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Choose a Good Fund, Not a Popular One

Choose a Good Fund, Not a Popular One, says Dhirendra Kumar in interview with CNBC-TV18

Excerpts from CNBC-TV18's exclusive interview with Dhirendra Kumar:

There has been a dramatic erosion in net asset values. If you were to sum up the last six months, how would you look at the mutual fund industry and what does it look like from here in terms of sector funds and equity diversified funds because looking at these returns and they are in excess of the kind of fall that we have seen on the market?
There are a lot of outliers in the whole thing. The averages do not reveal the whole truth. If we dissect the numbers intensely and then look at things, we get a completely different picture. The popular fund, the larger fund, has not lost as much but the biggest loser over the past six months has lost 54%, which is nearly 1.5 times more than the Sensex. So in that sense, we come across a large number of funds, which did not have any risk containment thing factored into their portfolio. They have been on a free fall and my worry is that we are getting into a phase where a number of these funds will be exposed to the risk that a good part of their portfolio will be illiquid.

That means trading or churning the portfolio would not be as easy.
It will be impossible for them to churn the portfolio on the other side of the bear market. As markets decline, the initial redemption pressure drives you to sell what you can sell easily and then the leftover is completely unsellable. So the bad gets worse in a bear market and that is what some of these funds which are at the bottom of the heap will be faced with.

The fact remains that people who had invested right at the top of the market-which is at 21,000 point-have seen a lot of erosion in their net asset values, what do you think about it?
There is nothing new about it and investors invest very confidently when the market is at its peak. That can be said for all bull markets whether 1984 or 2000 and now. So there is a lesson to be learnt from here. First and foremost you should invest your long-term money if you are a naive first time investor and learn from your lesson and invest regularly. If you have stopped investing maybe it is about time that you get started with regular investing. Make sure that you have chosen a good fund, do not buy the popular fund again because most investors chase past performance. Everybody is in the business of chasing momentum that could be risky.

What is your view on Reliance Diversified Power Fund?
I am quite optimistic about this fund over the next 3-5 years because there are a lot of things which will happen. It is a specific sectoral fund and is a good vehicle for targeted diversification. But it should not be the only investment which one should have. One should make sure that it is not more than 10-20% of one’s total portfolio. It is a concentrated bet. But one can still be optimistic. The fund manager has done extremely well with his asset allocation.

Sometimes all the sectoral funds of Reliance Mutual have the mandate that they could be fully into fixed income if they want to and they have been able to successfully do that.

What are the fund recommendations?
Choose a well-rated diversified equity fund and invest regularly in something which is proven for over five years like HDFC Top 200, Franklin Prime Plus or HSBC Equity or Magnum Contra. Choosing one or two of these funds and investing regularly can take you through. If you are investing for five years, it is always a good time to step in.

What are your views on gold funds?
All Gold ETFs offer similar returns and costs. It is a hard to understand sector and investors chase returns. It can be risky if the cycle turns. Funds have complex investment strategies. Look at it as more of a fund allocation as gold cannot be a mainstream investment.

Tell us about mutual fund SIPs.
If the investor is a saver who is looking to invest, some of the guidelines can help them. Invest regularly and it is a bad idea to invest lump sum money at anytime. Choose a good diversified equity fund if one has 15 years in mind.

But in any portfolio, have a 5-10% fixed income allocation because there is a roll for fixed income in any portfolio. Rebalance it annually so that there is no tax implication of that. Don’t buy too many funds. Buy one or two good funds. Review it annually. One can invest in Franklin Prima Plus, HDFC Top 200, HSBC Equity Fund and Magnum Contra.

What are the debt funds to invest for optimum post tax returns?
One should consider the FMP which is on offer currently but the differential between that, if it is a small amount of money and the difference between a bank deposit and choosing an FMP or making a choice of a short cash plus fund is not worthwhile. But if the investment is of more than one year, then you do have some interesting options.

What should investors be buying if they are investing for more than a year?
Fixed income funds have been through uncertain times. There are a couple of fixed income categories that are in red. Arbitrage funds score very well on the tax efficiency because the returns from these funds are treated like that of an equity fund. It is tax free and quite efficient and you are completely insulated from the equity risk.