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com August 10, 2007

Sharekhan’s top equity fund picks

Record foreign fund inflows enabled the market to advance by an and high interest rates have already affected the earnings growth
appreciable 6.1% in July. However, the upward march was bumpy with momentum was evident from the first quarter results of corporates.
breathtaking climbs, stomach-churning drops et al. Not content with For the first time in several quarters, the earnings of the corporate
conquering the lofty levels of 15k, the market rapidly gained another sector failed to meet expectations when adjusted for the foreign
800 points in less than a fortnight to close at an all-time high of exchange gains.
15,869 on July 24. Just when expectations were building up that the
Thus the sky does appear to be overcast. But as always, there's a
market would comfortably cross even the magic figure of 16k before
silver lining. India continues to grow at a faster pace than most other
the month got over, it plummeted by over 541 points on July 27, in
emerging economies and thus remains the toast of the FIIs. Just to
reaction to the weakness in global markets. Recovery was rapid but
give you an idea, the FIIs made net purchases worth over Rs17,000
short-lived. Thus even though the market took another round of cash
crore in the first three weeks of July alone-that is almost equivalent
reserve ratio (CRR) hike in its stride and closed up 300 points on July
to what they had invested in April, May and June put together. Of
31, it plunged by a mind-numbing 620 points the very next day when
course, the global concerns that we just talked of might result in
the other global markets crashed on heightened US subprime lending
some mass withdrawals in the near term but the fact remains that
concerns. Clearly, the market is choosing to take its cue from the
the Indian economy's impressive performance would be able to sustain
West at the moment. Considering that there is much trouble brewing
the foreign fund inflows in the medium term.
in the West, that is a cause for concern.
When all's said and done, there are concerns, both global and
All eyes are on the USA, where the subprime mortgage crisis is unfolding
homegrown, that might keep the markets volatile in the near term.
itself. The sharp rise in defaults on subprime loan repayments and
Hence caution is advised. Rather than rushing in on a correction, we
foreclosures on account of the rising interest rates in the USA has
would wait and watch how the global and domestic factors unfold. We
forced some of the biggest US subprime lenders to either shut shop or
prefer telecom and fast moving consumer goods sectors as well as
file for bankruptcy. There are fears that the crisis is spreading to the
select stocks from cement, engineering and capital goods sectors
other mortgage segments also and might ultimately result in a severe
with lower valuations.
credit crunch. A crunch in the housing market, in turn, could slow
down consumer spending-consumer spending grew at a mere 1.3% in We have identified the best equity-oriented schemes available in the
the second quarter vs 3.7% in the first quarter. Any downturn in the market today based on the following parameters: the past
US economy could spell trouble for our market as it would not only performance as indicated by the returns, the Sharpe ratio and Fama
affect our exports and hence our economy but also slow down the (net selectivity).
fund flows into our market. However, it will be some time before the We have identified the best equity-oriented schemes available in the
extent of the damage caused by the bursting of the housing bubble market today based on the following 3 parameters: the past
becomes clear. performance as indicated by the one and two year returns, the Sharpe
Fortunately, in spite of everything the broader American economy ratio and Fama (net selectivity).
appears to be in good shape. The unemployment rate remained stable The past performance is measured by the one and two year returns
at 4.6% and 92k new jobs were added in July 2007. In the second generated by the scheme. Sharpe indicates risk-adjusted returns,
quarter, the US GDP grew at the fastest pace in more than a year at giving the returns earned in excess of the risk-free rate for each unit
3.4% as against 0.6% in the first quarter of 2007. Inflation too remains of the risk taken. The Sharpe ratio is also indicative of the consistency
within the comfort range of the US Federal Reserve (Fed). The problem of the returns as it takes into account the volatility in the returns as
has till now remained limited to the housing sector and not affected the measured by the standard deviation.
rest of the economy. But if the crisis balloons this view could change.
FAMA measures the returns generated through selectivity, ie the
Meanwhile, there is another frightening aspect of the subprime returns generated because of the fund manager's ability to pick the
mortgage crisis. The recent meltdown in the equity markets across right stocks. A higher value of net selectivity is always preferred as
the world was triggered by reports of losses suffered by large funds it reflects the stock picking ability of the fund manager.
with exposure to the US subprime lending market. For instance, two
funds of Bear Sterns Cos., the fifth-largest US securities firm, collapsed We have selected the top 10 schemes upon ranking on each of the
last month while Australia's Macquarie Bank has voiced its fears that above 4 parameters and then calculated the mean value of each of
some of its funds may post losses. It is feared these foreign institutional the 4 parameters for the top 10 schemes. Thereafter, we have
investors (FIIs) may sell their profitable investments in the emerging calculated the percentage underperformance or over performance
markets to offset the losses suffered on account of the collapse of of each scheme (relative performance) in each of the 4 parameters
the US subprime lending market. That's not all, the yen has appreciated vis a vis their respective mean values.
by a good 5.3% against the dollar in the past few weeks which is For our final selection of schemes, we have generated a total score
triggering large-scale unwinding of the carry trades financed with for each scheme giving 30% weightage each to the relative
the Japanese currency. performance as indicated by the one and two year returns, 30%
Not all concerns that India Inc has to deal with are imported though. weightage to the relative performance as indicated by the Sharpe
There are problems aplenty on the home turf as well. Firm interest ratio and the remaining 10% to the relative performance as indicated
rates and strong rupee continue to hurt our exports, which (minus by the FAMA of the scheme.
petroleum products), as per our estimates in rupee terms, actually All the returns stated below, for less than one year are absolute and
saw a decline of 1% in June this year vs a 37% growth in June 2006. for more than one year the returns are annualised.
The slowdown in the export sector may ultimately slow down the
earnings growth of the domestic companies. That the strong rupee We present below our recommendations in the equity-oriented
mutual fund category.

