Fund Focus: Pragmatic Approach

This fund follows a different strategy at various points in time. Erstwhile Alliance MIP, it was known for its aggressive debt portfolio.

But after being taken over by Birla Sun Life Mutual Fund, it changed colours under the new management. However, it now seems to be reverting to its old aggressive ways. For instance, the average maturity rarely dropped below two years till late 2005. After that it was substantially lowered. Since November 2006, the average maturity has been more than three years and was 4.05 years in December.

The fund often held below AAA-rated paper in double digits, one of the highest in the category. The exposure was cut down to a single digit. But it's on the up again and such papers account for over 18 per cent of the portfolio. In the past seven months, the allocation to cash (and money market instruments) has varied from 1.03 to 13.71 per cent. During the same period, the allocation to G-Secs has ranged from nil to 39.23 per cent.

Over the past seven months, the equity component has varied between 13.5 per cent and 16.73 per cent while the allocation to mid- and small-caps has been on the rise. In July last year, 57.65 per cent of the portfolio was concentrated in mid- and small-cap stocks. It rose to 67.43 per cent in September 2006 and in January 2007 it stood at 74.43 per cent. Though its (1-year, 2-year, 3-year and 5-year) returns are above the category average, it is a volatile performer. It shone in 2002 and 2003 to be ranked among the top two funds, but managed to deliver category average and below category returns in the following two years. But in 2006, it was back in reckoning with a top quartile performance. Its expense ratio is not low at 2.16 per cent.

DSPML SavingsPlus Moderate: Caution First
This fund is known for its quality portfolio, lower risk and decent performance record. Launched in 2003, the fund did extremely well in 2004. It could not sustain its noticeable performance over the next two years since it refused to take undue risks in the equity market while its peers dabbled heavily in mid- and small-caps.

The average equity allocation over the past six months has averaged 15.46 per cent. Though it has a mandate to invest up to 20 per cent in equity, it is cautious in doing so. Moreover, the investment universe is restricted to the top 100 companies by market cap. So while returns may be compromised, the large-cap equity portfolio is liquid with lower volatility.

While quality has always been the watchword on the debt portfolio, it now has begun to take some risks here. Mid-2004, the fund began to introduce lower rated paper (below AAA) to boost returns. This has now reached a fairly sizeable amount. Since January last year, the allocation to lower-rated paper has averaged at 27.89 per cent every month. In four months of 2006, the average credit rating has been low at AA.

Though it started with a gilt-heavy portfolio, that is no longer the case. Floating rate instruments now dominate. In the past six months, they have averaged at 69.39 per cent.

Stability, rather than flashy returns, is what investors look for in MIPs. And this fund caters to this very need. Conservative investors would like this offering since the fund sticks to its large-cap stock mandate and does not get swayed by market sentiment and trends. Its standard deviation (a measure of risk), at 0.48, is lower than that of its peers. Its expense ratio is on the higher side at 2.01 per cent.

HDFC MIP Long-term: Clinical Precision
The first thing that hits you about this fund is the great returns. In 2004, it delivered 9.31 per cent (category average: 5.60 per cent). The next year, it delivered a fabulous 16.48 per cent (category average: 9.09 per cent). It was the top-performing fund in both these years. 2006 saw it slip to the fourth slot with a performance of 12.63 per cent (category average: 9.17 per cent).

With a large portion of its corpus in equity, the reason for this performance can be traced to the stock market rally. Though its equity allocation has dipped marginally from July 2006 (25.11 per cent) to January 2007 (23.77 per cent), it is still very high when compared with its peers.

Besides a significant equity allocation, a large portion from it has been assigned to mid- and small-cap stocks. This has risen from 49.62 per cent (July 2006) to 70.58 per cent (December 2006). In January, it was at 64.91 per cent.

High quality corporate debt dominates the portfolio with top-rated commercial paper following closely behind. Since January 2006, its average credit rating has stayed at AAA. While there is some exposure to lower rated debt (below AAA) to boost returns, the exposure peaked at just 7.81 per cent during this period. And except for March and April, G-Secs have been part of its portfolio. The average maturity has not been high and has hovered at 1.27 years.

The fund balances its aggressive equity approach with a conservative debt strategy. The risk associated with equity was very visible during the stock market crash last year. The fund had its worst month during that period and lost 6.67 per cent (May 9 - June 8, 2006). A good fund from returns' perspective but not for too conservative investors.

Prudential ICICI MIP: Aggressive Streak
If you continue to look upon this fund as a conservative offering, as it was earlier, you are totally off track. This fund has changed its strategy over the years. It started off as a 'wealth protector' in October 2000 by investing only in debt. By mid-2003, exposure to equities began to increase substantially. Though this move coincided with the market rally, the fund's performance was nothing spectacular. From 2002 to 2004, it underperformed the category average.

It's only in the last two years that the fund has beaten the category average. But in the bargain, it lost the 'wealth protector' tag with its aggressive play.

Since July 2006, the fund had been increasing its equity exposure. In November, its equity allocation was 15.14 per cent with 42.81 per cent in mid- and small-caps. In December, the equity allocation rose (17.20 per cent) but mid- and small-cap allocation dropped (36.69 per cent). In January, the equity allocation dipped (15.08 per cent) but the mid- and small-cap allocation rose (50.55 per cent).

On the debt side, the fund has tilted towards a more conservative approach in the quality of paper. The average credit rating stayed at AAA all through last year. Since April last year, G-Secs have consistently been a part of the portfolio. Where the risk does lie is in the average years-to-maturity of the paper. In August 2006 it was 1.75 years and in January 2007 it was high at 4.11 years. Of course, this will hold the fund in good stead if interest rates start dipping from now on.

Its (1-year, 2-year, 3-year and 5-year) returns are all above the category average. But the trade-off is a higher risk. When the markets crashed in May last year, this fund was badly hit.

Reliance MIP: Marathon Player
With an aggressive equity and debt portfolio, this one was the best performer last year and the third best, the previous year.

Since January 2006, the allocation to equity has ranged from 20.61 per cent to 14.59 per cent but has averaged at around 18 per cent per month. This equity allocation has always been heavily tilted towards mid- and small-cap stocks. Though these stocks have averaged at around 79 per cent of the equity portfolio, in February and March 2006, they occupied the entire portfolio and the large-cap allocation was nil.

With such an equity slant, little wonder that the fund has performed well. In fact, its best one-year return of 22.10 per cent can be traced to May 2, 2005 to May 2, 2006 the peak of the bull run. That very same month, it had to contend with its worst monthly performance (May 15-June 14, 2006) of -5.35 per cent. The debt portfolio has a high credit risk. The average allocation to lower rated paper (including AA+, AA, AA-) since January 2006 has been 14.21 per cent. This has slowly increased in December 2006 (15.42 per cent) and January 2007 (22 per cent). In fact, the average credit rating in the past two months has been AA. However, the average maturity of this fund is not too long at around 1.16 years. While G-secs are a part of the portfolio, exposure has been gradually decreasing and now occupies just 0.01 per cent of the portfolio.

A look at the current data (as on February 12, 2007) of its one-year returns of 12.67 per cent (category average: 8 per cent) and two-year returns of 14.31 per cent (category average: 9.13 per cent), shows the fund way ahead of the category average. But these returns have been achieved by taking more risks. So opt for it if you are willing to ignore short-term bumps.

This article was originally published on March 01, 2007.