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Diversification is the key

February 21, 2004 16:35 IST

And the markets did it again! Just when you thought the markets were poised to move upwards, they changed direction and how!

The BSE Sensex fell by 2.68% to close at 5,851 points while S&P CNX Nifty ended at 1,853 points (down 3.19%).

Profit-booking triggered by liquidity requirements for the forthcoming IPOs was seen as the cause for this sharp downswing.

Leading Diversified Equity Funds
Equity SchemesNAV (Rs)1-Wk1-Mth6-Mth1-Yr3-YrIncep.SDSR
K 30 G 25.470.26%8.74%60.63%109.36%NA105.13%6.72%0.92%
TATA EQUITY OPP. 14.390.11%7.50%92.65%188.69%35.58%11.19%7.40%0.70%
TATA PURE EQ 23.89-0.25%8.32%73.16%150.08%24.27%32.34%7.54%0.43%
BIRLA MIDCAP G 22.63-0.31%3.76%55.96%112.09%NA83.15%7.66%0.66%
ALLIANCE EQUITY G 58.52-0.49%8.25%65.12%124.21%20.01%37.29%6.80%0.43%
(NAV data as on February 20, 2004. Growth over 1-Yr is compounded annualised)
(Standard deviation indicates by how much the values have deviated from the mean of the values. It measures by how much the investor has diverged from the mean return either upwards or downwards. It highlights the element of risk associated with the fund.)

It was a tough week for equity fund investors as the markets fell sharply. Most of the equity funds delivered negative returns with the exception of K30 (0.26%) and Tata Equity Opportunities (0.11%).

A week like this one reminds you of the importance of holding a well-diversified portfolio. Diversification has traditionally been thought of as an across-asset classes phenomenon, i.e. investors should hold a part of their assets in equities, some in debt instruments, etc.

However the launch of global funds and regulations permitting Indian investors to hold assets abroad, have thrown open new opportunities for investors.

Investors can now invest in mutual fund schemes which invest globally thereby giving investors access to international assets.

Similarly they could remit up to $25,000 per calendar year, which can be used for various purposes like holding immovable properties, shares amongst others.

There was no relief at the debt markets this week either. The bond yields continued to inch upwards and prices fell further. The 10-Yr benchmark 7.37% 2014 yield rose by 2 basis points to close at 5.30% (February 20, 2004), while the 7.27% 2013 yield closed at 5.33% (February 20, 2004).

Leading Income funds
Income SchemesNAV (Rs)1-Wk1-Mth6-Mth1-YrIncep.SDSR
PRUICICI FLOATING RATE G 10.450.09%0.37%2.38%NA4.51%0.03%-4.47%
DSP ML FLOATING RATE G 10.390.09%0.38%2.40%NA3.80%0.02%-5.60%
DEUTSCHE FLOATING RATE G 10.150.08%0.36%NANA1.48%0.02%-9.65%
TEMPLETON FLOAT LTP G 11.370.08%0.38%2.35%5.59%6.45%0.11%-0.25%
K FLOATER G 10.320.08%0.38%2.53%NA3.25%NANA
(NAV data as on Feb 20, 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)

Floating rate funds continued to dominate the proceedings this week as well. PruICICI Floating Rate and DSP ML Floating Rate shared the top slot with returns of 0.09%. Deutsche Floating Rate (0.08%) came in at second position.

Most investors would be tempted at this stage to dump income funds and move into more lucrative options like monthly income plans (MIPs).

While MIPs are sound investment options per se they should not be treated as alternatives for debt funds. MIPs are a different asset class since they also invest in equities. Investing in MIPs would mean altering your risk profile.

With the economy on rise and interest rates likely to move upwards, its time investors looked for different options within the debt funds spectrum.

Investors can position themselves for the future by considering floating rate funds and schemes which invest in low rated paper.

Leading Balanced Funds
Balanced SchemesNAV (Rs)1-Wk1-Mth6-Mth1-Yr3-YrIncep.SDSR
FT INDIA INFLATION G 12.210.26%0.59%8.90%16.45%NA12.03%NANA
UNIT SCHEME 95 G 30.750.03%2.60%34.22%61.59%19.63%19.73%4.46%0.39%
CANGANGA 14.03-0.07%4.94%43.60%75.16%11.95%5.90%6.34%0.27%
K BALANCE 13.34-0.31%2.94%27.30%55.51%16.59%12.69%3.96%0.43%
FT BALANCED G 16.76-0.36%3.52%40.84%75.87%22.98%11.71%4.91%0.42%
(NAV data as on Feb 20, 2004. Growth over 1-Yr is compounded annualised)

Balanced funds had a poor week as both equity markets and debt markets took a beating. FT India Inflation (0.26%) and Unit Scheme 95 (0.03%) were the only balanced schemes which managed to deliver positive returns.

A week like the present one can be a rather distressing one for investors, if they haven't diversified enough across and within asset classes. More and more opportunities to do that are now being made available to the retail investor. The RBI guideline to remit up to $25,000 per calendar year is one such move.

Global equity funds that allow investors to take an exposure in foreign markets and currencies is another. Retail investors must use such sophisticated products to hedge their risks and take diversification to the next level.



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