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Fund investors have it both ways

August 28, 2004 17:14 IST

Equity fund investors had a rewarding week as stock markets looked up. The BSE Sensex surged by 1.03% to close at 5,117 points, while the S&P CNX Nifty gained 1.19% to close at 1,609 points. Long-term debt funds also witnessed some relief, as bond prices surged. This made it a good week for debt and equity fund investors.

Leading Diversified Equity Funds
Diversified Equity FundsNAV (Rs)1-Wk1-Mth1-Yr3-YrIncep.SDSR
SUNDARAM SELECT MIDCAP 26.424.13%9.96%64.45%NA60.42%8.25%0.46%
DISCOVERY STOCK 6.383.91%9.81%23.17%19.39%-4.35%NANA
HDFC GROWTH FUND18.183.32%7.19%18.55%37.30%16.57%6.83%0.43%
RELIANCE GROWTH82.433.19%9.80%63.81%64.08%26.82%6.70%0.37%
FRANKLIN PRIMA FUND79.143.09%6.26%62.71%67.01%21.24%7.79%0.55%
(Source: Credence Analytics. NAV data as on August 27, 2004. Growth over 1-Yr is compounded annualised)
(The Sharpe Ratio is a measure of the returns offered by the fund vis--vis those offered by a risk-free instrument)
(Standard deviation highlights the element of risk associated with the fund.)

The mid cap rally continued unabated. The obvious beneficiaries -- mid cap funds. The leaders over the week -- Sundaram Select Midcap (4.13%) and Discovery Fund (3.91%) rode the mid cap rally and have been doing it for some time now.

Category leaders -- Franklin Bluechip (1.36%) had a relatively dismal week while HDFC Top 200 (2.61%) posted a reasonably strong performance.

Leading Income Funds
Income FundsNAV (Rs)1-Wk1-Mth1-Yr3-YrIncep.SDSR
MAGNUM INCOME18.021.04%-0.30%0.10%8.65%10.65%1.04%-0.04%
ALLIANCE INCOME22.711.03%0.03%1.57%9.33%11.59%0.85%0.02%
RELIANCE INC. 20.330.95%0.35%2.39%9.32%11.29%1.04%0.03%
SUNDARAM SEL. DEBT DYN. 12.020.95%0.64%2.41%NA9.78%NANA
DSP ML BOND22.350.94%-0.26%0.18%9.08%11.53%1.04%-0.01%
(Source: Credence Analytics. NAV data as on August 27, 2004. Growth over 1-Yr is compounded annualised)

Bond yields fell this week stemming the surge that we have been witnessing for some time on inflationary concerns. Bond prices surged, pulling up long-term bond fund NAVs.

The 2014 GOI yield closed at 6.09% (August 27, 2004), down 46 basis points over the previous week. Long-term debt funds were in the limelight for a change and occupied the slot that has been ruled by floating rate funds for some time now. Magnum Income (1.04%) and Alliance Income (1.03%) lead the rankings.

Leading Balanced Funds
Balanced FundsNAV (Rs)1-Wk1-Mth1-Yr3-YrIncep.SDSR
HDFC PRUDENCE46.782.83%5.34%30.66%38.05%19.59%4.60%0.58%
SUNDARAM BAL17.082.27%4.55%25.52%24.50%13.26%4.50%0.38%
PRINCIPAL BALANCED 11.352.16%4.03%29.42%21.74%1.39%5.20%0.35%
KOTAK BALANCE 13.941.85%5.30%28.45%23.34%12.26%NANA
HDFC BALANCE16.561.66%3.18%23.24%21.58%13.84%4.74%0.34%
(Source: Credence Analytics. NAV data as on August 27, 2004. Growth over 1-Yr is compounded annualised)

Balanced funds benefited from the strong showing by equities and fixed income instruments. For a change we had HDFC Prudence (2.83%), at the leading position. Sundaram Balanced (2.27%) and Principal Balanced (2.16%), two of the more conservatively managed funds came in second and third respectively.

A lot of 'informed investment advisors' have been announcing the end of monthly income plans (MIPs). Creeping inflation has taken the wind out of bond yields. Equity markets have been witnessing testing times for some time now.

This has had its impact on MIPs, the investor favourite until only 6 months ago. The informed advice being shelled out to the investor is that he must exit MIPs and enter equities and balanced funds. Advisors claim that equity markets are attractively placed at these levels and are a good foil to the volatility in debt which is hurting MIPs.

Nothing could be further from the truth! Equities offer a totally different risk-return proposition compared to the low-risk MIPs. Equities and MIPs are not interchangeable investment options and suit two very different investor classes.

There is some interest in Morgan Stanley Growth Fund (MSGF) as an attractive investment opportunity because it trades on the stock exchange at a discount of over 25% to its NAV.

However, cheap valuations should be just one of the reasons for selecting an investment. While MSGF's investment approach has improved discernibly and its portfolio is looking a lot healthier, investors still need to consider a couple of things:

A) The discount on its NAV may remain till maturity or just before that. So investors looking to 'cash in' on the discount well before maturity may have a long wait (the fund will redeem in February 2009).

B) Performance of a close-ended fund isn't linked very closely to its portfolio, as there is a net asset value (NAV) and a market price.

There is usually a yawning gap between the two values, which explains the discount. Investors may find that even during a strong rally in stock markets, a close-ended fund backed by a great portfolio may still trade at a discount.

At the end, we reiterate the advice we have been giving for some time now. Stick to your risk profile. Don't jump asset classes without doing a thorough risk-return analysis, no matter what your investment agent or business newspapers advise you.

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