The nationwide lockdown due to the Covid-19 pandemic has resulted in many retail investors pulling money out of mutual funds to invest directly in stocks. Industry data show that equity-oriented mutual funds witnessed significant net outflows in the last few months. According to a recent survey, three out of 10 mutual fund investors may have moved to investing directly in stocks.
However, if you are new to equity investing, it may be better to start the journey with equity mutual funds. Many who start investing in high-risk investment avenues such as direct equities often get carried away by the excitement and make mistakes, which put their investments at risk.
In direct equity investing, you have to do extensive research and track the investment closely. But in mutual funds, there are experts who do the hard work of tracking the stocks for you. Among the wide range of equity-oriented funds available in the market, we have short-listed five schemes from different equity-oriented categories with varying investment strategies through which you can participate in equities.
You can invest in these funds through the systematic investment plan (SIP) route that is better-equipped to absorb market shocks.
The ideal investment horizon should be long-term — five years or more.
These schemes have been short-listed based on the consistency with which they have generated higher returns, compared with their peers, over the last seven years. To filter the schemes, we calculated quarterly returns (28 data points) from the last seven years’ NAV history for all the schemes in the large- and mid-cap, mid-cap, multi-cap and aggressive hybrid fund categories. The schemes in each category were then grouped into four quartiles.
Quartile rankings are a measure of how well a mutual fund has performed against all other funds in its category. Schemes with the highest returns in the chosen time period were grouped under the first quartile, whereas those with the lowest returns were bucketed in the fourth quartile.
Schemes that appear the maximum number of times in the first and second quartiles were then short-listed. For instance, Mirae Asset Emerging Bluechip Fund appeared 18 times and five times in the first and second quartiles, respectively, in the total 28 time periods.
Interestingly, all the schemes short-listed using these metrics are rated five-star by BusinessLine Portfolio Star Track MF Ratings .
This highlights the effectiveness of BusinessLine Portfolio Star Track MF Ratings in helping investors identify schemes that have consistently delivered the best returns over the long run.
We have not included large-cap funds in this list as the schemes we short-listed from the large- and mid-cap and the multi-cap categories provide you ample exposure to large-cap stocks. A few better-performing funds in the large-cap category that you can consider include Mirae Asset Large Cap, Aditya Birla Sun Life Frontline Equity, Axis Bluechip and ICICI Prudential Bluechip.
Mirae Asset Emerging Bluechip
It is one of the few consistently performing schemes, delivering a compound annual growthrate (CAGR) of 18.7 per cent since its launch in July 2010.
Mirae Asset Emerging Bluechip, an erstwhile mid-cap fund that now falls in the large- and mid-cap category post the reclassification by SEBI in March 2018, is mandated to invest a minimum of 35 per cent each in large- and mid-caps. By investing in this fund, you can get exposure to the best of large- and mid-cap stocks. Performance measured by the five-year rolling returns calculated from the past seven years’ NAV history shows that the fund delivered a CAGR of 19 per cent, while the category clocked 11 per cent. Its benchmark, Nifty LargeMidcap 250 TRI, generated a CAGR of 11.7 per cent in the same time period.
The scheme also managed to deliver better returns than its peers across cycles in bull, bear and sideways markets.
The fund cherry-picks growth-oriented businesses run by competent management and available at reasonable valuations. It intends to keep 40-60 per cent of its assets each in the large- and mid-cap buckets.
As per the latest portfolio (August 2020), the fund’s exposure to large-, mid- and small-cap stocks is 58 per cent, 34 per cent and 6 per cent, respectively. Please note that the scheme does not accept lump-sum investments currently.
However, investment through SIPs are allowed up to ₹25,000 per month.
DSP Midcap
It is one of the above-average, consistently performing schemes in the mid-cap category. A well-diversified portfolio with diffused stock holdings, prompt moves to increase cash and debt positions to reduce risks, and an ability to blend momentum and value picks have helped the fund deliver above-average returns.
Investors with a high risk appetite looking to gain from a potential rally in mid-cap stocks post-pandemic can consider investing in the scheme. Mid-cap funds have out-performed their large-cap counter parts over the long run, but they are highly volatile in the medium term. The investment horizon should be 7-10 years.
As mandated, DSP Midcap invests at least 65 per cent of its assets in companies that are ranked from 101 to 250 in terms of full-market capitalisation. Performance measured by the five-year rolling returns calculated from the past seven years’ NAV history show that the fund delivered a CAGR of 14.2 per cent, while the category clocked 11 per cent.
Its benchmark, Nifty Midcap 100 TRI, generated a CAGR of 10.5 per cent in the same time period.
The fund invests two-thirds of its portfolio in mid-caps and one-third in large- and small-cap stocks. Over the last three years, it has allocated 10-15 per cent to large-cap stocks.
So, DSP Midcap is able to maintain a relatively modest risk portfolio, and ensures superior downside containment during corrections and reasonable upside participation when markets rally.
