Reliance Mutual head of equities Madhusudhan Kela is among the most successful stock-pickers at Indian bourses and he isn't hot on mid-caps anymore. Here's what he thinks of the overall market and what he is buying now.

When money pours in it may not be easy to say, no, thanks. But that is what Reliance Mutual Fund has done in its Growth Fund. Last week Reliance Capital [Get Quote] Management said it would suspend sales in its Growth Fund for a period of three months.

The move was to protect the interest of existing investors in the fund in view of the increasing size and to facilitate better fund performance.

For the record, the fund currently has a corpus of nearly Rs 1,400 crore (Rs 14 billion). The suspension will take effect when the fund's corpus reaches Rs 1,700 crore (Rs 17 billion) or August 14, 2005, whichever is earlier, the company said.

But of all the fund managers, Madhusudan Kela, head (equities), Reliance Mutual Fund, should not be complaining. Kela, 37, has been one of the best stock pickers among the domestic fund managers.

His portfolios, particularly the ones tilted towards mid-caps (Reliance Growth is one of them), are studded with stocks which have moved up several-fold since he bought them for the first time. It is as though picking multi-baggers is his habit.

Kela's multi-baggers
Stock price (Rs)	Bought in	Price then	Price now
BEML	2003	240	657
Kirloskar Brothers [Get Quote]	2003	120	2389
Crompton Greaves [Get Quote]	2003	80	512
Jaiprakash Associates [Get Quote]	2003	50	249
KSB Pumps [Get Quote]	2003	140	330
Radico Khaitan [Get Quote]	2003	95	439
Sintex Industries [Get Quote]	2003	80	547
Jindal Saw [Get Quote]	2004	180	388
Tata Chemicals [Get Quote]	2004	140	192
Century Textiles [Get Quote]	2004	120	312
United Phosphorus [Get Quote]	2004	400	898
Wockhardt	2005	360	463
* After split

To set the record straight, Reliance Growth Fund has been among the best performers in the past one year, delivering returns of Rs 93.23 per cent, nearly double of what the BSE 100 gave (48.38 per cent). Not just that. Last year, Kela was adjudged Business Standard best fund manager of the year for the astounding performance of Reliance Growth.

The fund returned a category-topping 87 per cent in the one-year period ended June 30, 2004, and was on top of the table in terms of risk-adjusted returns, too. From a modest Rs 38 crore (Rs 380 million) corpus in June 2003 the fund has seen the fastest growth in assets under management. End of June 2004, the fund had a corpus of Rs 460 crore (Rs 4.60 billion).

Reliance Growth Portfolio churning in the past quarter (the stocks where exposure has increased the most).
Company	No. of shares held as on Jun,2005	Difference in no. of shares
Tamil Nadu Newsprint	2098782	2098782
Jaiprakash Industries	1594869	1594869
EID Parry (India)	1874894	1499823
IDBI	2225415	1249872
Ram Krishna Forgings	1235859	1235859
The stocks where exposure has decreased the most
Satyam Computer Services [Get Quote]	0	-399463
IndusInd Bank [Get Quote]	2134225	-360796
Jindal Vijayanagar Steel	0	-347868
Maruti Udyog [Get Quote]	0	-299645
Deccan Chronicle Holdings [Get Quote]	529970	-27003

As on June 2005, the corpus is up at Rs 1,322 crore (Rs 13.22 billion). It is no mean task that the fund has maintained its stellar performance even on a rapidly growing corpus.

Interestingly, an analysis of three-year daily rolling returns of Reliance Growth Fund for the period between October 1995 (when the fund was launched) and June 2005, shows a 30 per cent upside.

Simply put, if a person invested in the Growth Fund on any day for a period of three years, he would have ended up with a 30 per cent return on his investment on an average.

Reliance Vision Fund, which has a large-cap tilt, also boasts of a similar record with an average three-year daily rolling return of 26 per cent.

In fact, even the recent launches from Reliance's stable have done exceedingly well, partly driven by buoyant markets. Reliance Banking Fund, launched in May 2003, has posted a return of Rs 57.81 per cent since its inception (till June 30, 2005), beating the CNX Banks Index (49.34 per cent).

