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Crash Trapped

The recent crash has exposed chinks in this fund's recently-adopted aggressive strategy and removed the tag of 'wealth protector' that it has enjoyed for long. The culprit is high equity exposure led by mid- and small-cap stocks.

Already, it has lost close to 5 per cent in the crash to register its worst ever monthly performance as on June 8, 2006.

Encouraged by huge success with its equity portfolio, the fund had parked 15.40 per cent of its assets in stocks in April. Nearly a quarter of the equity assets were allocated to small-cap stocks. And when the tide turned against the equity markets, the fund's return tumbled. It's one of the worst sufferers of the recent crash. If the markets continue to dip, huge exposure to small- and mid-cap stocks would aggravate the pain further.

Having said that, Pru ICICI MIP's year to date return as on June 8, 2006 still looks attractive as compared to an average fund in the category-at 2.73 per cent, it's fourth best MIP. But be ready to experience some bumpy rides here in days to come.

The fund began its life rather too conservatively in October 2000. Though it could have invested up to 15 per cent of the corpus in equities, it choose to invest only in debt. That was not a problem then as a debt only portfolio could have earned handsome returns. However, unprecedented rally in the equity markets forced the management to change tack. It displayed first signs of change in mid 2003 by substantially increasing exposure to equities. The strategy worked, as it coincided with the markets rally. Another change came in late 2005 when the fund started to play its maturity card aggressively. This increased the volatility of the fund, but still it's lower than an average peer. This new approach resulted in good returns for investors.

The rules of the game have changed dramatically now. And with high equity exposure led by relatively risky small- and mid-cap stocks and debt market still in trouble, the fund managers have tough times ahead. An increasing expense ratio will further eat into the meager returns. The fund has tried to minimise risk by keeping cash and diversifying the equity portfolio.

A change of strategy did work for the fund, making it one of the popular MIPs around. But the days ahead are tough. Will it live up to its reputation of a capital preserver with this approach? Only time would tell. Nevertheless, investors here should be ready to wait.