I am interested in equity mutual funds, but I am scared of the risks involved. I have heard that shares of top FMCG companies like Hindustan Lever and ITC are stable. Would an FMCG fund be suitable for someone like me?
Riya Sen, via e-mail
Greed, fear and hope are key drivers of stock markets. In your case, fear seems to be the predominant emotion. And judging by the volatility of stock markets your concerns aren't misplaced. However, FMCG funds may not be your road to El Dorado.
The FMCG fund category has just three funds. And all the three seem to be on the road to nowhere—as far as returns are concerned. It is not poor management, but the type of stocks these funds invest in that adds to its limitations. FMCG stocks are said to be defensive in nature because in a falling market their prices do not dip as much as the market. Conversely, prices do not move up much in a rising market. And this has put brakes on the returns of these funds. Thus, in the past three years, none of the FMCG funds has ended on a positive note. Furthermore, a drought in the country last year saw FMCG stocks take a beating.
As these funds have a mandate to invest in the FMCG sector only, they can't look for other opportunities. If the sector is not performing this will reflect in the funds' performance. Thus, sector funds like this should not be your only exposure to the market.
If you wish to moderate the risk in an equity portfolio a balanced fund could be the way out. These funds invest in equity and debt usually in the 60:40 ratio. While the debt portion provides stability to the portfolio, equities serve to boost returns.