your risk of losing money sharply. Simply put, these funds build a portfolio of stocks, chosen from various sectors and reduce the risk associated with a particular industry. A sector fund targeting a specific industry is susceptible to wider price-swings than its conservative counterpart equity diversified funds. The trade-off for the balancing of risk and return in a diversified portfolio is that your overall return might be lesser than what you could get in a concentrated portfolio.

In the long run though a diversified portfolio helps you post steady returns and comprehensively beat the returns raked in by all other asset classes such as bonds, gold, etc. Spread across diverse sectors, these funds build a portfolio of stocks that help reduce risks associated with a particular industry.

Though that diversification doesn’t guarantee positive returns every year, it only reduces the risk on your investments. The rules of sound investing are diversification, balance, and a long-term orientation. Diversified equity funds will serve your interests only if your investment span is at least five years and more. So, first consider your objective and the time frame. Then evaluate the fund’s return consistency and investment strategy. A look at the sector allocation will tell you about the fund’s strategy.

After that, decide which of the 55 funds (in the category) will you put your money in. Pick up a truly diversified, yet actively managed equity fund. An actively managed fund will also ride the opportunities thrown up by a particular sector while being prudent with its exposure limits. And if the fund changes its investment strategy during your stay, do reconsider if the realigned strategy doesn’t agree with your comfort level. But most importantly, invest regularly. My take from diversified equity funds includes Pioneer ITI Prima and Sundaram Growth and HDFC Growth for being truly diversified. My choice among the diversified yet aggressive funds includes Alliance Equity, Birla Advantage and K 30.

Value Research