The fund invests in fundamentally sound companies with a dividend yield at least twice that of Sensex. Dividend paying companies usually have healthy free cash flows, steady earnings growth and a strong balance sheet. This results in steady stock returns over the long-term, while providing relatively better downside protection in times of market correction. The fund also has the flexibility to invest up to 35 per cent in companies facing special situations like de-mergers, buy-backs and open offers, which are used very selectively, with a focus on minimising the downside risk.
It has substantial exposure to mid-cap stocks, but this has not translated into fabulous out-performance, even in bull runs led by smaller market cap stocks. But it did put up a good show in 2009 and had held its ground in 2008. Even in the current market turbulence, it has fallen less than the average of its peers. During periods of volatility, the fund increases its debt allocation.
The top sectors in its portfolio are banking, consumer non-durable, software and pharmaceuticals. The fund maintains around 50 per cent exposure to midcaps and about 20 per cent to small-caps. The large-cap exposure is limited to a few stocks. It limits exposure to individual stocks to less than five per cent of the portfolio.
Its downside protection capabilities have proved the fund gains ground by not losing it in the first place. One would expect this trait from a dividend yield fund, but its surprising when one considers the high mid- and small-cap allocation. The risky bent is balanced by avoiding aggressive bets and increasing the number of stocks over time. Over the long-term, it proves a worthy bet.
