I have observed that most of the time you advise investors to invest in diversified funds like HDFC Top 200, DSPBR Equity and Magnum Contra. However, there are funds like ICICI Prudential Discovery Fund, Reliance Pharma and Tata Life Sciences & Technology Fund that are miles ahead in performance than the funds you recommend. So why don't you recommend these instead? The funds that I mentioned have not performed well in just a single quarter but seem to have done well even over different date ranges. How then does one decide which fund to buy?
- Praveen
When we recommend core funds, we look at a number of criteria.
We believe that the core holdings should be large cap, diversified equity funds. Where core holdings are concerned, we would never recommend a mid cap fund (such as ICICI Prudential Discovery where only 30% of the portfolio is in large cap stocks), a sector fund (such as Reliance Pharma) or a thematic fund (such as Tata Life Sciences & Technology). Such funds are susceptible to much greater volatility than their diversified, large cap counterparts.
When we look at performance, we do not just consider the last quarter or even the last year. We look at consistency over the years. We also take into account how the fund has fared over market downturns and rallies.
Funds that can generate superior long term returns (when compared to the category average) with limited volatility should form the core holdings of a portfolio, accounting for an allocation of no less than 60 to 80 per cent.
This article was originally published on May 07, 2010.
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