NEW DELHI, Nov 14: How does one go about selecting a mutual fund scheme? Is it the fund strategy, portfolio composition or returns? Since returns are what everyone is looking at, it is probably one of the most important criteria in the consideration set.
Most often than not, investors get influenced by high returns given by a fund over a certain period of time and invest in that fund. But the fact is that a fund may have taken a certain call, proving to be lucky, and therefore the returns may have gone up.
Thus, investors need to invest in funds that give consistent returns and not volatile high returns. DSP Merrill Lynch Equity Fund is one such fund that has been giving consistent returns over a long period of time. A proof of this is that Crisil has awarded the Composite Performance Rank (CPR) 1 to this fund for the quarter ending September 2005.
This is the second consecutive quarter when the fund has received a CPR 1 rating. This method uses a superior return score based on NAVs over a two-year period and concentration and liquidity of schemes to arrive at the rankings. The methodology does not take into account the entry and exit loads levied by the scheme.
A CPR 1 indicates a consistent performance and means that it ranks among the top 10 per cent of the schemes considered in the category of open-ended diversified equity funds. In the case of equity growth funds, a total of 47 schemes were considered.
The fund has delivered a compounded annualized return of 45.72 per cent over the two-year period ending 31 October 2005. Looking at a longer horizon, the fund has given 27.8 per cent annualised returns over five years. This is marginally better than 26.4 per cent given by the category. The fund’s performance seems to have picked up in recent years, since over the last three years, the fund’s performance compared to the category average has been better. Over three years, the fund has given 68 per cent returns, while the category has given around 57 per cent.
The fund has been in existence since April 1997, and like any other fund, has witnessed good as well as bad times. The fund claims it believes in value-based investing. The fund follows a bottom-up approach and does individual stock picking from a value perspective. The value-investing style aims to pick up a stock with untapped intrinsic value before the market discovers it.
The fund says it does not chase momentum stocks and largely employs a buy-and-hold strategy, which leads to a low portfolio churn. Pantaloon Retail, Bharat Forge, Amtek India and Balarampur Chini are a few examples of companies that the scheme identified very early and benefited from their re-rating. For example, Pantaloon was bought by the scheme as early as 1999 and some of that position is still held by the scheme.
According to Saurabh Sonthalia, executive VP and head of strategy and business development, “The value approach aims to minimize downside risk over the long-term, without sacrificing any of the upside.” Many times, funds tend to invest in illiquid stocks and benefit from the price appreciation, but this is a short-term approach to making money. DSP ML Equity Fund always invests in stocks that are highly liquid.
This is also the reason why the fund is always invested close to 90 per cent and almost never takes large calls on cash. The fund currently holds a diversified portfolio across sectors such as industrial capital goods, banks, consumer non-durables, petroleum products, software, pharmaceuticals, textiles, auto ancillaries and oil.
The fund claims that it does not look at sector allocation as a strategy, but concentrates on individual stocks. While most funds say this, DSP’s recent performance backs its claims. As on November 10, 2005, the fund had given a 62 per cent one-year return as against the 50 per cent return given by the equity diversified category. This fund is good if investors are looking to invest for the long-term and seek consistent returns.—By arrangement with the Times of India
