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Ever heard of a growth fund with a 50% exposure to liquid assets. Will drive a liquid fund to shame isn't it? Well that is exactly what the HDFC Growth Fund has done. Out of a Rs.132 crore corpus, the HDFC growth fund has allocated a whopping 50 percent net to investment in the call market. From a puritanical fund analyst perspective this ratio may sound disproportionate and atrocious. Experts may argue that an inordinately high exposure to liquid assets would mean mortgaging the future for the sake of the present. But hold your breath. Actually, HDFC is playing a very smart game by following this rather unconventional strategy. Here is why this strategy makes the fund all the more attractive at current depressed NAVs :

• First and foremost is the issue of market volatility. Over the past 6 months since the Union Budget was announced markets have been extremely volatile and this volatility has become all the more pronounced in the last couple of months. Under these circumstances, a high exposure to liquid assets reduces the volatility in the portfolio in the short to medium term.

• Second the timing of entry for HDFC was slightly preceding the downward correction of the market. Incidentally, market pundits are expecting the markets to bottom out in the next month or so at around the 3500 mark. In such a market high exposure to equities would have reduced the leverage the fund has to capitalize, on the emerging investment opportunities. A solid cash pile enables the HDFC growth fund to enter the market at the lower end of the market cycle to reduce the holding cost of equities.

• Thirdly a cursory look at the portfolio of HDFC Growth Fund makes it obvious that the equity portfolio is a two pronged strategy of combining solid brands with high growth sectors. Thus the fund holds strong brands like Britannia, ITC, Marico, Asian Paints (India) Ltd and Smithkline on the one hand and growth stocks like Infosys, NIIT, Visualsoft among others. What it means is that the fund has an existing portfolio which is long term in nature with little scope for appreciation in the short to medium run. In these circumstances a war chest to walk in and out of the market increases the flexibility of the fund.

• Last but not the least is the issue of growth fund economics. Should a growth fund be maintaining such a high proportion of its assets in liquid assets. The answer is why not. From an investor's perspective a mutual fund portfolio should be a mix of long term growth and medium term flexibility. A 50% exposure to cash ensures just that.

So in a nutshell the moral of the story is that there is nothing wrong with a growth fund holding a major exposure to liquid assets. What matters is the timing of entry, quality of the portfolio and the flexibility to churn the portfolio. On all the three counts, HDFC growth fund scores very high. At the current sub-par NAV the HDFC Growth fund offers a delicious opportunity to participate in the next market uptrend.

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