Sunday, April 27, 2008

Is It Really Focussed?

ICICI Prudential Focused Equity Fund aims to limit its portfolio to around 20 stocks

You invest in a mutual fund (MF) scheme because apart from being unable to track direct equity investments, you also want diversification. So your MF that diversifies across 40 to 60, sometimes even more than 80, scrips, steps in. But too many scrips can also dampen your fund’s portfolio as a bunch of them should see their share prices appreciate to have any decent impact on your fund’s net asset value (NAV). ICICI Prudential aims to address this issue as it has launched a new scheme that will neither under nor over-diversify.

Called, ICICI Prudential Focused Equity Fund (IPFEF), this scheme will invest in around 20 scrips as that’s the ideal number of scrips the MF believes a scheme should have. IPFEF will choose from the top 200 companies as per their market capitalisation.

Should you invest?
While having a tight and an adequately diversified portfolio has its merits, there is no thumb rule on the number of stocks that a MF scheme should hold. Further, the number of stocks in a portfolio is just an approach to fund management; it does not guarantee performance.

Look closely at ICICI Prudential MF’s bouquet of schemes and you realise that the focused approach could just be an excuse to launch a new scheme, as typically all its schemes have a much higher number of stocks. Even its other large-cap oriented funds like ICICI Prudential Growth Fund and ICICI Prudential Power Fund hold more than 30 scrips. Ultimately, IPFEF’s offer document says it can diversify beyond 20 stocks if its assets cross Rs 1,000 crore. That is a low threshold to have for a large-cap oriented fund. With giants like ICICI Prudential having the marketing and financial muscle to woo distributors and investors alike, it doesn’t take time to either mop Rs 1,000 crore or come up to that level in case they mop up a lower amount.

Avoid IPFEF. Instead opt for some of JM’s well-performing equity funds if you want to get the most out of a tight portfolio.

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