Large cap fund yet to prove prowess in market downturn

A large cap fund is considered an ideal investment option for risk-averse investors. While these funds do not promise overwhelming returns like their midcap or multicap peers in rallies, they are known to offer better protection in downturns. However, this does not make a thumb-rule for the entire range of large-cap funds including Principal Large Cap Fund.

PERFORMANCE:

Launched in October 2005 in the middle of the bull run, Principal Large Cap managed to do well delivering decent returns in the first two years. For a new fund, it was a rather comfortable journey – beating the market and its benchmark BSE 100 by healthy margins both in 2006 as well as in 2007. Its returns of about 48% in 2006 and 73% in 2007 compared well against BSE 100’s 41% and 60%, respectively, given its large-cap investment mandate. Year 2007, which was an year of midcap stocks, saw the Sensex and Nifty deliver just about 47% and 55%, respectively.

The feat of the first two years of the launch could not, however, be repeated in 2008 and the fund slumped by about 59% against BSE 100’s fall of 55%. The sensex and the Nifty had lost about 52% each in that year. While this came as a surprise given the fund’s large cap mandate, the downfall could be given the benefit of doubt in light of the fund’s high beta of 1.05. Beta compares the risk imbedded in the fund’s portfolio vis-à-vis that of the market as a whole. Thus, a beta greater than 1 indicates the fund is expected to generate returns higher than that of the market and vice-versa.

However, what has indeed been fascinating about this fund is the kind of turnaround that the fund has made in calendar year 2009. Since January, the fund has delivered a whooping 102% returns against BSE 100’s 82%, smartly compensating the downfall it witnessed last year.

PORTFOLIO:

Adhering to its investment mandate, Principal Large Cap has built up its portfolio with some of the best large-cap stocks available in the market. But the same is not without a tint of midcap stocks. The fund has shown a tendency to invest on an average, about 10-12 % of its portfolio in midcap stocks with the average number of stock holdings restricted to about 40 giving the fund a reasonable diversification.

An analysis of the fund’s portfolio shows that the fund has indeed been prompt enough to pick some of the multi-baggers that are reaping yields in the current market. Its picks like Shree Cement in Sep ’08, at one third of the current market price, and Lupin in Aug ’08 – both of these it continue to hold – have seen a good runup . Again Bajaj Auto, which it had picked way back in Oct ’07 has also rewarded it handsomely. The fund has, however, now replaced this stock with Hero Honda. It was also quick to offload Mundra Port within a month of its IPO and before the markets snapped the bull run in early 2008.

However, some of the moves did not work for the fund — such as its investments in ICICI Bank and ABB at their peaks in Jan ’08, the levels they are still to breach. What may have also hit the fund was its early exit from stocks like Axis bank in Dec ’08. Had the fund continued to hold this multibagger stock today, it may have added on extensively to its returns.

VIEW: This four-year old fund has reasonably proved its ability to beat the market in an upturn. However, it is yet to prove the same in the reverse scenario. While its performance in the current calendar year has been highly impressive, it is now rather imperative to watch whether it can continue to maintain this trend in the coming months as well. But given its track record, it can be conveniently deciphered that Principal Large Cap is one of the better performing schemes from the Principal basket.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Large-cap-fund-yet-to-prove-prowess-in-market-downturn/articleshow/5162018.cms

Pick a fund, not a portfolio

It goes without saying that choosing a mutual fund is the most critical aspect of fund investing. How well your investments perform is directly dependant on how you pick them. It is safe to say that picking the right fund is almost as good as ensuring good returns on your investments. But, despite the fact that choosing funds is such an important factor, most people often seem to falter at this very step.

There are a lot of different approaches used to choose a mutual fund. When it comes to equity funds, the approach that is most ineffective is the one based on the fund’s portfolio. Under this approach, an investor – and quite often even an analyst or expert – looks at the fund’s recent portfolio statement and decides for or against the fund on the basis of the stocks it holds. I can’t stress enough on why this method is a futile way of choosing a fund to invest in.

Firstly, this approach is wrong because it takes away the basic advantage of investing in a fund. You invest in a fund because you don’t have either the time or the knowledge, or sometimes both, required to dabble in stocks. So you let the fund manager do it for you. But when you start decoding a fund’s portfolio, you are doing nothing but dabbling in stocks and worse, also assuming that you are a better judge of stocks than the fund manager. In general, stock investors who feel the need to venture into funds as well use this approach. Apart from them, this method is used by broking firms who have started selling funds. In such firms, the stock analyst analyses the funds as well. And hence, he looks at the fund’s portfolio. If he doesn’t like the stocks in it, he renders the fund unfit for investment.

