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High-risk High-return

Magnum Emerging Businesses has impressed with its returns, but conservative investors won't like the risks it takes

Its returns are undoubtedly impressive, but it's not a fund for the faint hearted.

According to Srinivasan, it is a "high-risk, high-return strategy in terms of its concentration and deviation from the benchmark." The fund has outperformed its peers in five out of the six years of its existence. The only year the fund underperformed the category average with a pathetic fourth quartile performance was in 2008. Surprisingly, in 2011 it has held strong.

The fund's bottom-up philosophy of investing in high conviction ideas rests on the premise that its stock selection will have to be bang on to generate impressive returns. According to Srinivasan it is that very trait that has led to its outperformance. He narrows down on stocks such as Page Industries, MGFL, Jubilant Food, Hawkins and Blue Dart that he believes have contributed substantially to the performance over the last 16-18 months. This year he also credits stocks like Motherson Sumi, Texmaco, Gillete India and Agro Tech Foods to have aided the fund's performance.

Since launch, the number of stocks has averaged around 29 and ranged between 18 and 44. The allocation to the top five holdings (34%) is among the highest in the category with the allocation to the top holding going up to 10 per cent.

Aggressive bets in high conviction stocks have resulted in the fund's outperformance. But it also makes it more susceptible to getting hit either during a market downturn or should the picks backfire. This also holds true with the high sector bets that the fund sometimes takes.

What has aided the fund's performance is the allocation to the relatively smaller stocks as compared to its peers. The fund's weighted average market capitalisation of around Rs 1,600 crore is the sixth lowest in its category. To avoid liquidity issues, Srinivasan ensures that around one-fifth of the portfolio is allocated to large caps or cash (though cash levels are restricted to 10%).

If one goes by the three-year return as on December 31, 2011, this one is the best performer. If you invest in this fund, do so with the awareness that it is one of the more aggressive players. But going by its track record, it has not let down its loyal investors. So if you get in, hang on.