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Most of the analysts are of the opinion that the market has more or less reached rock bottom. They expect the equity funds to perform well this year. With the present NAV’s the equity mutual funds do look pretty attractive. But what should the investor concentrate on - which type of equity fund? In our opionion, it should be the diversified equity funds. Across two fiscals (1999-2000 and 2000-01), when the Sensex scaled a historic high only to slump lower, diversified equity funds have managed to beat the Bombay Stock Exchange sensitive index (Sensex).

According to an analysis by mutual fund experts the two-year period saw the Sensex starting at 3,740 at the close of December 31, 1999. After declining to 3,245, it peaked at 5,934 (February 11, 2000) and fell to 3,604 on March 30, 2001. The up-and-down spell was marked by extreme volatility, more so for the technology stocks. While the rise continued throughout 1999-2000, the whole of 2000-01 witnessed a downtrend. In sum, it witnessed a complete a bull-bear cycle.

The review encompasses a dozen funds (growth option), with NAVs adjusted for dividend payment and bonus issue, wherever applicable. The volatility analysis, based on monthly returns during the two fiscals, indicates that funds with higher weightage in the technology sector were more volatile than the defensively-managed ones. During 1999-2000, when the Sensex rose by 33.73 per cent, all the funds outdid the index. Their average appreciation was around 107 per cent. Those with a higher technology concentration recorded superior performance.

During 2000-01, the bearish phase, the Sensex fell by 27.93 per cent. This time, the same technology stocks undermined the funds, and underperformance was rampant. Only two topped the index. During the two-year period, therefore, the index did a negative 3.63 per cent. All but two funds gave positive returns and surpassed it, their average appreciation being 22.7 per cent. Significantly, towards the end of the period, most diversified funds restructured their holdings by scaling down exposure to the technology sector.

In terms of percentage changes over 1999-2001, Templeton India Growth Fund occupied the top position. Its NAVs in March 1999, 2000 and 2001 were Rs 8.16, Rs 15.45 and Rs 11.34 respectively. The second and the third slots were taken by Alliance Equity Fund (percentage change: 48.33) and Kothari Pioneer Bluechip Fund (46.63) respectively. On the other side of the spectrum was SUN F&C Value Fund, the change being a negative 7.47 per cent. The relevant NAVs were Rs 20.34, Rs 28.21 and Rs 16.32 respectively. The only other fund in the negative zone was DSP Merrill Lynch Equity Fund.

According to the report, these funds fared well vis-a-vis the 50 top stocks (which were generally trusted by investors) during the period under consideration. Of the 50 scrips, HDFC Bank was the best performer, followed by Reliance, Infosys, Reliance Petro and HDFC. The average appreciation of the top-50 was 9.7 per cent. Only 17 of these managed to better the funds' average score. Not more than 10 could outperform the top fund, and about 25 were worse off than the worst-performing fund. Investors who had opted for the SIP (systematic investment plan) route to investment in MFs were particularly in a better position during these two years.

We analysed some diversified mutual fund portfolios for our readers and have come up with some good safe diversified buys.

Aru Srivastava

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