Sharekhan Ltd
A-206, Phoenix House, 2nd Floor, Senapati Bapat Marg, Lower Parel, Mumbai - 400013, India.
Mutual Funds Mutual Gains

Aggressive Funds Balanced funds

Mid-cap Category Scheme Name  NAV Returns as on Jul 31, 07(%)
3 Months 1 Year 2 Years
Scheme Name  NAV Returns as on Jul 31, 07(%)
3 Months 1 Year 2 Years Birla SunLife 95 208.64 14.47 48.82 33.35
SBI Magnum Midcap 26.64 19.62 67.97 50.28 HDFC Prudence 130.20 12.79 44.65 36.13
Reliance Growth 324.13 17.65 67.41 46.66 FT India Balanced 37.70 12.16 41.66 33.16
Birla Mid Cap 80.30 23.03 63.48 46.08 Tata Balanced 57.54 11.33 44.40 33.94
ICICI Prudential 33.21 14.79 62.79 47.61 DSP ML Balanced 44.01 12.10 39.59 34.01
Emerging STAR SBI Magnum Balanced 39.35 9.85 37.20 33.33
Sundaram BNP Paribas 102.13 12.67 39.50 48.77
Indices
Select Midcap
Crisil Balanced Fund Index 2697.03 8.25 28.64 25.58
Indices
BSE Sensex 15550.99 12.10 44.74 42.57 Tax planning funds
Scheme Name  NAV Returns as on Jul 31, 07(%)
Opportunities category
3 Months 1 Year 2 Years
Scheme Name  NAV Returns as on Jul 31, 07(%)
3 Months 1 Year 2 Years PRINCIPAL Tax Savings 94.24 20.47 69.77 49.78
Birla SunLife Tax Relief 96 112.51 21.42 65.63 45.41
ABN AMRO Opportunities 25.94 21.39 70.81 51.67
Sundaram BNP Paribas 30.61 11.15 48.63 39.25
Fidelity Equity 25.14 15.18 61.52 44.96
Taxsaver
DSP ML Opportunities 64.42 15.02 48.91 45.37
Indices
Franklin India Flexi Cap 24.07 14.79 47.06 44.48
BSE Sensex 15550.99 12.10 44.74 42.57
Kotak Opportunities 33.78 14.36 50.46 42.29
Tata Equity Opportunities 68.75 15.91 54.00 42.63
Risk-return analysis
Franklin India Opportunity 29.51 14.81 55.89 44.37
The charts on the following pages give you a snapshot of how the mutual
Indices funds have performed on the risk-return parameters in the past. We
BSE Sensex 15550.99 12.10 44.74 42.57 have used the bubble analysis method to measure their performances on
three parameters viz risk, return and fund size. The risk is measured by
Equity diversified/conservative funds standard deviation, which measures the average deviation of the returns
Scheme Name  NAV Returns as on Jul 31, 07(%) generated by a scheme from its mean returns. We have tried to explain
the same with the help of a diagram, which is divided into four quadrants,
3 Months 1 Year 2 Years with each quadrant containing funds of a particular risk-return profile.
Birla SunLife Frontline Equity 60.21 14.64 57.21 47.04 The size of the bubble indicates the size of the fund.
DSP ML Top 100 Equity 67.33 12.81 53.17 48.18 The funds in the high-risk high returns quadrant follow a very
SBI Magnum Multiplier 63.38 17.07 57.00 51.59 aggressive approach and deliver high absolute returns compared to its
Plus 93 peers albeit at a higher risk.
HDFC Equity 172.33 14.00 48.98 45.68 The funds in the low-risk high returns quadrant outperform the peer
Birla SunLife Equity 220.83 18.58 66.99 47.93 group on the risk-adjusted returns basis as they deliver higher returns
Franklin India Prima Plus 162.39 14.07 57.76 48.30 compared to its peers without exposing the portfolio to very high risk.
SBI Magnum Global Fund 94 47.75 10.99 55.23 50.23 The funds in the low-risk low returns quadrant are not very aggressive
SBI Magnum Equity 32.68 14.91 54.39 47.60 and provide lower absolute returns, taking lower risks.
ABN AMRO Equity 32.46 19.65 62.06 46.80 The funds in the high-risk low returns quadrant underperform the
HDFC Growth 58.72 20.86 57.86 46.62 peers on the risk adjusted returns basis as they adopt a high-risk
strategy but the returns fail to compensate the risk taken by the fund.
Indices
BSE Sensex 15550.99 12.10 44.74 42.57 For aggressive, conservative and tax planning funds, risk is measured
in terms of two years' volatility while returns are measured as two
Thematic/Emerging trend funds years' average rolling returns as on July 31, 2007. For thematic and
balanced funds, risk is measured in terms of one year's volatility while
Scheme Name  NAV Returns as on Jul 31, 07(%) returns are measured as one year's average rolling returns as on
3 Months 1 Year 2 Years July 31, 2007.
DSP ML India Tiger 40.33 18.20 69.26 56.82
Tata Infrastructure 29.26 22.97 66.66 55.97
SBI Magnum Sector 44.29 13.97 54.00 49.13
Umbrella - Contra
SBI Magnum Sector Umbrella 34.41 17.84 57.77 32.94 Every individual has a different investment requirement, which
Emerging Businesses depends on his financial goals and risk-taking capacities. We at
Sharekhan first understand the individual’s investment objectives
Templeton India Growth 77.40 12.99 47.79 37.63
and risk-taking capacity, and then recommend a suitable portfolio.
Indices So, we suggest that you get in touch with our Mutual Fund Advisor
BSE Sensex 15550.99 12.10 44.74 42.57 before investing in the best funds.

