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Adventure Zone

Higher equity exposure and active duration management make the ride bumpy here, something that a typical MIP investor will rarely find palatable. However, those willing to stay invested for longer period and withstand volatility are likely to be rewarded here

Long-term investors can expect decent rewards. Risk-averse investors should skip this fund, as HDFC MIP Long Term is designed to deliver surprises.

In its two calendar years of existence, the fund has earned huge returns to grab top position in the category. And the outperformance has been nothing short of breathtaking - while it gained 9.31 per cent in 2004 as against the average peer's 5.60 per cent rise, last year the fund earned 16.48 per cent, much better than the category average return of 9.18 per cent. These huge returns have made it the largest MIP, with assets in excess of Rs 895 crore. And in its rating life of 11 months, the fund has managed five stars in nine months. This makes the fund one of the most compelling options in the MIP category. However, there's a caveat.

The fund's huge return comes at a cost of above average risk. Additionally, the fund has done well on back of high equity exposure in a bull market. The recent crash, therefore, gives a good opportunity to understand the risk associated with the fund. Between May 10 and June 1, the Sensex tumbled over 2,500 points. The fund lost 3.87 per cent. With an equity allocation of over 20 per cent, the fund is bound to suffer in a downturn. But with fund manager Prashant Jain at the helm, investors should be confident that the fund will do well in the long-run.

The fund's mandate to invest up to 25 per cent of corpus in equities (which the fund manager puts to good use) has proved to be a blessing. This along with nearly half the portfolio allocated to mid- and small-cap stocks have seen the fund's returns zoom. On the debt side, active duration management is behind the fund's success. It does take some credit risk and regularly invests in lower-rated papers to earn extra returns. However, the exposure remains restricted to single-digit. Overall, high-quality corporate bonds have always dominated the debt portfolio, with top-rated commercial papers playing the second fiddle of late. Initially, the fund used to invest in gilts but now they are out of favour.

A high equity exposure led by mid- and small-cap stocks, active duration management and exposure to lower rated papers have resulted in above average volatility. Expenses are high as well. However, the fund more than compensates for its high risk and cost by earning one the best returns in the category.