JM Basic Fund - Analysis

JM Basic Fund: Analysis- Invest Now

 

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The JM Basic Fund may be a good investment option for investors with a high risk appetite willing to take concentrated exposures to stocks in the core and infrastructure sectors. A sharp improvement in the fund's performance in the past year (with a 62 per cent return) has placed it within the top quartile both in the thematic infrastructure fund category and within the universe of diversified equity funds.

The fund's three-year track too has perked up, though the fund still lags many of its peers in the return rankings over a five-year period. The fund has a policy of declaring liberal dividends after periods of high returns. This provides an avenue for investors in this thematic fund to lock into gains when the theme outperforms, reducing the need to book profits by redeeming units. The dividend option may be preferred over the growth option.

Launched initially as a sector fund that would focus on energy stocks with a very limited investment universe, JM Basic has later broad-based its investment objectives to invest in a range of sectors that fit the broad categorisation of "basic" industries.

The definition of "basic" is sweeping, with the portfolio featuring holdings in financial services, packaging and commodities apart from conventional core industries such as engineering, metals and capital goods. This more diversified profile helps contain risk, to some extent.

 

Suitability

A clear preference for mid-cap stocks over large-caps and concentrated exposures to its top sectors and stocks makes JM Basic Fund suitable only to a fairly aggressive investor. The fund's portfolio strategy suggests that returns may witness greater volatility over the short-term, than the normal diversified fund.

The fund has however, managed downside risk reasonably well during the recent market correction, containing the decline in NAV to about 21 per cent from the January 8 peak, even as the BSE Capital Goods Index fell by about 22 per cent.

 

Portfolio strategy

Sectors such as construction, capital goods and metals have been the fund's key choices within the basic theme, even as it has largely stayed away from sectors such as power generation and oil and gas.

The fund has also displayed a clear partiality to mid-cap stocks, probably with the conviction that mid-caps rather than frontline stocks will outperform over the next few years. 86 per cent of the fund's end-January portfolio was invested in mid-cap stocks, with a market capitalisation of less than Rs 7,500 crore.

This was up from 77 per cent in August 2007 and 69 per cent in March 2007. Good performance has led to steady inflows and a swelling corpus size over the past year, with the current asset base at Rs 1,311 crore (end-January).

The expanding corpus has prompted the fund to expand the number of stocks in the portfolio though it still remains compact, at 35 stocks.

Though the sector holdings remain focussed (top two accounting for 40 per cent of assets), the fund has taken to holding smaller positions in some of its mid-cap picks.

 

Performance

The fund's one-year returns (62 per cent) as well as three year compounded returns (43 per cent pa) place it within the top quartile both within the diversified and thematic fund category.

Five-year compounded returns, at 39 per cent, are just a shade over the Sensex and place the fund in the second quartile within the equity return rankings.

 

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