New Stars on Horizon

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Under the apparent calm, the mutual fund industry went through a huge churn last year that saw the emergence of several new star funds. These new kids on the block not only impressed with their consistent returns but also gave the established names a run for their money.

We discuss five funds that shined bright last year. Our selection is based on changes in star ratings (from no rating to 4- or 5-star or from below 4 to 4- or 5-star) by Value Research. (See Rising stars)

ICICI PRUDENTIAL FOCUSED BLUE CHIP

It is a large-cap equity scheme which invests in 200 top stocks according to market capitalisation on the National Stock Exchange (NSE).

Launched in May 2008 when the equity market was starting to decline, the fund closed financial year ended 31 March 2009 with a 26.5% loss as against 39% fall in the Nifty and 42% in the NSE 200 index.

In 2009-10, it gave a 90% return compared to Nifty’s 77%. In 2010-11, it again did well by returning 19% as against Nifty’s 11% rise. In 2011-12, another difficult year for equities when the Nifty shed 9%, the fund limited its loss to 3%.

“The emphasis is on finding the best stocks and holding them for long periods,” says Manish Gunwani, senior fund manager, ICICI Prudential AMC.

The fund’s resilience in 2011 and better-than-benchmark returns in 2009-10 and 2010-11 make it one of the better performers in the equity large-cap category.

RELIGARE MID- & SMALL-CAP

The scheme was launched in one of the worst possible times to invest—19 January 2008, when the stock market was at peak, only to weaken in the next 15 months, when the Sensex fell from 21,000 to 8,000.

The fund’s disastrous beginning (NAV fell 46% between April 2008 and March 2009) was followed by a 133% return in 2009-10 as against 126% rise in the benchmark CNX Midcap index. In 2010-11, the fund(12%) beat its benchmark (4.35%).

It outperformed in 2011-12 too by posting a gain of 6.5% as against 4% fall in the CNX Midcap index.

The fund has had 50 or more stocks in the past one year. Its favourites are private banks and consumer food companies, which comprised 16% and 9% of the portfolio, respectively, at the end of March 2012.

RELIGARE TAX PLAN

In its first year of existence since December 2006, it beat the bigger funds in the category—SBI Magnum Tax Gain, Reliance Tax Saver, HDFC Long Term Advantage and Franklin Tax Shield—by giving a 64% return compared to 59% rise in the benchmark BSE 100 index.

The following year (2008), when the market crashed, it was the 6th best performer in the tax-saving category with a 50% fall in net asset value or NAV. The worst fund in its category saw its NAV fall 65-66%. The BSE 100 index fell 55% during the period.

After the 2008-09 fall, the fund began to recover losses and registered a 98% rise in NAV in 2009-10, the 11th highest return that year in the category. It also beat the benchmark (88%) by 10 percentage points.

This was followed by a rather subdued 2010-11, when it returned 11% (16th best in its category) as against 9% generated by the benchmark.

The next financial year (2011-12) was marked by volatile equity markets. The average return by tax-saving funds during the period was -5%. Religare Tax Plan not only outperformed its benchmark (-8.65%) but also the category average by limiting its NAV fall to 0.5%.

The fund’s strategy is to bet on growth-oriented mid-cap stocks.

“We keep the portfolio well-diversified and use the three-year lock-in to our advantage by being patient investors,” says Vetri Subramaniam, chief investment officer, Religare Mutual Fund.

SBI MAGNUM EMERGING BUSINESS

The fund’s impressive performance in the past three years stands out in the mid- and small-cap category.

In 2009-10, it gave a 153% return compared to 96% rise in the benchmark BSE 500. In 2010-11, the fund (it rose 13.65%) again beat the benchmark (7.5%) by a fair margin. But the performance in 2011-12 deserves special mention. At a time when most equity funds were struggling, the fund’s NAV rose 12.4%. The BSE 500 index fell 9% during the period.

Being a mid- and small-cap equity scheme, the fund’s returns are relatively volatile. The fund has had a high turnover ratio (145-150%) in the last one year.

R Srinivasan, fund manager, explains, “The high turnover ratio is on account of relatively small number of stocks (we restrict the number of stocks to 25) which necessitates a churn, and a high concentration of mid- and small-caps, which requires us to run a large-cap filler to manage liquidity on the overall portfolio.”

MIRAE ASSETS OPPORTUNITIES

The fund, launched in April 2008, completed three years in 2011 and straight away received the highest grade (5-star) from Value Research. It has maintained its performance and rating in the last one year.

The large- and mid-cap fund shed 42% value in the first year (May 2008-March 2009) but made a strong comeback the following year (April 2009-March 2010) with a 121% return. Its benchmark, BSE 200, rose 93% during the period.

It followed this up by another 15% increase in NAV compared to 8% rise in BSE 200 in 2010-11. In a more difficult 2011-12, the fund lost 2.3% compared to 9% fall in the BSE 200 index.

“A large part of the fund’s portfolio is the core holding and only a small part comprises tactical allocation. In the core portfolio, we typically have a buy-and-hold strategy unless there is a change in assumption which demands that we move to a better opportunity,” says Neelesh Surana, Head, Equity, Mirae Asset Global Investments.

TAKE YOUR PICK

While choosing any of the funds mentioned here, other than consistency of performance (a key parameter for rating funds by Value Research), investors must also check assets managed by the particular fund, the pedigree and the profitability of the fund house. These are some parameters that rating agencies may not take into account but can prove to be crucial in the long term.