The Hindu Business Line : Fund Talk

It would be better to select funds for their ability to match rewards to risk consistently, and not on the basis of their aggression or risk profile.

Please recommend a mutual fund scheme with the highest risk and return potential. I intend to invest Rs 10,000 per month and am even ready to see my capital/investment eroded. But the returns, if any, should be sizeable and quick.

N. K. Vohra

The best way to ensure a relatively high return on your equity funds is to time your investments to low market levels. Investments made during a moribund phase in the stock market may deliver strong returns without your having to assume uncomfortably high downside risks.

Unfortunately, assuming a high degree of risk with your investments doesn’t automatically guarantee high returns. Some of the equity funds that generate high returns do assume considerable risk to do so. But to conclude that all funds which take on risks manage an outsized performance is wholly incorrect.

The recent market cycle has thrown up several instances of sector, theme and mid-cap funds which saw their NAVs drop much more than their diversified peers because they were concentrated in sectors or stocks that were worst hit by the market rout. Not all of these have managed to recoup lost ground as well as their peers in the rebound.

For instance, JM HI-FI Fund, which lost 75 per cent between January 2008 and March this year, gained just 35 per cent in the past five months; its NAV remains at Rs 5.25 per unit. Many mid- and small-cap funds have also faced a similar situation where the fall has been sharper than the market; but participation in the rebound has not.

If one harks back to the dotcom crash of 1999-2000, funds which ended up at the bottom of the pile were the ones which took imprudently high exposure to momentum stocks in the IT sector. With the next bull market led by an entirely different set of stocks, funds focussed on technology remained poor performers. The above instances suggest that any investor would be better off selecting funds, not on the basis of their aggression or risk profile, but on the basis of their ability to match rewards to risk, consistently over market cycles.

Having said this, you can add an aggressive tilt to your portfolio by buying equity funds which have a bigger exposure to mid-cap stocks or those which focus on a particular theme or sector. However, to protect your profits in these funds, it would be best to track them closely and take profits off the table when they deliver returns that beat your expectations.

Sundaram BNP Select Midcap, Birla Midcap Fund and DBS Chola Opportunities are a few funds which we would recommend for an investor who would like to acquire a high Beta exposure to the stock markets. (A fund with a high Beta will deliver higher-than-index returns in a rising market and may fall more if the market declines).

We recommend these funds because of their superior show over a complete market cycle over the past five years. We would also recommend funds such as the Principal Junior Cap or the Junior Nifty BEES Exchange Traded Fund, as they represent good high Beta exposures to the market which may sharply outperform the Nifty, in a bullish market scenario.

We also think commodities funds such as DSP BlackRock World Energy Fund, DSP BR World Gold Fund and Mirae Asset Global Commodity Stocks Fund may be good options for aggressive investors to ride the commodity cycle.

AARATI KRISHNAN

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