(Issue March 2012 MF Newsletter)

Q1. I have been investing in the markets since the last 3 to 4 years, and have investments in the following mutual fund schemes:

However, the aforementioned funds have performed quite badly. Hence could you please advice as to what to do with these funds?

Answer: The analysis of your mutual fund portfolio reveals that your portfolio consists of all equity mutual fund schemes, categorised below and adopting the following style of management:

(NAV data is as on February 27, 2012. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)

If we assess the performance of the funds held by you, thematic funds focusing on power & energy sector and infrastructure sector haven’t been able to clock very luring returns. It is noteworthy that their lacklustre performance has occurred due to:

• Anti-inflationary monetary policy stance maintained by RBI (dampening mood in infrastructure sector); and
  
  
• Project execution delay and stricter environmental norms hindering power and energy sector
  
  

While interest rate sectors from hereon are expected to perform better, due to a descending trend in the interest rate scenario expected from the next fiscal year (i.e. 2012-13), we recommend that you redeem your investments in the aforementioned thematic funds and invest in "diversified opportunities style funds", as they have the mandate of engulfing opportunities across themes and market capitalisations. Thus by doing so, you’ll not only benefit from only infrastructure sector (which is an interest sensitive sector), but also other interest sensitive sectors such as autos, banking, etc.

As far as your mutual fund holdings in diversified equity funds are concerned, they are fairly diversified across mutual fund houses, and are skewed towards funds following the value style of investing. Barring "SBI Magnum Contra" you may continue to hold all other diversified equity schemes as they have shown a consistent performance track record across bull and bear phases of the Indian equity markets. We recommend that you exit "SBI Magnum Contra", as the fund has lagged its peers in the "contrarian" style of investing.

In order to obtain a more comprehensive detail review of your aforementioned portfolio, we recommend that you avail of our mutual fund portfolio review service, which can help you assess other vital details such as:

• Risk-return
• Sector(s) you are exposed to
• Top-10 stock holdings of your total mutual fund portfolio
• Composition of your portfolio between thematic and diversified equity schemes
  
  

Q2. Can you please write to me about top-5 mutual fund schemes for a Systematic Investment Plan (SIP)?

Answer: Primarily let us tell you that there are no special mutual fund schemes for SIP investing. So, selecting an appropriate mutual fund scheme for your SIPs is very crucial. With host of mutual fund schemes available in the markets today, it is vital that you select winning mutual fund wisely, by taking into account the following points:

• Performance: While assessing the performance of mutual fund scheme you need to analyse the same in light of:
  
  
  • Peer comparison study
  • Time period
  • Return
  • Risk
  • Risk-adjusted returns
  • Portfolio characteristics
  • Portfolio turnover
    
    

  But while doing so it is vital to remember that past performance is not everything.
  
  

• Fund management: This is one of the qualitative parameter, while selecting funds for wealth creation. The performance of a mutual fund is largely linked to the fund manager and his team. He’s the guy who’s managing your money invested in mutual funds, so knowing his experience in fund management will be valuable.
  
  
• Costs: Yes, it is vital to ascertain the costs associated with a mutual fund scheme as well. The two main costs are expense ratio and exit load.
  
  

While star ratings is popular and many investors pick funds on ratings, you got to be aware about the fact that these stars need not always shine, and thus investing in star rated schemes is not always a wise idea. While selecting winning mutual fund schemes for your portfolio it is also important that one knows his investment objective and appetite for risk as well, as that only can structure your portfolio with appropriate mutual fund schemes.

Disclaimer:
Answers to the queries are based on facts provided and PersonalFN would have no responsibility for the consequences of the outcome based on these solutions. For a detailed analysis of your mutual fund portfolio, please consult a mutual fund advisor.