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I have invested in HDFC [Get Quote] Capital Builder and Magnum Midcap fund via an Initial Public Offering.

Should I add one sector fund like Magnum Contra to my portfolio or should I opt for a large cap fund?

If I opt for a large cap fund, can you suggest one based on the past five year performance, portfolio and less downward risk?

- Sameer Thakur

I will first tackle your question on Magnum Contra before I take on the rest.

What Magnum Contra is not

Firstly, Magnum Contra is not a sector fund.

A sector fund is one which invests in the stocks of a particular sector. For instance, a pharma sector fund will only invest in the shares of pharma companies. Or, an auto fund will invest in the shares of auto companies.

You should invest in a sector fund only if you have thorough knowledge of that sector and are quite bullish on it.

The risk in a sector fund is high. The sector could take a turn for the worse and your fund will consequently perform miserably.

On the other hand, if it does exceedingly well, you would reap great returns.

The risk in a sector fund is much higher than in a diversified equity fund. But so is the potential to reap great returns.

What Magnum Contra is

Magnum Contra is a diversified equity fund that takes a contrarian view to investing.

A diversified equity fund is one that invests in the stocks of various companies of different sectors.

As the name suggests, it will follow a contrarian view to investing. This means the fund manager will deliberately bypass the most popular stocks that everyone is chasing.

Kotak Contra is another contrarian fund to hit the market and the Initial Public Offering is on till July 1, 2005.

The fund manager in both cases will focus on stocks that have strong fundamentals but are trading at a significant discount to their intrinsic value. In layman's terms, funds whose share is, say, Rs 15 right now but have the potential to be Rs 100 over a period of time.

In other words, the fund managers of such funds will invest in out-of-fashion sound companies. These will be stocks that are strong on fundamentals but whose value is not yet recognised by the market. To put it very simply, it is like buying umbrellas in the winter to sell them in the monsoons.

If the fund manager makes some good picks, the returns could be phenomenal.

Returns from Magnum Contra

Based on the type of stocks that the fund manager will invest in, this fund will appear unattractive in the short-term. Over the long run, you could reap some great returns.

Do note, it may take a long time to deliver attractive returns. Therefore, you should invest in the fund if you have the patience and are willing to block your money for some time.

As far as the performance of Magnum Contra is concerned, the fund ranks second on the basis of five-year trailing returns in the category of 52 diversified equity funds.

Adding to your portfolio

It is always a good idea to have different types of funds in your portfolio. So it would be nice to have a mix of mid-cap and large funds.

Let me explain that. If the number of shares in a company is multiplied by its current price, the result is market capitalisation. Blue chips are the largest companies in their sectors; the ones with the largest market cap.

The smaller companies are called mid-caps and they have the potential to be tomorrow's blue-chips. Funds that invest in these are called mid-cap funds.

Investing in mid-caps (or such funds) are more risky than investing in blue-chips.

Mid-caps could give phenomenal returns or end up going downhill. Also, their earnings tend to be very volatile and this affects their share price too.

• Why mid-caps are hot

Both the funds you have currently invested in � HDFC Capital Builder and Magnum Midcap fund � are mid-cap dominated funds.

So you must balance your portfolio by investing in large cap funds.

You can consider funds like Franklin India Bluechip, HDFC Equity, Principal Growth.

If you prefer funds that are a little more aggressive (higher risk), then you can consider the likes of Reliance [Get Quote] Vision.

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