Changes in FundsIndia’s Select Funds

June 10, 2014 . Vidya Bala

FundsIndia’s Select Funds, a list of investment-worthy funds across various categories, helps you narrow your investment choice in the mutual fund universe.

This list is reviewed by us on a quarterly basis. There are additions to ensure that good choices are not left out; while funds that underperform are shown the door. But sometimes when the market mood suggests a behavioral shift, we also take in to account funds that will best suit such a turn in markets.

At this juncture, we think it is worthwhile considering funds with a ‘growth’ approach, or those with higher weights to cyclical sectors than those loaded with defensives. It is for this reason that you may see some exits by otherwise sound funds. This is a relative call we have to take and is done to keep our list compact; not so much because the funds that exited are underperformers.

In other words, while there remains a larger ‘buy’ list of funds, Select Funds may be viewed as a more ‘what to buy today’ list; taking in account more qualitative factors such as market conditions and a fund’s positioning to ride the same.

We discuss below the changes made – both to equity and debt funds.

Equity Funds

We have quite a few funds that made the cut to our equity fund list. We added BNP Paribas Equity, ICICI Pru Top 100, Birla Sun Life Top 100, Reliance Tax Saver (ELSS), SBI Magnum Global and Mirae Asset Emerging Bluechip. We removed Canara Robeco Equity Diversified, HDFC Index Fund Sensex Plus, Religare Tax Plan, SBI Emerging Businesses and DSP BR Small and Midcap.

BNP Paribas Equity has been a steady performer for a good while now. However, we had to wait for two reasons: one to see how the fund did in an upturn (it has, for a good part, been an outperformer in a volatile market) and also to see the fund garner some asset size. With the fund emerging a winner on these counts, we have added this to the list. Do note that this fund has a large-cap bias and is not for the high-risk investor.

Birla Sun Life Top 100 and ICICI Pru Top 100 made it in our filters. Their exposure to large-cap plus market segment, places them in a sweet spot of getting a mix of the large-cap strength, as well as a bit of nascent large-cap and mid-cap returns. These funds are suitable for those wanting to venture beyond large caps, but are not ready to take on the mid-cap risks.

We have kept aside HDFC Index Fund Sensex Plus from our Select list for now, given that in markets such as the present one, actively managed funds tend to outperform by a mile.

Among the tax-saving funds, we have added Reliance Tax Saver, which is known to perform better in bull markets. We have removed Religare Tax Plan from the list, given its more defensive stance. However, we remain positive about the fund’s ability to generate long-term returns. The fund remains in our overall buy list.

Among the mid-cap funds, we have added Mirae Asset Emerging Bluechip. Similar to its diversified sister fund Mirae Asset India Opportunities, Emerging Bluechip too, has shown consistency and an ability to deliver well across market cycles.

We have also added SBI Magnum Global, a mid-cap fund which after years of exemplary performance, slipped into mediocrity during the 2008 downturn and beyond, but which has resurrected with a more steady and inspiring record in the last 2 years. Its portfolio, tilted towards quality cyclical stocks, inspires us.

On the other hand, its more aggressive cousin, SBI Emerging Businesses, has temporarily been removed from our list as its portfolio does not look cut out for the present cyclical rally. We will watch it closely for changes. The fund too is not out of our buy list.

DSP BR Small and Midcap, as expected by us, made a lightning comeback, given that it is a high beta fund. However, its volatility, though, worries us a bit. We have therefore put it in on our ‘watch’ list.

Theme Funds

Last quarter, we added this category for investors who wish to go that extra mile in terms of higher risk, tracking sectors and also taking active calls on their funds. We had an IT and pharma fund – ICICI Pru Technology and SBI Pharma both of which sport quality portfolios. However, the rupee’s gain against the dollar led to both these sectors being beaten down even as other sectors rallied.

We remain confident about the long-term prospects of these sectors and have a hold on these sectors. But we would prefer that any fresh exposure is done through ICICI Pru Exports and Other Services, given that the fund has a broader export theme basket that includes both IT and pharma.

We have also added what could be the turnaround story of 2014, banking and financial services, through ICICI Pru Banking and Financial Services Fund. This fund has outdone Reliance Banking in terms of its risk-adjusted return and lower standard deviation. But as is the case with theme funds, it is important for you to book profits in extraordinary rallies in the fund.

Hybrid Funds

We have brought back the most popular equity-oriented balanced fund – HDFC Prudence, a true bull market performer. While this fund’s midcap tilted portfolio and longer duration on debt portfolio can make you nervous in down markets (esp. in equity and debt), we had maintained a hold on it. That mid-cap stocks are poised for a revival brings this fund back to the limelight.

With the debt-oriented balanced fund category on a comeback trail after almost a full year of underperformance, we decided to go with the ones that will make the best of the equity rally. While most funds remain in the list, we let go of the tamer DSP BR MIP. The fund, though, remains in our buy list.

Debt Funds

Considering that we are headed for a rate cut, albeit not in the near future, we would like to gear up our list right away to make the best of any price rally from rate cuts, when they do happen.

In the less-than-1-year ultra short-term category we added ICICI Pru Flexible Income Plan. With a low-risk portfolio, the fund has been delivering handsomely and is suitable for those looking for certificates of deposits than bonds in their portfolio.

In the short-term debt fund category, we have been consciously adding funds with at least some exposure to corporate bonds, with short to medium tenure, to benefit from capital appreciation in a rally. Towards this end, we have added Tata Short Term Bond. We have however, kept aside PineBridge India Short Term and Canara Robeco Short Term. Both these funds though, remain good for conservative investors.

Similarly in the income fund category, we have added another fund – UTI Dynamic Bond that will give sufficient exposure to gilt, with some exposure to corporate funds as well. We expect such a fund to make the best of any debt rally. While the risk is higher than the other income funds in our list, we prefer this over a full-fledged gilt fund, where duration risk would be higher.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis of investment decisions. To know how to read our weekly fund reviews, please click here.

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