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Fund Focus: Prudential ICICI MIP

When the tide turned against equity markets, the fund became a victim, shedding its ‘wealth protector’ tag

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.

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 (4.5 per cent as on July 17, 2006) are still far higher than an average peer’s 2.5 per cent. But one should 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 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 the levels are lower than an average peer. This new approach resulted in good returns for investors.

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.