Invest In Equities Cautiously

I had invested in Sundaram Select Focus Fund last year. My exit load period will expire soon. Should I hold or redeem my investment in this fund?

- Suren Bundela

During the last year, Sundaram Select Focus Fund has underperformed its benchmark. The fund managed to generate only 6.94 per cent in returns (CAGR), while its benchmark, the Nifty index, has generated a return of nearly 10 per cent during the same period (as on November 5, 2013).

The fund’s long-run track record is also disappointing. As seen in the chart, during the last five years, it has generated absolute returns of only 66 per cent, while the Nifty has generated absolute returns of 109 per cent during the same period.

Consider exiting this fund and switching to other Large-Cap funds such as those shown in the table. These funds have generated significantly higher returns than Sundaram Select Focus Fund and have also outperformed the Nifty. Additionally, as the table shows, Sundaram Select Focus Fund is relatively more volatile, as the fund had a higher downside risk and standard deviation than its Large-Cap counterparts.

These funds are amongst the best performers in their categories. The schemes have consistently generated high risk-adjusted returns and will help you maximise returns and simultaneously limit risk. You could split your investment between two or more funds for diversification. In the long-run, these top-performing Large-Cap funds should add value to your portfolio.

However, you should invest in these funds cautiously as the current valuations are not very attractive. During Muhurat trading on November 3, 2013, the Nifty surpassed its previous peak and closed at a record high of 6317. The last time the index crossed 6300 was in November 2010, and at that time it was trading at a P/E of about 26x. The valuations are relatively more favourable now, but by no means are they cheap. On November 5, 2013, the Nifty was trading at a P/E of 18x – only marginally below its long-run average P/E as shown in the chart.

The recent rally was probably driven by liquidity rather than fundamentals, as the recent economic indicators have been negative. In September and October, foreign institutional investors (FIIs) have poured in about Rs 27000 crore in equities – offsetting the amount which was withdrawn in the months of June, July and August, when the spectre of quantitative easing (QE) tapering spooked the global markets.

Equities may be volatile until investors have more clarity about the Federal Reserve’s plans to wind down its QE programme. The markets may be range-bound in the short-term as the upcoming elections may weigh down the sentiment.

Hence, it would be a good idea to redeem your holdings in Sundaram Select Focus Fund and invest in money market funds. Use systematic transfer plans (STPs) to invest in equity funds in small doses. This will enable you to benefit from rupee cost averaging.