The annualised standard deviation (SD) (a measure of risk or volatility) of DSP Midcap has been 21.5 per cent, which is lower than the 23.6 per cent SD of the mid-cap fund category.
Kotak Standard Multicap
Equity multi-cap funds have the flexibility to invest across the spectrum of market capitalisation, depending on market conditions.
Kotak Standard Multicap, formerly known as Kotak Select Focus, has been a top performer in the category.
The scheme takes concentrated sector bets and identifies better-performing stocks within those sectors.
However, its portfolio is diversified at the stock level across market capitalisations.
Performance measured by the five-year rolling returns calculated from the past seven years’ NAV history show that the fund delivered a CAGR of 13.2 per cent, while the category clocked 9.6 per cent. Its benchmark, Nifty 200 TRI, generated a CAGR of 10.2 per cent in the same time period.
The fund holds 74 per cent, 21 per cent and 1 per cent in large- mid- and small-caps, respectively, as of end-August. Please note: SEBI’s recent tweak in investment norms for multi-cap funds requires an allocation of at least 25 per cent each in large-, mid- and small-cap stocks.
Multi-cap funds should comply with this provision within the next five to six months.
This change could make a difference in the performance of the fund going ahead. How this change plays out need to be seen.
Although the fund’s mandate allows it to bet on select sectors, its sector preferences are fairly well-spread. Banking has been the top preference for many years. With the slowdown induced by the pandemic and the fear of bad loans rising, the fund has steadily brought down allocations to banking this year — down by almost 10 percentage points now, from about 28 per cent exposure in December 2019.
The current top overweight sectors in the fund are cement and industrials, while utilities and telecom sectors are the major exclusions.
Banks, software and petroleum products are the top three sectors; Reliance Industries, Infosys and ICICI Bank are the top three stocks.
Parag Parikh Long Term Equity
Part of the multi-cap fund category, Parag Parikh Long Term Equity invests a minimum of 65 per cent in Indian equity and up to 35 per cent in overseas equity securities and domestic fixed-income instruments.
It is one of the few consistently performing schemes in the multi-cap category, delivering a CAGR of 16.3 per cent since its launch in May 2013. The outperformance of the fund over the long run is due to its value-oriented multi-cap approach, prudent cash calls and significant allocation to global stocks. These strategies have helped the fund not only deliver outperforming returns in market uptrends but also in containing the falls well in market downturns.
Performance measured by the five-year rolling returns calculated from the past seven years’ NAV history shows that the fund delivered a CAGR of 13 per cent, while the category clocked 9.6 per cent.
Its benchmark, the Nifty 500 TRI, generated a CAGR of 10 per cent in the same period.
The scheme holds high-quality value stocks. It is one of the few funds in India that invest in foreign stocks while maintaining the minimum 65 per cent threshold in domestic equities to qualify as equity-oriented funds.
However, SEBI’s recent tweak in investment norms for multi-cap funds requires an allocation of at least 75 per cent in Indian equities and at least 25 per cent each in large-, mid- and small-caps. This change could make a difference in the performance of the fund. How this change plays out need to be seen.
The foreign stocks portion of the scheme’s portfolio gives it global diversification benefits and access to niche stocks not available in India. Its foreign holdings are mostly tech stocks — Amazon, Alphabet (Google parent), Facebook and Microsoft.
The fund manager takes efficient cash calls based on the market conditions.
This has helped the fund manage the deployment of cash to make use of buying opportunities and contain the falls well during uncertain market conditions.
Canara Robeco Equity Hybrid
It is one of the low-volatile funds (as measured by standard deviation) belonging to the aggressive hybrid category with an annualised SD of 15.2 per cent (against a category average of 16.8 per cent).
As required, Canara Robeco Equity Hybrid allocates 65-80 per cent to equity, while the rest is invested in debt instruments.
The higher allocation to equity helps deliver superior returns. The scheme is treated like an equity fund for taxation purposes. Debt exposure helps the fund cap losses in downturns.
The top-performing funds in the category have generated returns in line with equity-oriented funds.
For instance, performance measured by the five-year rolling returns calculated from the past seven years’ NAV history, shows that Canara Robeco Equity Hybrid delivered a CAGR of 11.2 per cent, while the Nifty 50 TRI clocked 9.4 per cent.
Equity large-cap funds generated 9.1 per cent and aggressive hybrid funds category clocked 8.7 per cent in the same period.
The fund delivered mediocre returns during 2016 and 2017, given its allocation to some troubled sectors including pharma and software. But it made a comeback thereafter, and ranks among the top five, thanks to its strategy of increasing allocation to debt assets.
The scheme follows a multi-cap approach. It maintains two-thirds of its equity portfolio in large-caps and the rest in mid- and small-cap stocks. On the debt side, the fund follows a blend of accrual and duration strategies.
It is one of the few schemes in the category that invest exclusively in the highest-rated debt instruments.