Funds that survived the crash

When equity investors were getting mauled by one of the worst crashes in the history of the Indian stock market this January and equity became a dreaded word in investment circles, another class of equity-linked assets stood rock solid amid the mayhem like bravehearts and even went on to deliver some value to the investor.

While the broader market is still struggling to rise to its feet after the post-January 10 crash, a handful of equity funds have outperformed the benchmark indices in the period since then. “If you look at the last three months’ returns, there are 12 funds that have made the grade,” says A.N. Sridhar, Head (Equities), Sahara Mutual Fund.

Fund takeaways Funds that have survived the adverse market conditions offer useful insights on investing. Check for fund houses and funds that are inherently value-based In case of momentum funds, check for those that have "extreme" flexibility options in their offer document, which would help them jump to debt in a falling market. A dexterous manager would try to save the day If fund houses have enough managers to manage the various schemes, funds have better chances of performing Generally, the funds that have outperformed the indices since January 10, 2008 have also been consistent performers with decent returns Index funds have followed the benchmark true to their name. Again, one or two have been marginal outperformers Certain funds like contra funds and premier equity funds, etc., have again outperformed the indices by adhering to their declared themes

Which are these funds and how have they managed to successfully ride the choppy market? For starters, all these funds are openended and most of them have provided consistent, decent returns. Sundaram BNP Paribas’ Tax Saver Fund is a good example. This fund, alone among the tax savers, has outperformed the benchmark.

Tax saver schemes by themselves tend to be off the radar of most fund managers, especially when such funds are locked for a minimum of three years. But even tax saver funds need to do well in the short- and long-term for investors to be interested in them.

“At Sundaram BNP, we have several fund managers and, therefore, there is time and bandwidth for fund managers to perform,” says Satish Ramanathan, the fund manager for the tax saver scheme.

In the case of DWS Alpha, the fund manager gave increased weightage to capital goods, ferrous metals, consumer non-durables and software, while reducing exposure to transportation, non-ferrous metals, construction companies and petroleum products. Whatever be the portfolio constitution, the fund manager has reserved the right to make a quantum jump from equity to debt should the situation so warrant.

Sahara’s Wealth Plus, a truevalue fund that ignores momentum stocks and, instead, focusses strongly on fundamentals, has been another outperformer. “We are the first fund in the country to look at the RoE (return on equity) concept,” says Sridhar. The stocks that the fund has invested in are essentially blue-chips and mid-caps that show strong promise and have a market capitalisation of at least Rs 100 crore each. Most of the stocks in the portfolio have a weightage of less than two per cent each. Wealth Plus has done well in the shortterm as well. “That is because the market does not want mid- and small-cap stocks that are most volatile. We are protected by default, as we are not into those stocks,” Sridhar says.

Birla Sun Life Frontline Equity, too, has performed well “because we have been disciplined enough to adhere to benchmark weights,” says A. Balasubramanian, Chief Investment Officer at the asset management company. “There are different ways of aligning to the index, and we have done some handpicking for outperformance,” he says. The key reason behind the success of these funds has been “value” rather than “momentum” investing, though the latter has provided handsome returns in its own way for the short-term investor. “Timing the market is next to impossible,” says Chetan Sehgal, Director (Research), Templeton Equity. Chasing momentum may not lead to wealth creation over the long-term and investors could miss long-term trends. After all, over the last five years, the most successful investors have been those that have stayed invested, points out Sehgal.

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Value investing also saved the day for Templeton India Equity Income Fund. Sehgal says value investing tends to ensure lower downsides than the overall market, as it focusses on cheaper stocks as well as stocks that are out of favour. Tata Contra, too, got its share of the limelight “because of the very nature of the fund, which has opted for scrips other than those the market is focussing on,” says Ved Prakash Chaturvedi, Managing Director, Tata Contra.

But isn’t investing in index funds in a volatile market also a good idea considering that a couple of them have outperformed the benchmark, albeit slightly? “Index funds are fine when the benchmark is moving sideways and for those who want to play it absolutely safe. But for outperformance, they are not a solution,” says Sridhar.