Does it pay to be opportunistic?
Oct 29, 2004

Author: PersonalFN Content & Research Team

Within the diversified equity funds segment, there exists a breed of funds whose most distinctive identity is that they lack one. These are funds which follow a fluid investment style and move with the markets. Generally referred to as opportunities funds, they invest in the season's flavour; e.g. in a large cap rally these funds will pile their portfolios with large cap stocks and a mid cap rally would see the same funds change gears and invest in the mid cap segment.

So do these funds make good investment propositions? We decided to face off some opportunities funds vis-à-vis conventional ones with a well-defined investment strategy. For the former peer group funds like Magnum Global who have a fluid investment style have been considered amongst others.

The other group consists of professed large cap and mid cap funds, wherein investors are fully aware of the fund's area of operations. Also funds with a minimum 3-Yr history have been chosen since we are dealing with the equity funds segment.

The unambiguous ones¦

Diversified Equity Funds	NAV (Rs)	1-Yr	3-Yrs	5-Yrs	SD	SR
FRANKLIN INDIA PRIMA FUND	87.79	60.23%	74.38%	26.99%	7.79%	0.63%
HDFC CAP BUILDER	28.37	66.95%	48.06%	-	6.71%	0.60%
FRANKLIN INDIA BLUECHIP	53.44	37.98%	45.72%	23.99%	6.85%	0.56%
SUNDARAM GROWTH FUND	28.44	38.60%	42.68%	17.66%	6.38%	0.56%

(Source: Credence Analytics. NAV data as on Oct 27, 2004. Growth over 1-Yr is compounded annualised)
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)
(Standard deviation highlights the element of risk associated with the fund.)

The performance of this category has an undeniably impressive one. Franklin India Prima (74.38% CAGR) ranks heads and shoulders above its peers. Even peers like HDFC Cap. Builder (48.06% CAGR) and Franklin India Bluechip (45.72% CAGR) have delivered smart returns despite being at distant second and third positions respectively.

The opportunity seekers¦

Diversified Equity Funds	NAV (Rs)	1-Yr	3-Yrs	5-Yrs	SD	SR
DSP-ML OPPORTUNITIES FUND	21.18	39.80%	51.24%	-	7.43%	0.58%
TATA EQUITY OPPORTUNITIES	22.95	50.72%	48.59%	21.44%	8.59%	0.56%
MAGNUM GLOBAL FUND	14.68	69.60%	47.05%	11.09%	7.10%	0.61%
CHOLA OPPORTUNITIES FUND	12.17	14.60%	17.01%	-2.93%	6.52%	0.20%

(Source: Credence Analytics. NAV data as on Oct 27, 2004. Growth over 1-Yr is compounded annualised)

Funds from the opportunities segment have clocked impressive returns over a 3-Yr period as well. DSP ML Opportunities (51.24% CAGR) emerges as the leader followed by Tata Equity Opportunities (48.59% CAGR). However none of the funds could even remotely match Franklin India Prima's performance. In fact no fund from this segment has done enough to qualify as investors' preferred option over the conventional funds.

Now lets compare the performances on the volatility front, which is measured by standard deviation. Opportunities funds fare poorly on this parameter as compared to their peers; the worst performer in the opportunities segment Tata Equity Opportunities (8.59%) was a lot more volatile than its counterpart from the conventional segment.

Sharpe Ratio measures the returns per unit of risk borne. Opportunities funds poor performance is uncovered on this parameter as well. Hence not only did the funds expose their investors to higher risk levels, but failed to compensate them by delivering adequate returns.

Does this imply that funds of the opportunities variety are bad propositions? Not necessarily, over short-term horizons, these funds can be lucrative options e.g. Magnum Global 69.60% over a 1-Yr period. However over longer time horizons, which are ideal for evaluating equity funds, conventional funds are a much better bet.

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