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I would like to invest Rs 40,000 in two funds of Prudential ICICI [Get Quote]: Dynamic and Discovery.
Am I making the right decision?

Also, I would like to start a Systematic Investment Plan whereby I invest Rs 1,000 every month in the fund.

Can you suggest a good diversified equity fund?

- Arunabha Deb

First, let us give you a brief idea about the two funds you have chosen.

Investment styles

Prudential ICICI Dynamic invests in shares. It also has the flexibility to invest its money entirely in debt (fixed return instruments) and money market instruments. If the fund manager sees a turbulent time ahead for the stock market or a slump in the market, he has the option to sell the shares he holds and put the money in these investments.

Is that what you are looking for or do you want a fund that invests only in stocks at all times?

Currently, Pru ICICI Dynamic has predominantly invested in mid-cap stocks across various sectors.

Prudential ICICI Discovery, on the other hand, invests only in stocks and value stocks at that. Here too, many of the stocks are mid-caps.

Are you sure these funds fit in with your overall investment strategy?

Performance

Having discussed their portfolio, let us look at performance. As far as performance goes, both funds are yet to establish themselves.

Take the case of Pru ICICI Dynamic, the older of the two. Last year, it performed very well. But, in the two years prior to that (2003 and 2004), the fund did not perform that well. In fact, when looking at the average returns of diversified equity funds, this fund did not even get an average return.

Also, this fund is more volatile than other diversified equity funds.

Overall, it is an average performer, coupled with higher risk.

Pru ICICI Discovery is quite a young fund so one cannot really evaluate its performance over a long period of time. It has done pretty well in its short performance history so far.

This fund might figure in the list of recommended funds if it carries on and builds on its excellent start to establish itself among the better funds in its category.

In the light of the above, both funds can be avoided at the moment.

Prudential ICICI Discovery
Launched: July 2004
Net Asset Value: 21.95
One-year return: 83.38%

Prudential ICICI Dynamic
Launched: October 2002
Net Asset Value: 43.85
One-year return: 79.74%

~ Other diversified equity funds gave an average return of 63.41% over the same period.

~ The above figures are calculated as on January 20, 2006, for the growth schemes.

Diversified equity mutual funds to consider for investment.

At Value Research, we give mutual funds a star rating (one to five) depending on the returns they have delivered and the risk they have taken to give those returns.

Birla Sun Life Basic Industries, Franklin India Prima, HDFC [Get Quote] Equity, HDFC Long Term Advantage, HDFC Top 200, Magnum Contra, Reliance [Get Quote] Growth and Reliance Vision are some funds that have a 5-star rating. 

Birla Equity Plan, Birla Mid-Cap, DSPML Equity, DSPML Opportunities, Franklin India Bluechip, Franklin India Prima Plus, HDFC Capital Builder, HSBC Equity, Magnum Global, Principal Resurgent India Equity, Sundaram Growth, Sundaram Select Focus, Sundaram Select Midcap, Tata Growth and UTI Master Value have a 4-star rating.

How to invest

It is not advisable to make a lump sum investment of Rs 40,000 in a mutual fund, especially if it is an equity mutual fund and the market is at such a high level.

It is better to invest systematically over a period of time. If you put in small amounts every month, your investments even out  over time. You get fewer units when the NAV is high and more units when it is low.

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