Wednesday, November 19, 2008

JM Basic Fund: Aggressive play, but lower returns

Launched in June 2005, JM Basic Fund is focussed on the industrial sector of the economy. The open-ended equity-diversified fund has an objective to provide capital appreciation through deployment in sectors categorised under “basic industry” in the normal parlance and in the context of the Indian economy. These include, but are not limited to, energy, petrochemicals, oil & gas, power generation & distribution, electrical equipment suppliers, metals and building material. The scheme has not been a star performer, but over a life span of three years, it is an average performer in the category. But the fund has raised eyebrows by showing a jump in returns since 2007. That year, it took the fifth position in overall equity-diversified schemes, by delivering 31.90% compounded annualised returns over a two-year timeframe. But the ranking slipped since the beginning of this year due to a major slump witnessed in the markets, so much so that its long-term trailing returns have also been negatively affected. The fund takes concentrated bets on stocks in the core and infrastructure sectors.

The scheme, under the management of Asit Bhandarkar, was earlier biased in favour of large-cap stocks. However, the entry of Sandip Sabharwal into the fund house in December 2006 as its chief investment officer — equity has brought many changes in the fund’s outlook. The scheme began to aggressively invest in mid-cap stocks. At present, 57.43% of assets are invested in stocks of companies with a market capitalisation of less than Rs 6,577 crore. The scheme, which used to invest its portfolio across fewer sectors, also increased the diversification to over 16 sectors. At present, the engineering & industrial machinery sector, housing & construction, steel and electricals & electrical equipment are the fund’s big holdings. It has not touched the energy and power sectors much. Apart from conventional core industries, JM Basic Fund has also held stocks in packaging, paper and sugar sectors. Also, the fund does not hesitate to put large sums in few sectors — currently, the Top 3 sectors account for about half of the fund’s assets. Recently, it has been hit hard by its continuous high allocation to housing and construction. The fund manager is also active in managing holdings. Thus, the portfolio has been churned every month. The scheme seemed to struggle over the years and enjoyed little popularity amongst investors. The rally in 2007 saw the fund take off, but that performance could not be sustained once the markets turned bearish, which is a point worth noting for investors. JM Basic Fund, due to its inconsistency in returns, is a risky choice.

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