Investment Focus - HDFC Sensex Plus Plan: Buy :: Business Line

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The 12 per cent fall in the BSE Sensex since February (to 16,200 levels) has made the Indian market inexpensive from historic as well as global perspective.

The time appears right for investors to buy into equities with a five-year holding period. But given that a fuzzy economy and rupee do pose risks to corporate profits, it may be best to play it safe with blue-chips at this juncture. Hence, investors can buy equities through the HDFC Sensex Plus Plan, a diversified equity fund. The fund is a good investment option for three key reasons:

HDFC Sensex Plus Plan aims to deliver a return that is better than the Sensex over the long term. For this, it invests 80-90 per cent of its portfolio in stocks from the Sensex basket, with weights that are close to the index. Besides this, 10-20 per cent of the portfolio is actively deployed in stocks outside the Sensex to deliver a ‘kicker' to returns. The key advantage of this approach is that investors get the benefits of index-linked returns with low risk. Now, this fund has delivered remarkably well to its mandate over its ten-year history.

Its 21 per cent annual return since 2002 is significantly higher than the Sensex's 17 per cent over the same period. In the last 3 and 5 years too, the fund returned 10 and 6 per cent a year. The Sensex return was 3-4 percentage points lower. Slightly varying the sector weights in the portfolio relative to benchmark and active investing in ‘value' stocks in the mid- and large-cap space have helped the fund's returns.

While keeping up with the Sensex in rising markets, HDFC Sensex Plus' track record is more remarkable for its ability to contain losses to its NAV during down phases in stock markets. This ability was on display in the market crash of 2008, when the fund's NAV dipped 47 per cent, compared with the 54 per cent drop in Sensex.

It was reinforced in 2011, when the fund contained its losses to 21 per cent against the Sensex fall of 25 per cent. The lower losses in a bear market make the fund less risky and deliver a smoother ride to investors.

Finally, at 16200 levels, the Indian market today offers a good entry point for long-term investors. The Sensex today trades at a price-earnings multiple of just 12.5 times estimated earnings for its constituent companies this fiscal. That is substantially below its 10-year average of 16 times and close to the lower bounds of the valuation that markets have enjoyed over the past 10 years.

Sensex PE multiples in the past 10 years have ranged between 11 and 26 times.

Yes, several factors seem to be arrayed against companies and their stock valuations at this juncture. There is pressure on corporate profits, a weak rupee, policy uncertainty, to top off a slowing economy. But it is periods of extreme pessimism that provide great buying opportunities for long-term investors in stocks. And a revival in the stock market usually precedes an upturn in the economy or corporate earnings.

Units of HDFC Sensex Plus plan are available at Rs 207.5 per unit.