Mutual funds for long-term investors - Part I

Mutual funds for long-term investors - Part III

Mutual funds for long-term investors - Part IV

In the second part of this five part series on top 25 mutual funds analysed by Value Research we produce the next best five mutual funds that investors can put their money in for the long term.

Interestingly, three of these five belong to HDFC [Get Quote] Mutual Fund. They are HDFC Equity, HDFC Prudence and HDFC Growth at number 8,9 and 10 respectively.

DSPML's T.I.G.E.R. comes at number 6 followed by Franklin India Prima Plus at number 7.

# 6: DSPML T.I.G.E.R. Reg -- Capital maker

Equity: Diversified

Information: www.dspmlmutualfund.com NAV: Rs 45.857 (28/09) Entry Load: 2.25 per cent for investment less than RS 5 crore Exit Load: 0.5 per cent for redemption within 179 days Expense Ratio: 2.01 per cent Launch: May '04 Plans: Growth, Dividend Min Investment: Rs 5,000 Benchmark: BSE 100 Portfolio Manager: Soumendra Lahiri

The name might appeal to aggressive investors, when in actuality the conservative ones will feel right at home here. The broad investment mandate, large-cap tilt and intense diversification should alleviate all their fears. An acronym for The Infrastructure Growth and Economic Reforms, the fund focuses on sectors that are likely to prosper from growth related to economic reforms and infrastructure development.

With this as a starting point, the fund manager follows a top-down approach (for sector selection) before resorting to bottom-up stock picking. Unlike other infrastructure offerings, its broader mandate has enabled it to tap into sectors that core infrastructure funds do not -- healthcare, FMCG, textiles, consumer non-durables.

A high degree of diversification, typical of equity funds in the DSPML family, is evident.

At 72, the number of stocks in its portfolio is far more than any other fund focused on infrastructure/core sectors. In fact it is probably too high for a fund with a relatively focused investment objective.

Nevertheless, that has not diluted the return generating capabilities of the fun. It remains among the top quartile across the six-month, one year and three-year horizon.

Owing to its superb run, assets have grown by 130 per cent over the last one year to Rs 2,600 crore, making it the 12th largest diversified equity fund.

Stocks like Reliance Industries [Get Quote], Larsen & Toubro and BHEL have been long-term favourites. While there is a reasonable amount of continuity in its top holdings, considerable churning takes place among the rest.

Great returns on a predominantly large-cap, growth-oriented, infrastructure-led portfolio is what T.I.G.E.R is all about.

#7: Franklin India Prima Plus -- Quality control

Equity: Diversified

Information: www.franklintempletonindia.com NAV: Rs 177.2704 (28/09) Entry Load: 2.25 per cent for investment less than Rs 5 cr Exit Load: 1 per cent for inv. Expenses Ratio: 2.15 per cent Launch: Sep '94 Plans: Growth, Dividend Min Investment: Rs 5,000 Benchmark: S&P CNX 500 Portfolio Manager: Sukumar Rajah, Anand Radhakrishnan

Its mild-mannered approach makes it a suitable holding for investors who like its smooth ride.

Its dominant strength lies in a high-quality portfolio. For example, the fund has largely stayed away from sky-rocketing real estate plays.

Many would call it a missed opportunity, but that is where the fund adds value -- it does not buy into fads easily. Maintaining a strong focus on fundamentals is the fund's top priority.

It invests in a portfolio of around 50 stocks and the top holdings are almost always well-known blue chip stocks. Right from January 2000, the fund has held an average 70 per cent of its portfolio in large caps.

This has not been the case all along though. Launched around the peak of the IPO boom in September 1994, it started off as a stock collector and had nearly 200 stocks in its kitty by March 1996. The relentless cleaning took years before it could pare it down to 40 stocks (January 2001).

Thanks to big bets in technology, the fund trampled its benchmark and peers in 1998 and 1999. But it could not sidestep this landmine. When the tech bubble burst in 2000, it fell harder at (-) 31.89 (category average: (-) 24.27 per cent).

The fund's middling performance after that has been easier to swallow. It can now be branded as a well-diversified, large-cap fund with low volatility ad decent returns.

Because of this, the fund may never deliver eye-popping returns. But at the same time, it will never make you regret your decision of investment in it.

# 8: HDFC Equity -- Top gun

Equity: Diversified

Information: www.hdfcfund.com NAV: Rs 182.838 (28/09) Entry Load: 2.25 per cent for investment less than Rs 5 crore Exit Load: Nil Expense Ratio: 1.83 per cent Launch: Dec '94 Plans: Growth, Dividend Min Investment: Rs 5,000 Benchmark: S&P CNX 500 Portfolio Manager: Prashant Jain

This perennial winner has a massive fan following. And rightly so!

Like a magician repeating a trick, HDFC Equity has beaten the category average every single calendar year since 1997. Its ability to identify opportunities at the right time is the key factor contributing to its success.