This approach has been appearing in the media a lot too. Recently, a financial publication published a misdirected article that picked individual stocks in isolation from funds, followed the fund managers’ actions on those stocks through a couple of years and then declared those actions to be illogical. What amazed, and amused, me was that they didn’t realise that the funds that they had picked out were funds that had mostly outperformed their benchmarks and peers over the last few years.

This is just another example which shows why a fund shouldn’t be analysed on the basis of its portfolio. A fund buys or sells a stock for myriad reasons, many times for reasons that have nothing to do with the stock’s performance. At times, another stock from the industry could be more attractive. At times, there could be an internal limit on an industry, or to the company. And likewise.

Hence, a fund shouldn’t be analysed on the basis of its portfolio. For most funds, a look at its past returns-based performance is more than enough. A comparison of a fund’s returns, vis-à-vis its benchmark’s or peers’ returns, will give you a fair idea of whether the fund is worth investing in or not. The fund’s portfolio should be looked at after it has answered other basic questions. The portfolio should only be seen to know if the fund is concentrated, is it churned a lot, does it have exposure to emerging sectors, etc. The portfolio should be used to decide between two otherwise similar funds, not as a primary deciding factor....

Source: http://www.financialexpress.com/news/pick-a-fund-not-a-portfolio/533114/0

MF portfolio: Diversify and factor in risk appetite

The equity markets are at their volatile best and it is difficult to predict the direction of the markets amidst the ongoing results season. Robust industrial production numbers backed by strong global cues led to a major upsurge in the markets last week.

While the markets have been on a roll since March this year and are continuing to scale up, investing at the current levels has become risky for investors who did not enter earlier.

For an average investor, who does not have the time or the inclination to track the movements of the markets, investing in stocks directly could be risky. A direct equity portfolio requires constant attention, or else the opportunity to exit from losing investments in time or book profits on those performing well, may be missed.

For such investors, investing in equity markets through the mutual fund route may be a better strategy.

While the burden of managing the stocks is passed on to a fund manager in a mutual fund, the selection of the right funds for the portfolio remains the problem of the investor. Choosing the right funds based on your risk appetite, time horizon for investment and returns expectation is extremely important.

The method of investing in mutual funds also assumes importance depending on the nature of the markets. Investments in mutual funds can be made in lump sum or through the systematic investment route.

In the current market conditions, making lump sum investments may not be a good idea considering the fact that the markets have run up very fast and investors may encounter a correction. Hence, in these times, making investments using the systematic investment plan (SIP) or systematic transfer plan (STP) is advisable.

Here are some pointers for investors in mutual funds to build a robust portfolio:

Portfolio allocation:

As a thumb rule, 100 minus your age is the amount which should be invested in equity. However, risk appetite and resources are important factors to be considered also. Generally, it is seen that risk-taking ability goes down as you become older since capital preservation takes precedence over capital appreciation.

Portfolio size:

While building a mutual fund portfolio, it is important to remember that even five funds can give the desired level of diversification. So, there is no need to hold a large number of funds. In any case, an individual should not hold more than 10 funds, or else it becomes extremely difficult to monitor.

Designing the portfolio:

The base of a mutual fund portfolio should be built with diversified mutual funds. Allocation to the base should be around 50 percent in not more than 3-4 funds. Diversified funds can invest across sectors and hence can move swiftly across different stocks when the tide turns. For those with a medium risk appetite, balanced funds which invest in equity and debt can form the base of the portfolio.
Once the base is built, a high risk investor can add a good large-cap and mid-cap fund to the portfolio. Sector funds and theme funds are highest in risk and best avoided unless you can monitor these funds regularly to identify opportunities for profit-booking. Investors with a low risk appetite can invest in debt funds. In the current interest rate scenario, keep away from income funds and long-term debt funds since interest rates are expected to harden.

Selection of funds:

Risk-adjusted returns, comparison with benchmark, consistency of performance, fund manager's performance, costs and reputation of the fund house are some of the factors to be considered in selection of a fund. The selected fund should be in existence for at least five years to ensure that it has seen different market cycles. Avoid new fund offers since they have no history of performance.

In the current market conditions, investors would do well to stagger their investments or use the systematic investment facility to invest for the long term. You must review your portfolio performance at least twice a year to ensure that the investments are growing as desired and weed out non-performers after monitoring them for at least a year.

Source: http://economictimes.indiatimes.com/articleshow/5158705.cms?flstry=1