Bogged by rising inflation: Sectors you can still bet on

Dhirendra Kumar, CEO, valueresearchonline.com feels that inflation numbers came as a shock for investors who depend on investment for their income. This 12% is an exception than the usual thing and it will come down. More importantly, you have nothing risk-free in mutual fund.

A moderate and a conservative way to an income oriented option would be an MIP (Monthly Income Plan) but it is not tax efficient till you hold it for at least one year and the way you draw your income from that. The treatment is not of a like equity so either take a conservative simple approach to choose one or two good MIPs and expect less periodic income from that. One approach would be to withdraw from that in six months to supplement your existing income from the other sources.

The other approach is to have a nominal allocation to equity to combat inflation, on which you do not depend. So if you have Rs 25 lakh invested in fixed income avenues, not more than 5% of your total revenues should find its way into a largecap diversified equity fund. Think of it as something, which you will not withdraw, but that is there just to combat inflation and you don’t depend on it for income.

On Birla Sunlife Equity Fund

Birla Sunlife Equity is a good fund to stay invested. Over the past one year, this fund will be down about 15-16% if it is one time investment. It’s a good well managed diversified equity fund. One should stay put in it and shouldn’t look at the value every other day.

Over the past six months, this fund has fallen but so has most other funds. But this fund manages to the decline much better. There is reason to very optimistic with this fund. This fund has given annualised return of nearly 35% since its launch in 1998, which is a quite handsome return and it has been through multiple cycles. It will be rewarding to stay put and remain invested, as it’s a good fund.

If one has to invest more then SIP is a good idea. The moment you invest at one time and you get into the kind of market we saw in the past six months not withstanding what has happened in the past two-three days, it is a big blow to savings habit. Even if you are with a mediocre fund, averaging it by being a regular investor you do a favour to yourself.   

On Reliance Diversified Power

This is a good sector fund. I am very optimistic on this fund over the next three-five years. But if it is the only fund one owns, then he should sell about four-fifth of his holding because this is an investment, which is today worth close to Rs 1 lakh. One should sell around Rs 80 thousand or maybe exit this fund and own a diversified equity fund. If one has other investments in equity and this is 10-15% of overall portfolio then one should stay invested.

On HDFC top 200, HDFC equity, HSBC Advantage Equity fund

These are good funds. For the sake of greater diversity of the fund manager drawing on varied skills, I would not suggest two equity funds of HDFC. If I had to choose one of the two then I would choose HDFC top 200. One should not choose HDFC equity and replace it with some other equity fund of any other fund family. One has quite a number of choices like Magnum Contra, or UTI equity or a K30.

On sectoral funds

One should have a special understanding and knowledge about sectoral funds because they tend to be a vehicle of targeted diversification. It could be a good vehicle if you want to invest in a sector but you don’t know how to do it then there could be a good choice. So if one is up beat on any sector he could consider one. But if one is unable to get out at the right time, for example a banking or a buyer fund tend to be far more volatile then the generic funds so most investors could do without owning any sector fund. If one has any specialist understanding then only you should consider one and it should not be more than 10-15% of his portfolio. If a sector is doing well then even an active fund manager will go about loading his portfolio with that.

On Pharma Funds

If UTI Pharma is the only fund in one’s portfolio then one should not own it. Any pharma fund is a relatively steady take on the market. These funds certainly have shown greater resilience in a sliding market.

Pharma funds in general have done a little better in the phase of the market we have just been through. So the investor might not have gained as much in UTI pharma fund till December’07. This fund has fallen much less. For a naive investor, it is not a very prudent thing to have only this fund, and the investor should have a diversified equity fund.

On Aditya Birla Century SIP or Reliance SIP Plus Insure

They are basically an add-on to the equity fund or the investment options which these fund companies offer. If you chose this option then you will get added insurance coverage without any significant cost. So it’s an attractive way to get an insurance coverage if you are a regular investor in an equity fund.

Given the variables, Birla Sunlife Insurance coverage add-on is a superior bet because it offers greater flexibility, higher coverage, is quite segmented and compartmentalised. Invest for three years and start getting coverage if you remain invested and if you discontinue investing you are still entitled for the cover. If something happens then you get insurance coverage and the compensation.

In case of Reliance you have to be tied in; the company will maintain the SIP. So both of it has similar variables. If I have to look at it on the yardstick of the insurance coverage add-on, the Birla add-on is better.

On SBI Contra Fund

It is an exceptionally good fund and it did very well till about three years back. After that, it has moderated and the change stands. This fund has done exceedingly well and is not as ballistic as it was initially. It is a good thing that this fund has really stood on its own and is a fine choice for any investor for an investment in diversified equity fund for three-five years.

On future investments in MFs

I would advice most investors not to look at mutual fund, equity fund with a six months perspective and not to get carried away by this rally. Markets turnaround when you least expect it and mutual funds investors should be encouraged to look beyond that. You don’t have a control on the market but you surely have a control on your time horizon and being regular is something you cannot avoid in this kind of market. So don’t get carried away, don’t try to capitalise on the market rise for the short run, choose a good fund. If one is following these three-four quality checks and the method of participation, one will be well off.

Don’t stop your investment because if the market crumbles again; most investor tend to stop their investment, which is a wrong strategy. Once you decide choose a good fund, invest regularly and don’t get distracted by what is happening in the market because the simple way of making money in the market is buying low and selling high and people do exactly the reverse of that.

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