Investors need to get savvy

S. Vaidya Nathan

AT A time when almost all equity-oriented mutual fund schemes have similar portfolios, investors need to look particularly carefully at the kind of fund they invest in and the specific schemes they choose.

Here is checklist of what to look for, whether you are already invested or planning to invest:

*The convergence in stock and sectoral preferences is a outcome of the meltdown in the IT sector in the last year and does not provide conclusive or consistent indications on a scheme's investment strategy.

*Investors have to pick and choose carefully as a choice based just on the present portfolio mix can land them in trouble.

*If as an investor you prefer a diversified stock and sectoral profile, look at funds that have consistently adopted such an approach and done well. Only a few schemes, such as Kothari Pioneer Bluechip, Zurich India Equity Fund, Sundaram Growth Fund (though given to some hectic portfolio changes and momentum investing from time to time), consistently followed such an approach and did well.

Templeton India Equity Fund also consistently followed a diversified portfolio approach but its ability to do well across all market cycles is now open to question. If you are inclined to take a higher level of risk, Alliance Equity Fund comes into play as it has had a consistently higher weightage to the tech sector than the rest. These schemes have stuck to one strategy over a period three to five years, which is important.

*In other words, do not go for those forced into diversification by the events of the last 15 months. Their ability to manage a diversified portfolio over a period is unknown. It is better to wait and see how they handle such a portfolio and whether they stay the course over a long time in terms of strategy.

Fund managers of most such schemes have shown a propensity to move from a diversified to a concentrated strategy and, within sectors, from frontline stocks to second/third-rung stocks and vice-versa. These factors enhance the risk profile. Barring a few schemes, the rest do not have the returns to show in absolute terms as well as in relation to the risks taken.

*As far as sectoral funds are concerned, stay clear of the fast moving consumer goods (FMCG) funds. There is a problem here as the performance of some companies tends to run counter to the others. Instances over the last two years are companies with an urban tilt, such as Cadbury, Nestle and Britannia, vis-a-vis companies with a more diversified presence, such as Hindustan Lever and Colgate.

Much the same is true of the pharmaceutical sector as well. Business Line had earlier advocated an allocation to these sectoral funds in a select way, and it would have paid off then, but the present circumstances do not suggest positive benefits from such an approach.

*As far as the IT sector is concerned, it is better to go the sectoral funds way and, judged on performance over time, the three schemes that seem good options are Kothari Pioneer Infotech Fund, Alliance Capital Tax Relief and Alliance New Millennium Fund (though first-time investors in the last-mentioned fund suffered a steep loss on account of launch when the market was at a peak).

*Overall, a combination of good diversified schemes, an index fund such as Franklin India Index Tax Saver (which also offers a tax rebate under Section 88) and IT sectoral funds may be way for investors to go. The allocation across these categories depends on investors' risk preferences. At least a 20-25 per cent weightage to the tech sector may be needed.

*Last, but not the least, it is important to seek out funds that do not indulge in gimmicks such as dividend payouts as a route to an investors's purse strings. Only a few funds, such as Zurich India Mutual Fund, Alliance Mutual Fund and Sundaram Mutual Fund fall in this category.