Three equity mutual funds to sell now ::Business Line

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A rising tide lifts all boats. Thus, equity funds across the spectrum have seen a rise in their Net Asset Values (NAVs) in the stock market rally since the New Year.

With the rally led by the riskier stocks and sectors, select equity funds, which have a lacklustre five-year record, have registered sharp NAV gains.

This offers a good opportunity for investors to exit these funds and switch their investments into equity funds with a more consistent record.

Below are three funds that investors can sell today, in order to effect such switches.

We have homed in on these funds based on two criteria. These equity funds have registered top NAV gains in the past three months, allowing investors to cash out at returns that are 15-20 per cent higher than what they could have managed a couple of months ago. Yet, as these funds have substantially underperformed the broader market and peers over three- and five-year time frames, they aren't good choices for an investor's long-term equity portfolio.

JM Basic Fund: A theme fund intended to invest in the energy, oil and gas and other basic sectors that supply primary inputs to manufacturing, JM Basic has sharply underperformed markets and peers in the last five years.

The fund's five-year compounded annual loss of 7.3 per cent, against the CNX 500's positive 5.3 per cent return, puts it in the bottom 10 per cent in the equity fund category. Three-year returns at 19.9 per cent too position it among the laggards.

The fund's underperformance is attributable to its focus on sectors such as capital goods and power through 2009 and 2010, precisely the sectors that were most hit by the slowing investment cycle.

Despite a shift in focus to sectors such as finance and auto in the past year, investors may be better off switching out.

A diversified equity fund may have greater flexibility to switch actively between themes that win in the current environment of economic uncertainty.

HSBC Progressive Themes Fund: A theme fund, HSBC Progressive Theme Fund's mandate is rather broadly defined as “investing in sectors, areas and themes that benefit from India's progress, reform process and economic development.”

The fund's 23 per cent holding in banks has helped it register a 17 per cent gain in its NAV in the last three months.

However the fund's five-and three-year records are uninspiring with a five-year annualised loss of about 1 per cent and a three-year return of barely 12 per cent.

Both these returns place the fund in the bottom 10 per cent in a peer group of diversified equity funds.

Banks and capital goods have consistently figured in the top sector weights in the past three years.

While bank stocks are bound to lead from the front in any sustained stock market recovery, this sector will be owned by many diversified equity funds.

Reliance Equity Fund: Defined as a moderate large cap fund which will use both long and short positions in equities to protect against downside risk, Reliance Equity fund has not managed the falling markets of 2011 particularly well despite its specialised mandate.

The fund's NAV lost 33 per cent in value while the Nifty — the fund's benchmark — fell no more than 25 per cent.

The fund has seen its NAV gain nearly 23 per cent this year and has outperformed the market. But its three-and five-year records argue for an exit while the time is right.

A three-year return of 16 per cent is well below the Nifty's 26 per cent and the five-year return of 4 per cent also falls short of the Nifty return of 7.5 per cent. Funds such as Reliance Equity Opportunities make for a better long-term bet.