For example, when the Supreme Court halted PSU disinvestments in September 2003, the fund sold its entire energy holding and built a fresh position in March 2004, when PSU stocks started rallying.

Though the fund maintains a large-cap bias, it does not hesitate to invest substantially in stocks of smaller companies, as and when there are opportunities to exploit. Currently, large-caps account for 51 per cent of the assets while the mid- and small-cap allocations stand at 42 and 6 per cent respectively.

The fund manager has always boldly ridden his convictions. He refrains from taking cash calls and prefers to remain fully invested at all times.

Historically, his portfolio has been a focused 25-30 stocks.  But the complexion of the fund seems to be changing on this front. The number of stocks has increased to over 45. And, the concentration in the top five holdings has been moderated from 35-40 per cent about a year ago, to just around 25 per cent now.

This is probably not reflective of his stance but rather an adjustment to the size. Investors have flocked to this fund in droves making it the largest diversified equity offering of Rs 5,000 crore. And this very factory may be detrimental to the strategy of the fund. The fund's ability to identify opportunities and take meaningful exposure in them will be neutralised by its increasing size.

The fund has displayed ample spunk till date, but it remains to be seen how it fares from here on.

# 9: HDFC Prudence -- Fine balance

Hybrid: Equity-oriented

Information: www.hdfcfund.com NAV: Rs 136.239 (28/09) Entry Load: 2.25 per cent for investment less than RS 5 crore Exit Load: 1 per cent for redd. 1 year and investment Rs 5 crore Expense ratio: 1.89 per cent Launch '94 Plans: Growth, Dividend Min Investment: Rs 5,000 Benchmark: Crisil Balanced Fund Index Portfolio Manager: Prashant Jain

This fund treats its investors well.

Be it in protecting the downside or generating great returns, it has delivered magnificently.

During the lean years of 2000-2001, the fund lost less than the average balanced fund. In the recent past as well, the fund has done a commendable job of protecting the downside.

During the quarters of June 2006 and March 2007, when the average category loss stood at (-) 7.97 per cent and (-) 3.23 per cent respectively, HDFC Prudence managed to return a loss of (-) 6.58 per cent and (-) 3.18 per cent during the respective quarters. Furthermore, the fund has been amongst the most efficient in pulling out of each such slump and ensuring that the momentum is not lost.

Being a chart topper was a habit for this fund. Till last year, at least. While that in itself is not a disturbing fact, it tends to nag when compared with this year's performance, which is short of the category average.

We can't find a fault with its stock or sector moves. But where we did find significant change was in its diversification. Owing to a rising corpus (increase of 100 per cent since January 2006) combined with a mid-cap orientation, the count of stocks has increased form 30-35 (early 2006), to as many as 50 scrips. This has been accompanied by a steady decline in the concentration of holdings.

While this will help the fund retain its low risk grade, it looks like returns have been compromised. But going by the fund's long term track record, we prefer giving the fund manager the benefit of the doubt. We stick to our verdict that this is among the best choices around.

# 10: HDFC Growth -- Potential energy

Equity: Diversified

Information: www.hdfcfund.com NAV: Rs 63.818 (28/09) Entry Load: 2.25 per cent for investment less than Rs 5 crore Exit Load: 1 per cent for redeemed 1 year and investment < Rs 5 crore Expense Ratio: 2.32 per cent Launch: Aug '00 Plans: Growth, Dividend Min Investment: Rs 5,000 Benchmark: BSE Sensex Portfolio Manager: Srinivas Rao Ravuri

The fund's revved up stance should appeal to its investors who are in search of more pickup from this offering.

After a fairly uneventful 2004 and 2005, HDFC Growth beat the category average by 10 percent age point last year. Savvy sector selection has been a testament to the fund manager's skills. While its peers were neutral towards the health-care sector, the fund's allocation increased from 4.44 per cent in January 2006 to 11.33 by the end of the year on the back of concentrated bets in Sun Pharmaceuticals and Divi's Laboratories.

Similarly, the fund defied popular trend and pruned its allocation to financial services while increasing it to the automobile sector. Typical to the fund's style, the increased exposure to particular stocks or sectors is done in a systematically and phased manner by building position slowly.

With a comfortable diversification across 35 stocks, buy-and-hold seems to be the preferred strategy with stocks like BHEL deeply entrenched in the portfolio for more than 73 months. But aggression's evident in its significant exposure to mid- and small-cap stocks.

In fact, for a period of 12 months between March 2004-05, the fund's focus shifted to mid cap stocks.

But don't get carried away by the current performance.

By and large, it has been a middle-of-the-road performer with periodic spurts of brilliance. What's impressive is that in such a frenzied market, it has managed to deliver great results and emerged out of the shadows.

This can probably be credited to the new fund manager who has been around for a year. Going by the recent performance, HDFC Growth may finally have earned a place in the sun. This fund is worth a second look.