In the past year, however, the fund (53.40 per cent) has underperformed the index (58.50 per cent). Reliance Power Sector Fund has delivered an amazing 47.06 per cent return since its launch in May 2004.

The Power Index has gained 14.56 per cent during the period. Reliance Pharma has gained 30.77 per cent since its inception in June 2004 while the benchmark BSE Health Care Index has gained 22.56 per cent.

Similarly, Reliance Media and Entertainment Fund has gained 30.61 per cent while the CNX Media and Entertainment Index gained 15.20 per cent. The Reliance Opportunities Fund, however, has underperformed marginally with a return of 7.58 per cent compared to the BSE 100 return of 9.14 per cent.

Reliance Vision Portfolio churning in the past quarter (the stocks where exposure has increased the most).
Company	No. of shares held as on Jun,2005	Difference in no. of shares
Jaiprakash Industries	999941	999941
Yes Bank [Get Quote]	999941	999941
Oriental Bank of Commerce [Get Quote]	999841	999841
Hinduja TMT [Get Quote]	848828	848828
Rolta India [Get Quote]	499970	499970
The stocks where exposure has decreased the most
Ashok Leyland [Get Quote]	9961133	-2933097
Tata Steel [Get Quote]	0	-499816
Ceat	917446	-332562
Gujarat State Fert & Chem	1798122	-273948
Bharat Forge [Get Quote]	2790	-236760

The Growth Fund has nearly 70-75 per cent exposure to mid-caps where market experts feel valuations are stretched. According to Kela, the choices were to either compromise on valuations or buy inferior quality stocks or hold high cash levels, all of which would hurt investors. The asset management company, however, chose neither. It simply said no to fresh money.

"Some of the mid-caps have run ahead of fundamentals. Hence, one has to be very selective in buying a mid-cap stock. Even to keep Rs 1,700 crore (Rs 17 billion) invested wisely is not an easy task," Kela adds. Point taken.

Kela does not follow a top-down approach and has no loyalties to any particular investment style - growth or value. Rather, he believes in opportunism. He does not mind buying cheap, low P/E stocks or high-values ones. The only thing he looks out for is the delta factor - the rate of change. Kela and his analysts closely track relative valuations on a daily basis.

"At any given point in time, we need to make sure that we derive the maximum value for every rupee that we invest," says Kela. Put another way, Reliance MF goes for stocks that are gaining momentum. Provided certain hygiene factors are met.

"It is important to learn the strategic content from the management. We need to know how hungry the management is. We also make an analysis of a company's competitive strengths, risk-taking ability and other external factors that might influence the business."

Indeed, Kela has been fast on his feet. For instance, in 2003 Kela was over-weight on large-caps. "In 2003, it did not quite matter what you were invested in. You just had to be invested in equities at that point of time," he says.

With foreign institutional investor interest in India growing, it was clear that the action would be in large-cap stocks. "And that is what we did," Kela had said in an interview with Business Standard last year. After playing the mid-cap game successfully in the past one year, he is back to the large-cap ground.

The Reliance Opportunities Fund, which alters its allocations dynamically across various segments in the market based on its view, is currently has a dominant allocation to large-caps.

"Our Opportunities Fund is titled towards large-caps as we see better value in several large-cap stocks," says Kela.

Its top picks are its own group flagship (actually, it's no longer in the same group), Reliance Industries [Get Quote] (8.38 per cent), State Bank of India [Get Quote] (4.36 per cent), ITC (4.11 per cent), Nirma (3.32 per cent) and HCL Technologies [Get Quote] (3.27 per cent). Other large-cap stocks in the portfolio include ONGC [Get Quote], Mahindra & Mahindra, Bhel, Maruti, Tata Consultancy Services [Get Quote] and Bharat Forge.

Having said that, Kela isn't bearish on the market per se. Kela has been inching up his cash allocations for the past couple of months, however, at the end of June all equity funds had cash allocation of less than 15 per cent -- evidence that he isn't bearish yet.

