6 GREAT equity funds for 2006

In fact, make that '6 great evergreen equity funds. In our view these funds have done enough for us to believe that they will be relevant for some time to come, unless of course there is a fundamental change in the way they are going to be managed.

The Personalfn Research Team makes its business to comb through the hundreds of mutual funds in the industry to identify the best.

Our list of preferred equity funds have been subjected to the most stringent selection guidelines before graduating to the 'preferred' list. In addition to considering everyone's favourite 'NAV (net asset value) return' criterion, we probe a lot deeper into the processes and investment style of Asset Management Companies.

We prefer AMCs that put the onus to perform on their processes and not on an individual/fund manager. Equity funds from process-driven AMCs tend to do better over the long-term and negotiate stock market ups and downs better than their peers.

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The last criterion in particular is very significant in our view; most equity funds tend to do well during a rally, but only the very best can cope with a market downturn.

We have considered a minimum 3-year track record while selecting the funds; in our view that is the minimum time frame investors should look at while evaluating an equity-linked investment. As a consequence of the minimum 3-year performance criterion, some funds like Fidelity Equity for instance, that have shown glimpses of good performance over a brief history, failed to make the list.

Personalfn's chosen funds!

1. Franklin India Bluechip Fund

Fund Profile
Franklin India Bluechip Fund (FIBF) is one of the better-managed large cap funds in the country. The fund has an impressive track record going back to 1994. Another plus is continuity in fund management; Mr. K. N. Siva Subramanian, a leading fund manager, has been managing the fund since inception.

Portfolio Strategy
FIBF maintains a stock portfolio of about 30 stocks. It does not shy from making concentrated allocations in stocks as well as sectors. The top 10 stocks in its portfolio usually account for more than 50% of net assets. Likewise, its sector allocations are also concentrated across a handful of sectors.

FIBF is probably the only large cap fund that has maintained its 'true blue' large cap nature. It has adhered to its mandate even during the mid cap rally and remained invested in large caps, while its peers deviated from their professed mandates and invested a portion of their assets in mid caps to capitalise on the growth opportunities in that segment.

Outlook
FIBF's impressive track record should make it an ideal candidate for investors looking to invest in a large cap fund. The fund is process-driven and has a history of identifying trends earlier on.

Given that large caps can do better than their mid cap peers at least on a risk adjusted basis, a large cap fund like FIBF should prove to be a rewarding investment proposition.

2. HDFC Equity Fund

Fund Profile
HDFC Equity Fund (HEF) is a pre-dominantly large cap equity fund. It has a decade-long track record of impressive returns across market cycles. It is managed by Prashant Jain, one of the more respected figures in the fund management industry, for more than 10 years.

Portfolio Strategy
HEF pursues an aggressive investment style. It usually invests in about 25 stocks. The fund manager backs these stocks by making higher allocations to them. For the same reason, its sector allocations are also concentrated. This style has worked well for the fund over the years.

Another trait that has worked well for HEF is its knack for entering and exiting sectors at the right time. Of course, it has made mistakes like its heavy PSU exposure in 2003; but it has been more right than wrong. A case in point of a very timely exit was software in December 1999, at a time when others were busy getting into the sector.

HEF invests predominantly in large caps, but can invest in mid caps; a flexibility it used liberally during the mid cap rally.

Outlook
For investors with a high risk appetite, HEF makes an ideal investment option. The fund's ability to keep turbulence at bay despite managing a concentrated portfolio is a major positive. The flexibility to invest in mid caps implies that investors can get a flavour of the 'mid cap potential' whenever it arises.

3. HDFC Top 200 Fund

Fund Profile
HDFC Top 200 Fund (HTF) is an index-plus fund, among the earliest funds of its kind. Launched in 1996, it is on the verge of completing an impressive decade in the industry. It is managed by Prashant Jain.

Portfolio Strategy
HTF pursues an index-plus investment strategy, aligned to the BSE 200. Upto 60% of its net assets are invested in stocks from the BSE 200. It can invest the balance 40% in stocks that are not a part of the index. The fund maintains a portfolio of 40-50 stocks. It maintains a relatively concentrated sectoral portfolio.

Like its sibling HDFC Equity Fund, HTF made several critical investment calls that worked well for it like exiting technology/media/telecom in 1999.