Sharekhan 2 August 10, 2007

Mutual Funds Mutual Gains

Aggressive Funds
Risk-Return matrix

HIGHER RISK Franklin India Opportunities HIGHER RISK

LOWER RETURNS HIGHER RETURNS

ICICI Pru Emerging STAR

==Std. Dev.====>

Birla Midcap HSBC India Opportunities

Tata Equity Opportunities

DSP ML Opportunities
Reliance Growth

Fidelity Equity

Franklin India Prima Sundaram Select Midcap

Birla India Opportunities HDFC Capital Builder

LOWER RISK LOWER RISK

LOWER RETURNS HIGHER RETURNS
==Average Rolling Returns====>

Equity Diversified/Conservative Funds

Risk-Return matrix

HIGHER RISK HIGHER RISK

LOWER RETURNS HIGHER RETURNS

SBI Magnum Multiplier Plus 93

Reliance Vision
==Std. Dev.====>

Franklin India Prima Plus SBI Magnum Global Fund 94

HSBC Equity Kotak 30
Birla Sunlife Equity

Principal Growth
Sundaram Select Focus
ICICI Pru Growth Plan
DSP ML Top 100 Equity
HDFC Top 200 ICICI Pru Power
HDFC Growth
UTI Master Value Franklin India Bluechip

Brila Sunlife Frontline Equity

LOWER RISK
LOWER RISK HIGHER RETURNS
LOWER RETURNS

==Average Rolling Returns====>

Thematic/Emerging Trend Funds

Risk-Return matrix
ICICI Pru Discovery
HIGHER RISK
HIGHER RISK
Tata Infrastructure HIGHER RETURNS
LOWER RETURNS
ICICI Pru Infrastructure

SBI Magnum Sector Umbrella - Emerging

==Std. Dev.====>

Business

DSP ML Tiger

Birla Div Yield Plus Templeton India Growth

UTI Master Value

SBI Magnum Sector Umbrella - Contra

HDFC Core & Satellite

UTI Div Yield

LOWER RISK LOWER RISK
LOWER RETURNS HIGHER RETURNS

==Average Rolling Returns====>

Sharekhan 3 August 10, 2007

Mutual Funds Mutual Gains

Balanced Funds
Risk-Return matrix

HIGHER RISK HIGHER RISK

LOWER RETURNS HIGHER RETURNS
==Std. Dev.====>

Birla Sunlife 95
HDFC Balanced

HDFC Prudence
SBI Magnum Balanced

UTI Balanced Tata Balanced

Birla Balance Franklin India Balanced

DSP ML Balanced

LOWER RISK ICICI Pru Balanced LOWER RISK

LOWER RETURNS HIGHER RETURNS

==Average Rolling Returns====>

Tax Planning Funds

Risk-Return matrix
HIGHER RISK
HIGHER RISK ICICI Pru Taxplan HIGHER RETURNS
LOWER RETURNS
==Std. Dev.====>

HDFC Taxsaver Principal Tax Savings

Sundaram Taxsaver

SBI Magnum Tax Gain Scheme 93

Principal Personal Taxsaver

UTI Equity Tax Savings Plan Birla Sunlife Tax Relief 96

Tata Tax Savings

Birla Equity Plan Franklin India Taxshield

HDFC Long Term Advantage LOWER RISK

LOWER RISK HIGHER RETURNS
LOWER RETURNS

==Average Rolling Returns====>

Disclaimer: mutual fund investments are subject to market risk. Please read the offer document carefully before investing.
Past performance may or may not be sustained in the future.

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The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries
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that may prevent SHAREKHAN and affiliates from doing so. We do not represent that information contained herein is accurate or complete and it should not be relied upon as such. This document is prepared for assistance
only and is not intended to be and must not alone betaken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make
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Sharekhan 4 August 10, 2007