Monday, September 03, 2007

From September 2007, I intend covering one Fund Flavour per month with Diversified Equity Funds earning the distinction of being the first flavour to be savoured. The first week will bring forth a bird’s eye-view of the category followed by gliterring gems within that category in the second week. The third week will be dedicated to NFOs open in the current month. The hot happenings during the month in the Indian Mutual Fund arena will be the subject matter of the fourth week.


Diversified Equity Funds

What's in a name?

If sector funds sound suave, thematic funds trendy, then diversified equity funds can be dubbed as plain. Sure, they are not as boring as index funds but neither are they hot. If that summarises your line of thought, then it is high time you realize that you have grossly underestimated this evergreen fountain from which fabulous returns have flowed….

Varied assortment

Are your chances of finding a diamond better if you scan 10 heaps of charcoal or a thousand? More the coal you scan, higher your chances of finding diamonds. This is no rocket science. But the underlying rationale for Diversified Equity Funds. The 164 funds in this category manage Rs. 90998.81 cr with diverse investment focus - asset allocation, market cap allocation, sectoral weightages…

Take a sample of what is on offer.

HDFC Equity and Reliance Growth are growth funds which allocate a minimum of 90 % to equity.
Magnum Multicap and Franklin Flexicap invest across market caps – large caps, mid caps and small caps.
Birla Sun Life Frontline Equity targest the same sectoral weights as the BSE 200 but retains the flexibility of selecting stocks within those sectors.

Since diversified is their first name, that is what you can expect from such funds.They have a broad-based portfolio. The definition of “diversification” varies from product to product and fund manager to fund manager irrespective of the market condition. What you need to see is how diversified they are and whether or not it caters to your investment objective and taste. You can select multiple styles for yourself.

Along the meandering road to investment heaven you pass through varied avenues…

Narrow - Sector Funds

Diversified equity funds can rotate their portfolio according to changes in corporate fundamentals and other determining factors. Investing across different sector funds can help create a more diversified portfolio with a marginally higher risk-return equation than investing in well-diversified schemes or balanced funds. However, sector funds have to stick to their portfolio irrespective of whether that sector is doing well or not. The caveat, however, is that you must be able to understand the dynamics of the sectors you wish to invest in. If you cannot do that, then you are better off investing in diversified equity funds.

Wide - Thematic Funds

Managing sector funds can be as daunting as making money out of them. Mutual funds have been quick to adjust and a new breed of funds has come up. So what is this new animal? Thematic funds that aim to invest in a bunch of sectors woven by a common objective. These funds follow a theme rather than just one sector and are, therefore, not watertight. Say, infrastructure theme that runs across sectors like auto and auto ancillaries, computer software, metals and banking and finance or services industries that includes sectors like housing and construction, hotels, chemicals, plastics and pharmacheuticals. These funds look to bridge the gap between sector and diversified funds. Of course, sometimes the portfolios in these funds bear semblance to those of diversified equity funds and a clear demarcation is not possible. Just like sector funds, thematic funds have a flip side. Although a wide choice of sectors is available, thematic funds still follow a restricted strategy. This restrictive strategy prevents these schemes from participating in certain booming sectors. That explains the reason for their underperformance vis-a-vis diversified equity funds.

And widest - diverse, dextrous and dynamic Diversified Equity Funds

You could do well by allotting a major portion of your equity portfolio to diversified equity funds and only 15-20 per cent to sector and thematic funds.
The choice is yours…

There is no such thing as a universally valid investment proposition. The concept of “one size fits all” doesn't work while investing. For example, a mutual fund scheme which makes a perfect fit in an investor's portfolio could be grossly unsuitable for another. A diversified equity fund with a proven track record across longer time frames and market phases could merit inclusion in a 30 year old risk-taking investor's portfolio. However the same fund should perhaps not find place in a 60 year old retiree's portfolio who has no appetite for taking on risk and for whom capital protection and assured income is a priority. If you decide to invest in them, make sure you understand the objective of the scheme and see if it fits your investment needs. Don't just blindly invest in any fund or new fund offering that hits the stands.
The key to financial freedom may lie in this: if you are after robust long-term returns, go for diversified funds. They are better bets. Go forth and diversify.

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