Outlook
HTF's index-plus strategy has infused a degree of consistency in performance. This makes it an ideal investment option for investors with a moderate-high risk appetite. An impressive track record and a competent fund management team are other reasons to invest in the fund.

4. Franklin India Prima Fund

Fund Profile
You might say that Franklin India Prima Fund was responsible for introducing the term 'mid caps' to the mutual fund investor. It was launched a good 10 years before other fund houses caught on to the mid cap opportunity. An impressive show since inception and the fund management expertise of K N Siva Subramanian are the biggest positives in its favour.

Portfolio Strategy
FIPF invests predominantly in mid cap stocks; it invests a small portion in large caps. The fund's equity portfolio is well-diversified (over 50 stocks) with the top 10 stocks accounting for less than 40% of net assets.

In our view, a diversified equity fund should have no more than 40% of net assets in the top 10 stocks and FIPF fares well on this parameter. This becomes even more critical in the case of a mid cap fund given the higher risk involved. Sectorally, FIPF maintains a concentrated portfolio

Outlook
FIPF is best suited for investors with a flair for high risk – high return investment avenues. The fund's decade-long expertise in managing investments in mid cap stocks is a big positive.

Identifying trends earlier on and keeping volatility at bay through a well-diversified stock portfolio are other reasons to invest in the fund.

5. Principal Growth Fund

Fund Profile
Principal Growth Fund (PGF) is a predominantly large cap diversified equity fund. Launched in October 2000, it has only completed 5 years in the industry. For most of its existence it was a relatively modest performer; a change in the fund management team changed that and the fund has now emerged as a better-performing predominantly large cap fund.

Portfolio Strategy
PGF invests a larger portion of its net assets in large cap stocks. It has the flexibility to invest a portion of its assets in mid caps, something it has put to good use during the mid cap rally. The fund's stock picks are well-diversified with the top 10 stocks accounting for less than 40% of net assets.

It maintains a sectorally concentrated portfolio when it identifies an opportunity. Likewise, it goes into cash quite liberally either to cut losses or to invest later at an opportune time.

Outlook
Investors with a moderate-high risk appetite should consider adding PGF to their portfolios. Like its equity fund siblings, PGF has done well to generate wealth for investors by taking on lower risk, a fact evident from its Standard Deviation and Sharpe Ratio numbers.

A process-driven investment style will ensure that the fund is a consistent performer going forward.

6. Sundaram Growth Fund

Fund Profile
Launched in 1997, Sundaram Growth Fund (SGF) is one of the most conservatively managed equity funds. Its process-driven approach has endeared it to investors who have come to expect a degree of stability and consistency in SGF's performance.

Portfolio Strategy
SGF pursues a pre-dominantly large cap investment strategy. It adheres to well-defined processes. For instance, its investments in a single stock cannot exceed 5% of net assets.

If the stock allocation exceeds that number then it must necessarily dilute its stake in the stock. On the same lines, its sectoral allocations also have limits aligned to those of the BSE 200.

These processes ensure that the fund is well-diversified across stocks and sectors at all times. This is something that helped the fund negotiate the downturn in tech/media/telecom sectors in early 2000.

Outlook
Without doubt, SGF's biggest positive is a well-diversified investment strategy, which has worked well for the fund across market cycles. This is evident from its consistent performance on the returns and risk parameters (Standard Deviation and Sharpe Ratio). For investors with a moderate risk appetite, SGF is an ideal investment option.

Sundaram Asset Management Company is on the verge of formalising an equity tie-up with BNP Paribas. The latter has bought a 49.9% stake in Sundaram AMC. While details of the tie-up and its implications to investors (in Sundaram schemes) will unfold at a later stage, our interaction with Sundaram AMC indicates that the investment style and processes of AMC and the mandates of the existing funds will remain undisturbed.

The funds profiled above represent, in our view, the best equity funds available to investors. However investors would do well to realise that investments in mutual funds are prone to the vagaries of markets and that even the best of schemes could suffer during a downturn in markets.

However the chosen schemes are certainly better equipped to protect investors' interests during adverse conditions vis-à-vis their peers.

Also investors' investment objectives and risk profiles will play a vital role in determining the allocation to be made to each fund. This is where the services of an expert and qualified investment advisor will come to the fore.

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