Equities have emerged as the hottest asset class over the past year. The share of the category of diversified equity funds in the Indian mutual fund industry has zoomed from 11 per cent to 23 per cent. Not only has the category added phenomenal amount of assets to its kitty, but the number of funds has also gone up substantially--around 40 funds have been launched since July 2004.
With the increasing number of funds, the task of choosing the right ones has become very difficult. Though much has been said about the top performing funds, it is equally important to steer clear from the underperformers. Therefore, this time, we ran our screen for those funds in the category of diversified equity funds, which have always remained in the bottom half of the category since 1998, on the basis of calendar year returns of the funds.
The logic for such a time frame is simple. Firstly, a period of seven years is large enough for an equity fund to prove its mettle. And remaining a laggard continuously over such a long time frame speaks louder than words. Secondly, in the block of the last seven calendar years, the Indian stock markets have witnessed all phases--a market crash, followed by a volatile phase of recovery, and an unprecedented bull run which is still continuing.
Therefore, during this period, all kinds of equity funds have got an opportunity to perform at some point of time or the other, whether they are value-oriented or growth-oriented, aggressive or defensive, and skewed towards any kind of market classification. And a fund which could not perform in just about any kind of market will actually require a long hard look, before you decide in favour of it.
The following three funds emerged on our fund screen.
JM Equity Fund: This fund has found the going quite tough. However, in the last couple of years, it has managed to come a little closer to the category average, missing it by 6.59 per cent in year 2004. Traditionally a large-cap oriented fund, it has recently gone for a portfolio makeover. The exposure to large-caps dropped to 39 per cent in November 2004, from the previous month's 71 per cent. This worked for the fund, as it ranks seventh on the basis of trailing 6-monthly returns as on July 13, 2005. Though the fund is showing signs of recovery, but it has a long, uphill road to go before it catches up with the long term performance record of some of its peers.
LICMF Equity Fund: LICMF Equity is yet another fund which has failed to keep pace with other funds in the category. The fund has a strong focus on large-cap stocks. Since January 2004, the exposure to large-cap stocks has averaged 88.35 per cent. At the stock level, the fund has shown a tendency to churn its holdings aggressively, as the number of stocks in the portfolio vary substantially within the space of a month. Also, the fund tends to concentrate in its top holdings, while investing small proportions in other stocks. As per its June 2005 portfolio, the top five holdings accounted for 33.5 per cent of the portfolio.
Principal Equity Fund: To be fair to this fund, it has missed the category average only by a narrow margin in three of the past seven years. But there were years like 2003 when the fund missed an average peer by more than 33 per cent. The fund looks well diversified at the sector level. In recent months, the fund has notably increased the number of stocks in its portfolio. In June 2005, it held 44 stocks, none of which individually accounted for more than 3.5 per cent of assets.