VR Logo

Fidelity MF Bins the Cap

The fund is looking to free itself from some rules that were holding it back

The fund has changed its mandate, now we will have to see if it can also manage to change its performance.

Diversification has taken a backseat here. Fidelity Mutual Fund is looking to remove some of the self-imposed shackles that have kept some of its funds from being able to take advantage of some opportunities that came up on the horizon.

The mandates of Fidelity Equity Fund and Fidelity Tax Advantage Fund did not allow an exposure of over 25 % in any single sector earlier. However, the fund house has now announced that it would be removing this provision of the mandate from June 1, 2009. Both these funds are handled by Sandeep Kothari.

The reason why the fund is doing so is less than clear. After all there was no pressing reason to do so, simply because the fund was not facing any ostensible problems. Despite its tight mandate restricting it to an 25 % sectoral exposure, Fidelity Tax Advantage Fund had given a good performance despite the challenging environment that it worked under. The fund’s one-year return as on June, 2009 was 1.55 % compared to the category's negative 4.84 % and the Sensex' negative 3.26 %.

The fund gave a return of 48.18 % compared to category standing of 48.94 % and the Sensex' return of 55.57 % on year-to-date (YTD) basis. The fund’s sectoral exposure stood at 18.31 % for financials, followed by 15.94 % for energy at the end of March 2009, signifying that it would not take an undue risk of overexposing itself to a sector, which, if it went down, would have a negative impact on its finances.

Similarly, Fidelity Equity's mandate was even more stringent. Aside from the 25 % cap in a single sector, the fund could not increase its exposure to a single stock above 4 % -- though this is not mandatory and this showed in the fund taking a bigger-than-allowed bite in some specific stocks. According to its latest fact sheet, the fund has a maximum exposure of 8.77 % in Reliance Industries. Next in line are SBI (4.90%) and ITC (4.68%). As far as sector exposure is concerned the fund had maximum tilt towards the financials at 20.48 %. The next-best sector was energy (15.07%) followed by FMCG (13.01%).

In terms of performance this fund has performed well compared to its peers in a one-year time frame. While Fidelity Equity has given returns of 1.68 % in a year, category average stands in the negative at 4.03 % while that of Sensex is also in the negative at 3.26. But when the time-span is changed to YTD, the comparative position alters, with the fund delivering a 49 % return, the category average was 50.73 % and Sensex at 55.57 %.

With a change in its mandate, the fund manager will get the chance to show his abilities on a level-playing field. This will help the fund to move into sectors that it thinks will deliver better returns on full-thrust to try and lock-in the gains for investors.