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DBS Chola Hedged Equity Fund � Should you buy?

Published on Thu, Mar 22, 2007 at 13:00 | Source : Moneycontrol.com

Updated at Sat, Mar 24, 2007 at 12:20

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DBS Chola Mutual Fund's latest new fund offer - DBS Chola Hedged Equity Fund (DBSCHEF) seeks to generate long-term capital by investing in equity and related instruments as well as seeks to minimize risk by hedging a part of its equity exposure through derivatives.

Advisor Hemant Rustagi feels, "Since the fund seeks to invest in a broad based equity portfolio and derivative instruments, it can be an ideal product for investors intending to invest in equities to capture the growth without the effect of market swings on the long term performance." However, he adds, "While these kind of funds aim to generate returns both in the bull market and bear markets, some of the funds with the similar philosophy have not been able to do so." (View - New Fund Offers open NOW)

Though experts believe that it is a good option for conservative investors who wish to improve their portfolio returns without changing their risk profile, they wish to highlight some facts and concerns:

Hedging does not mean Guaranteed returns:

Investment expert Sandeep Shanbhag says, "A number of schemes of late have been promoting hedging as one of the USPs (Unique Selling Point) of their scheme. But it must be remembered that hedging is not like a panacea for all market evils and in no way does it guarantee return for any scheme."

R Rajagopal, Head of Equities at DBS Chola Mutual Fund clarifies, "Hedging definitely is one of the most effective strategy to minimize volatility risk in portfolio management. We believe only with a Dynamic Hedging one can practically mitigate this market risk as one needs to assess the markets from time to time. Hedging does not convert a negative market movement into positive returns for the investor but it definitely aids in assuaging the downfall in the returns to a great extent (depending on the hedge ratio in place). Thus it shall aid out performance in volatile market condition."

Lack of Arbitrage Opportunities:

"As only some 150 odd stocks are available for trading in the derivative segment, even if the fund manager wants to hedge a particular stock by taking an opposite position in the derivative market, it may not be possible because of unavailability", says Shanbhag.

Rajagopal counters, "Primarily the scheme would construct its portfolio out of the 154 stocks available in the F&O segment today. It shall also use the three indices namely- IT index, Bank Index and Nifty index as well for portfolio hedging. We believe this list is ever expanding, as more and more scrips would keep coming into F&O segment. Further we would like to state that the portfolio would be able to achieve diversification with say 35-40 stocks itself and the current universe of 154 stocks is 4 times the intended portfolio size. Hence the limited stock availability is no issue at all. Since the portfolio would be a subset of the universe it will be able to do both stock level as well as portfolio level hedging (as F&O would be available for each stock in the portfolio).

Track record of existing DBS Chola schemes not so impressive:

"The performance of DBS Cholamandalam as a fund house has not been spectacular to say the least. Investor's would be better off evaluating the scheme's performance over the next six months to a year and then based on the performance decide whether to invest or not", says Shanbhag.
Meanwhile, Rajagopal counters as he says, "Our Opportunities Fund and Growth Fund have been top and second quartile performer in the last one year."

Conclusion:

Experts believe that though DBS Chola Hedged Equity Fund can be a good option for conservative investors who are looking to improve returns on their portfolio without changing their risk profile, investor's would be better off evaluating the scheme's performance over the next six months to a year and then based on the performance decide whether to invest or not.

- Reena Prince

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