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The 5 BEST and worst mutual funds

January 10, 2007 08:59 IST

Every New Year, it is common to swear off your bad habits and make resolutions for the coming year. Here is one for 2007. "I will buy a mutual fund only at the right time and that too of a few fund houses." This resolution is based on the conclusions of fund analysis we have done since March 2006 when MoneyLIFE was launched.

Over this period, the stock markets have given investors ample opportunity to feel good about their choice of investments. Despite negative factors like interest rate fears, commodity meltdowns, and emerging market sell-offs in bouts, investors have enjoyed an average of 40% return from the market.

So what do you do next? Those going alone in the equity markets would depend on brokers, friends and tele-vision channels. After all, the Sensex, the most popular benchmark of equity market performance, did exceptionally well gaining 43% in 2006. But what about fund loyalists?

Retail investors are routinely asked to park their money with funds who are supposedly run by experts in stock picking. But have funds outperformed their benchmarks?

Unfortunately, as MoneyLIFE has been pointing out through its cutting edge analysis throughout the year that is unavailable elsewhere, the performance of funds, on an average, has been very uninspiring.

Any investor, following a simple disciplined approach, as explained in our Stocks Screen section or following a system of identifying short-term winners, as identified in the Street Beat section, would have done better!

Mutual funds are supposed to at least equal if not better their benchmarks. However, in almost every category, more than half the funds fail to even match their benchmark's performance, leave aside beating it.

Sample this. Of the 180 equity diversified growth schemes in existence as at the end of December 2006, 50 were launched less than a year ago and so have no record of full year's performance. Of the remaining 130, just about 45 have managed to beat their benchmark over the last one year.

And that too in a year when equity markets have provided an average of 35% return. Who were the winners and laggards? Here is the list, which will partially help readers decide what to do next year.

Total no. of  funds in existance for more than a year






Average Returns of Equity Diversified Schemes %


Above Average


Below Average


The 130 equity diversified growth schemes, which have been in existence for more than a year, have provided an average return of 30% to investors in the last one year.

But unsurprisingly, only 35% of these (45 schemes) have managed to outperform their respective benchmarks while only a little more than 50% (69 schemes) have actually managed a performance better than their category's average. Who did the best?

Sundaram BNP Paribas Select Midcap Growth Fund was the best with a one-year return of 54%. Benchmarked against the BSE Midcap, which was up 27% in the last one year, the scheme managed to outperform it by a wide margin.

With Rs 1,634 crore in assets under management, Jaiprakash Associates, Emami and Mphasis are among its top equity picks. But two stocks in its portfolio that have propelled it to the top are Ansal Properties and Unitech. Was it luck or skill to have selected these two stocks that have risen parabolically in the last few months? Indeed, if you take out these two stocks from the portfolio, performance would be less exciting.

One interesting aspect of this scheme is that it has only 75% exposure to equities and holds 25% in cash. This level of cash is the largest among equity funds.

Construction and infrastructure have been the dominant themes last year. No wonder Tata MF's Infrastructure Fund with a return of 54% over the last one year was the second-best performer among equity diversified growth schemes. Benchmarked against the Sensex (up 42%), the scheme managed to outperform by a wide margin. This Rs 1040-crore fund has 95% of its net assets invested in equities and only 5% in cash.

It has concentrated portfolio with one-third of its equity picks invested in the top 10 holdings. Among its top picks are BHEL, ACC, Grasim, L&T and Reliance Communication -- all sound stocks that will work equally well next year, if the economic climate stays robust.

The next best performing fund too came from the infrastructure stable. Prudential ICICI's Infrastructure Fund managed a 53% return for 2006, outperforming its benchmark, the Nifty (up 35%), by a wide margin. With Rs 1,479 crore in assets, the scheme is 94% inves-ted in equities.

This scheme has a highly concentrated equity portfolio with almost 44% of its net assets in top 10 holdings. Patel Engineering, Kesoram Industries, Jindal Steel & Power, Grasim and Century Textiles are among its top five equity picks. All of these look good for the next year. But are Jindal Steel and Grasim infrastructure stocks?

SBI Fund Management's Magnum Global Fund found a place among the top five with a 51% return over the last one year, comfortably outperforming its benchmark, the BSE 100, which was up 36%. Its corpus of Rs 839 crore is 94% invested in an interesting mix of stocks -- Shree Cement, Infotech Enterprises, Ansal Properties, Thermax and Dishman Pharmaceuticals being its top picks. 

