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Reliance Equity Opportunities & Franklin India Flexi Cap have different styles, so which to choose

The names of these funds are pretty misleading when one looks at the investing style of the respective fund managers. One would expect an opportunities fund to aggressively build positions in specific stocks and exit once the price reaches the target level. Similarly, one would expect a flexi cap fund to constantly change its colours as it bets on large cap stocks when it sees a rally there and shifts to mid and small cap ones when it spots potential here. But both these funds do not really cater to such styles. In fact, Reliance Equity Opportunities has displayed a tendency to shift between market caps while Franklin India Flexi Cap did show a bit of aggression in its churning. But that was in its initial days.

For some strange reason, Flexi Cap seems to be very cautious in exercising its mandate of moving between various caps. One would have thought that the fund manager would rapidly move in and out of stocks of various market capitalizations since he is not restricted to any single one. Not so. Franklin India Flexi Cap has always been predominantly large-cap oriented and failed to take advantage of the mid-cap rally last year. This could probably explain why its performance was not too impressive in 2007. But this reasoning certainly cannot justify the performance of Equity Opportunities. Equity Opportunities displayed ample flexibility when mid-caps rallied last year by hopping on to that wagon. Ironically, the move did not pay off well for Equity Opportunities. It delivered less than Flexi Cap.

The sharpness of performance depends on a number of factors; the most significant being whether the fund manager is able to derive the maximum advantage from the ongoing rallies — be in stocks of various market capitalizations or sectors. Which brings us to whether or not they played the sector card well.

Equity Opportunities remained bold in its technology allocation and took a contrarian stand. By the end of the last calendar year, it had a technology allocation that was higher than Flexi Cap and the category average. Equity Opportunities maintained a signification allocation to basic/engineering while Flexi Cap bet on financial services. Yet none of them had a significant allocation to energy, metals and realty which ended the year on a good note.

The similarities between these two funds are amazing. Both have seen their assets dip significantly from February to March. Where performance is concerned, both outperformed the category average in 2006 and failed to do so in 2007. Concerning the portfolio allocation, both shirk away from debt, maintain high levels of equity and, if the need be, hold significant portions in cash. They do not churn their portfolios rapidly and maintain very well diversified offerings.

Though at this point, it may well be mentioned that Flexi Cap does have a more bloated portfolio. Its top five holdings since January 2006 have averaged at almost 27 per cent. While the same figure stands at 21.78 per cent for Equity Opportunities. And the number of stocks Flexi Cap holds has averaged at 48, while the same stands at 37 for Equity Opportunities.

Equity Opportunities did really well in 2006 and in our earlier analysis we had said that if its performance in the initial years is anything to go by, it would probably emerge as a suitable core holding. But its performance last year was not impressive. The same can be said for Flexi Cap. Even their current performance is nothing to write home about.

A cause for concern, where Equity Opportunities is concerned, is the initial issue expenses. SEBI regulations permitted new fund offerings to charge an amount not exceeding 6 per cent of the initial issue expenses to investors. This amount could be amortised over a period of 10 years. Whi