The document summarizes an interview with Pradeep Gokhale, Senior Fund Manager of Tata Ethical Fund, about the fund. The Tata Ethical Fund is a Sharia-compliant fund that invests only in stocks selected by Dar-al-Sharia that meet Islamic finance principles. It excludes companies in banking, alcohol, tobacco, and those with high debt levels or interest income. The fund has consistently outperformed peers over market cycles due to its focus on high-quality companies with strong earnings growth and low debt.

1. 18th May 2015
Fund Focus: Tata Ethical Fund
Its ethical, and makes good investment
sense too
Pradeep Gokhale, Senior Fund Manager, Tata Mutual Fund
Investors who believe in investing in Shariah
compliant funds have a good option to consider in
Tata Ethical Fund, considering its long track
record of alpha generation. Even for those who
are not necessarily guided by Shariah
considerations, here's a fund whose philosophy
has enabled it to do well over a market cycle is it
holds up value better than most in challenging
market conditions. Read on as Pradeep explains
this very interesting product and why it actually
delivers superior returns over a market cycle.
Click here to know more about percentiles and the colour codes
WF: How is the investment universe defined for this fund?

2. Pradeep: The fund is Sharia compliant fund and thus the investment universe consists of
only those stocks which are in compliance with Sharia principal. Dar-al-Sharia, a Dubai based
institution specialising in Islamic finance selects the universe of such stocks for the fund and
the fund invests only in stocks that fall within this universe. The key selection criteria are:
 The fund does not invest in banking and financial sector.
 The fund does not invest in tobacco or alcohol sectors.
 The fund cannot take position in the futures and options segment.
 The fund cannot invest in companies who have funded more than 30% of their assets
from interest bearing debt.
 The fund cannot invest in companies that have more than 5% of their total income
coming from interest earned.
WF: Which are the sectors that you would typically avoid in a Shariah compliant
product? If you were to compare the CNX 500 vs the CNX 500 Shariah Index,
what is the proportion of the base index that does not find its way into the
Shariah Index?
Pradeep: As is clear from the selection criteria above, the fund does not invest in financial,
tobacco and alcohol sectors. The fund cannot invest in companies who have high debt levels
or companies which generate a lot of interest income. The CNX 500 Sharia Index which is the
benchmark of this fund has 153 stocks against 500 stocks in CNX 500 index.
WF: Your fund has consistently delivered positive alpha over the last 6
consecutive years and in 7 of the last 8 years. What are the factors that have
enabled consistent alpha generation?
Pradeep: The fund has focussed on companies with strong compounding characteristics i.e.
companies that can grow their earnings over a long period of time. Also, we have stuck to
these companies for a long period as can be seen from the very low portfolio turnover.
Additional positive for these companies was that they had low debt levels (being part of
Sharia universe), thereby ensuring that the full benefits of operating profit growth went
primarily to equity holders and not to lenders. Thus, we invested in quality companies with
low debt and stayed with them for a long time.
WF: When compared with the pool of diversified equity funds, your fund seems
to do much better than the pool in more challenging market conditions (top
quartile in 2011, 2013 and YTD 2015) and relatively poorly compared to peers in
healthier markets (2012 and 2014). What do you attribute this to?
Pradeep: Typically diversified funds have a large exposure to banking sector and also tend to
have exposure to companies with higher debt levels. Such portfolio typically does well in

3. more bullish phases but also losses are higher when markets turn weak. Thus if you look at
returns only for a bullish period you would see ethical fund returns to be lower. However, if
one looks at the cumulative returns, they would turn out to be much better in the ethical
fund as it does not lose much in a bear phase and retains most of the returns generated in
bull phase. Thus over a longer period the investor compounds his investment in a better way
in an Ethical fund. E.g. an investment of Rs 100 in Ethical fund as on January 2009, would be
worth Rs 428 by Dec 14. However, the same investment in BSE Sensex would have been only
Rs 292.60 whereas it would be only Rs 374.61 if invested in Bank Nifty. This is because the
broader market and the banking sector fell much more in CY11 and CY13, thereby giving up
a large part of the gain made in previous bull periods of CY09, CY10 and CY12.
WF: How are you positioning the fund now in terms of sector and thematic
preferences, in these volatile times?
Pradeep: The fund is overweight on auto and auto ancillaries, cement and capital goods and
industrials which we feel will benefit from the expected domestic growth recovery. Also we
are overweight on IT and pharma sector as they are secular growth sectors. We are equal
weight on FMCG sector due to high valuations. The fund is also underweight on oil and gas
sector. The focus is again on finding companies who can compound earnings over a long
period in an improving economic growth scenario.
WF: Is this fund positioned largely as a Shariah compliant opportunity or is there
a broader appeal that you are seeking to build for the product?
Pradeep: The fund is positioned as a fund which invests in growth companies that have high
capital efficiency and cash generation. Such portfolios tend to perform very well across
business cycles as such companies do not lose much value in a business downturn unlike
companies with large leverage. Thus the fund is ideal for long term investors who want to
get the full benefit of compounding and low volatility irrespective of his / her religious
preferences. As can be seen from the past record, the fund has outperformed BSE Sensex
even in bull phases even though the fund cannot invest in banking sector.
Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets
or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal
or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility
alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.
Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect
in the scheme portfolios of Tata Mutual Fund.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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