Top 5 Schemes

1 year Return


Benchmark Returns

Sundaram BNP Paribas Select Midcap


BSE Midcap


Tata Infrastructure Fund


BSE Sensex


Prudential ICICI Infrastructure Fund


S&P CNX Nifty


SBI Magnum Global Fund 94


BSE 100


Prudential ICICI Dynamic Plan


S&P CNX Nifty


Note that these stocks are not the leaders of their segments. In essence, the fund has tried to combine less-fancied stocks of fast-growing sectors (Shree Cement from cement, Infotech Enterprises from software and Dishman from pharmaceuticals). This is an intelligent strategy and is likely to work in 2007 as well.

The last among the top 5 best-performing diversified schemes was Prudential ICICI's Dynamic Plan that returned 50% during 2006 against the 35% returns provided by its benchmark, the S&P CNX Nifty. With Rs 1,411 crore in assets under management, the scheme is 95% invested in equities.

The scheme has a fairly concentrated portfolio with one-fourth of its equity investments in the top five holdings, which include ITC, Deccan Chronicle, Jaiprakash Associates, I-Flex and Reliance Industries. It has quite a few new additions to its portfolio like Wipro, Greaves Cotton, Container Corporation, Tata Power, L&T, Apollo Tyres, Parsvanath Developers and Marico.

The Laggards

You cannot have a list of losers and laggards without funds from JM, Principal, ING Vysya, Taurus and UTI. But the lemon fund of 2006 came from ABN Amro. Its Dividend Yield Fund was the worst-performing one among equity diversified funds, and how. Amazingly, it lost 8% over the last one year compared to the 42% returns of its benchmark, the Sensex!

Fortunately, this shocking piece of "expert stock picking" was limited to a fund with just Rs 38 crore in assets. How did the fund manage to lose so much money in a year that has been so great for equities?

Among its recent top picks were Allahabad Bank, Jaiprakash Associates, Kesoram Industries, Punjab National Bank and Bank of Baroda. None of these is poor quality stock. In fact, Sundaram has made money out of Jaiprakash and ICICI Pru has made money in Kesoram. Bank stocks have gone through the roof in the last three months. So, what went grossly wrong in ABN Amro's stock picking?

Bottom 5 Schemes

1 year Return


Benchmark Returns

ABN AMRO Dividend Yield Fund


BSE Sensex


JM Emerging Leaders Fund


BSE 200


Principal Dividend Yield Fund


CNX 500


ING Vysya Dividend Yield Fund


BSE 100


Taurus Discovery Stock


BSE 200


Possibly, market-timing -- the nasty little secret of the fund management industry. Fund managers sermonise that you cannot time the market but they often do precisely that and lose your money.

JM's Emerging Leaders offered an ironic twist to its name. It may have picked the leaders but ended up being a terrible laggard.

It was the only other fund to have lost money in a chartbusting year for the market. It was down 2% against a 35% return provided by its benchmark, BSE 200. This too is a small fund with just Rs 56 crore in assets under management with 87% invested in equities. Among its top equity picks are Bombay Rayon, Apollo Tyres, BHEL and Kalpataru Power Transmission. But the two worst-performing stocks, Spicejet and Jet Airways, are also a part of its portfolio.

The third-worst performer among equity diversified schemes in 2006 was Principal's Dividend Yield Fund. It just about managed to keep its capital intact over the last one year against a 29% return of its benchmark, the CNX500.

With a fund size of Rs 181 crore (are investors really that ignorant to have parked so much money in an obvious loser?), the fund is 89% invested in equities. Among its top equity picks are Tamil Nadu Newsprint & Paper, ONGC, Varun Shipping, Cummins and Tata Chemicals. This is an awful portfolio and the faster you dump this fund, the better it is for you.

Slightly higher than that was ING Vysya's Dividend Yield Fund, which returned just 4% in a year. It is benchmarked against the BSE 100 which was up 36% in 2006. Taurus Discover Stock was fifth from the bottom, up by only 5% when its benchmark BSE 200 returned 35% during the year.

Past performance of funds is no guarantee for future results. But while numerous studies (including our own) have proven that winners do not enjoy winning streaks, there is a tendency of losers to continue to underperform (read the Earning Curve article on page 59).

So, dump these laggards and jump into a fund from one of the following fund houses who have more funds in the top 10 than others: Birla SunLife, DSP Merrill, HDFC, ICICI Pru, Reliance, Sundaram BNP Paribas and Tata.

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