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Aarati Krishnan

A SIZABLE allocation to PSU stocks has put UTI's Mastergrowth fund among the top diversified equity funds in the recent times. The fund's NAV has appreciated about 24 per cent since the end of 2002, beating the S&P CNX Nifty's returns of 8 per cent by a wide margin.

Given that the divestment process still has some way to go, leaving some scope for an upward re-rating in a range of PSU stocks, investors in this fund can hold on to their investments for the time being.

Fresh investments timed at this juncture may be risky. Having run up to high levels, some PSU stocks appear to carry downside risks.

The fund may not be suitable for those looking solely at capitalising on the PSU stock rally as it also allocates a significant part of its portfolio to index stocks and mid-cap stocks. This tends to dilute the investment focus.

Suitability: A fund focussed only on PSU stocks may come with the high level of risks usually inherent in sectoral funds. But in the case of the Mastergrowth, this risk is watered down by the presence of non-PSU stocks.

The fund has also tended to invest in some mid/small-cap stocks of a risky genre. But these have usually been restricted to less than 5 per cent of the portfolio. The fund appears to carry risks usually associated with a diversified equity fund.

Investment strategy: The preference for PSU stocks has been a long-standing feature of UTI Mastergrowth. In fact, the top holdings were almost completely made up of PSU stocks in the late 1990s.

With PSU stocks (most of which are cyclicals) faring poorly, the fund turned in an unimpressive performance during the bull run of 1999-2000.

By January 2001, around 22 per cent of the portfolio was parked in PSUs. But the fund stepped up its PSU allocation from the beginning of 2002.

It has, therefore, had the advantage of an early entry into some of the less-favoured PSUs such as Neyveli Lignite, Shipping Corporation and SAIL, and has benefited from the sharp spike in their prices.

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