The only exception is Media Fund which has booked profits aggressively to make use of the recent rally in media stocks. Cash allocation in Media Fund now stands at 38 per cent, primarily because the fund has booked profits considering the huge run up in several media counters.

While profit-booking is a continuous process, Kela continues to be bullish even as some market experts - even the finance minister - express concerns over stock valuations. Kela is content looking at the big picture. Even though markets are at a new peak, for Kela, valuations are still at comfortable levels.

"People are missing the point - this is the first time that we are seeing a good equity environment build-up. Liquidity is pouring in from all sides. Stocks are still under-owned and in several companies earnings growth of 15-20 per cent is visible; hence, overall valuations are not very stretched," he defends. "There is very little downside in stocks if one takes a three-year time-frame," he adds.

Kela's case is simple. Considering a modest earnings growth of 10 per cent and a price-earnings multiple of 12 times, the Sensex would trade at 8078 in 2009. If one assumes an earnings growth of 15 per cent and applies a 16 times price-earnings, the Sensex would quote at 12,229 in 2009. For now, growth momentum seems to be strong with year-on-year earnings growth in excess of 15 per cent.

Kela and his team have been early birds into several mid-cap counters. But that is not it. More important is the decision to stay put in several stocks to ride the entire rally.

Several stocks in the Reliance Growth Portfolio have been multi-baggers since the time Reliance Mutual made its first purchase. And many of them continue to be the fund's top holdings even now. Bharat Earth Movers [Get Quote], Kirloskar Brothers, Crompton Greaves, Jindal Saw, Jaiprakash Associates, KSB Pumps and Radico Khaitan are some notable examples.

TOP 10 HOLDINGS
Reliance Equity Opportunities Fund AUM = Rs 1,616.64 crore		Reliance Growth AUM = Rs 1,322.03 crore		Reliance Vision AUM = Rs 675.36 crore
Company	% of net assets	Company	% of net assets	Company	% of net assets
Reliance Industries	8.38	Bharat Earth Movers	5.58	Siemens	10.07
SBI	4.36	SBI	3.61	Reliance Industries	6.65
ITC	4.11	Kirloskar Brothers	3.48	Automotive Axles [Get Quote]	5.67
Nirma	3.32	Crompton Greaves	3.33	Jet Airways [Get Quote] India	5.62
HCL Technologies	3.27	Jindal Saw	2.97	Bharat Forge	5.13
Corporation Bank [Get Quote]	3.23	Jaiprakash Industries	2.2	Tata Motors [Get Quote]	5.03
Jaiprakash Industries	2.85	KSB Pumps	2.11	ONGC	4.56
Siemens	2.76	Radico-Khaitan	2.08	Television Eighteen	4.1
ONGC	2.76	Divis Laboratories	2.08	Hinduja TMT	3.88
Mahindra & Mahindra	2.76	Jindal Steel and Power	2.02	Oriental Bank of Commerce	3.7

For now, Kela isn't fascinated by the buzz surrounding several counters. He would much rather stick to his convictions. "In this market, our strategy is to add to our holdings where our conviction level is already very strong."

Some recent additions to Reliance portfolio are Shivvani Oil, NIIT [Get Quote], Pritish Nandi Communications, i-flex, Texmaco, Lakshmi Machine Works [Get Quote], Blue Dart Express [Get Quote], Nirma, Rolta, Ram Krishna Forgings and Tamil Nadu Newsprint. Besides, Kela has also been increasing exposure Punjab National Bank [Get Quote] and Oriental Bank, apart from picking up the latest entrant Yes Bank. Some stocks which he has sold include Ashok Leyland, Tata Steel, Satyam Computer, Maruti, IPCL [Get Quote], ACC and Reliance Energy [Get Quote].

Kela has his list of regrets, too. Pantaloon [Get Quote], for example. He bought the stock at Rs 40 and sold at Rs 120.

He could well pat himself for netting three times gains. But if he held on. Well, the stock now quotes at Rs 1,400 plus. But then, this is a game where you win some, lose some. Net-net Kela and his team have been on the winning side till now.