Though we come to you with a list of mutual fund (MF) schemes worth investing at the start of the year, there are times when some of our recommendations go astray and merit an exit. Few others scream to make an entry based on their performance and pedigree or a revamp.
In April, we told you about five schemes waiting to get into Mint50—Mint’s chosen set of 50 schemes that we feel you should invest in—for a variety of reasons. In our biannual review of Mint50, some of those have made it to the list. Naturally, some move out to make space, but that doesn’t necessarily mean you should sell them. Read on to find out which ones have made and why and what should you do if you’re invested in schemes that move out of Mint50.
ICICI Prudential Focused Bluechip?Fund?(IPFB): Mint50’s depleted large-cap bucket just got a boost. Unlike most of its peers, IPFB has a concentrated portfolio; it is invested in 25-30 scrips at all times. As a result, it tends to take higher exposure in sectors. That is also why, unlike a few peers, IPFB stays away from mid-cap firms.
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Mint50 Best Funds | Mutual fund schemes to invest in
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Its top 10 scrips accounted for as high as 60% of the corpus last October; at present this figure is 55%. As per its July portfolio, top two sectors (banking and software) accounted for 40%. “If you do your homework well, there are opportunities in the large-cap space,” says fund manager Prashant Kothari. And Kothari seems to have done his homework; IPFB was the top performing large-cap scheme in 2010 and 2009 with returns of 27.07% and 91.19%, respectively. Its exposure to scrips such as Bajaj Auto Ltd and Tata Consultancy Services Ltd in 2010 proved beneficial. This year, so far, it has lost 2.72% compared with the category average loss of 5%.
Mirae Asset India Opportunities Fund (MIOF): One of the most innocuous fund houses has churned out a powerhouse performer in MIOF. It is large-cap-oriented and also invests in mid-cap scrips. It is opportunistic—it gets in and out of scrips swiftly, helped in part by its tiny size (Rs191 crore as of July-end). But that doesn’t mean it churns the portfolio. Explains fund manager Gopal Agrawal: “We set aside about 25% of the corpus that is churned actively. The rest, about 70-75%, follows a buy-and-hold strategy.”
Though the scheme takes aggressive exposure in sectors (its top three sectors accounted for about 46% as per the July portfolio), it doesn’t invest more than 5% of its portfolio in single scrips. Agrawal likes cash-generating firms and those that require “very low” capital, such as Bharat Heavy Electricals Ltd and Larson and Toubro Ltd. Agrawal is bullish on banks and energy stocks.
MIOF’s investments in companies like Gateway Distriparks Ltd, Indraprastha Gas Ltd and Motherson Sumi Systems Ltd helped the fund deliver 23.12% compared with the category average of 16.88%.
AIG India Equity Fund (AEF): Despite its underperformance in 2010, we put AEF in Mint50. We feel it was a temporary blip for an otherwise well-managed fund. Launched in May 2007, it returned 11.02% in the past two years compared with 5% by the category. Though two of its investments—Maruti Suzuki India Ltd and Hero MotoCorp. Ltd (erstwhile Hero Honda Motors Ltd)—went wrong last year, AEF seems to have corrected course. It gained 8.76% in the past six months, while the category lost 2.64% on an average.
Fund manager Huzaifa Husain has consistently deployed cash in recent months; its cash has come down to 5.3% from 24% in February. Husain likes to go for companies that he believes are in a dominant position such as Hero MotoCorp. “They may or may not be among the highest market-cap companies, but they have to be dominant within the industry. They can withstand the good and bad times better than others,” he adds. He also looks for companies that generate cash and don’t borrow too much.
Despite a dismal 2010, the fund seems to have made quick recovery and we think it is poised for good times ahead.
UTI Equity Fund (UEF): Don’t expect rocking returns from UEF—formerly known as UTI Mastergain Unit Scheme and renamed in 2005—because its fund manager Anoop Bhaskar is known to over-diversify his portfolios. Expect consistency, though.
Bhaskar, one of the more famous mid-cap fund managers of the 2000s, avoids companies that borrow “too much”. “Operating cash flow of a company has to be positive,” he says. UEF is a diversified equity fund that invests predominantly (at least 70% of its corpus) in large-cap companies and the rest in mid- and small-cap companies.
On an average, UEF holds 85 companies. Its top 10 holdings account for just 35% of the portfolio. Apart from an occasional blip, it has typically done well in rising as well as falling markets. In the present volatile markets, Bhaskar has removed volatile scrips and stuck with less volatile names. Small wonder then that in the past six months UEF lost just 0.2% as against an over 2% loss by the category and 5.4% loss by BSE 200 index.
Religare Midcap Fund (RMF): Well-managed and consistent mid-cap funds are few and far between. Those that are, have either become too large making them sluggish, others don’t accept lump sum investments. We think RMF meets most of our requirements. RMF aims to invest in scrips with market capitalization lower than the least market cap scrip of Nifty index and more than 5% of the market capitalization of the same stock. At present, companies with market capitalization of Rs500 to Rs10,000 crore qualify.
A true mid-cap fund, this one avoids large-caps. Fund manager Vinay Paharia prefers to invest in companies that generate high returns from their capital employed. He doesn’t mind paying a slightly high price for scrips if he sees value in them. To reduce volatility, RMF rarely holds more than 4% in a single scrip.
Though for a fund of just Rs56.2 crore, a holding of about 60 scrips seems much. “We don’t let the corpus size decide the number of holdings. Tomorrow, if the scheme’s size shoots up, a concentrated portfolio may become a problem as I suddenly have to diversify to justify the increase in size. So we prefer to run it the way we’d run, say a Rs100 crore or a Rs1,000 crore fund,” says Paharia.
SBI Short Horizons Debt Short Term Fund (SSD) and Principal Income Short Term (PIST): We’re revamping our short-term bond funds basket a bit and putting in two new schemes, SSD and PIST. If you wish to park your money for the next six months to a year, short-term bond funds will bode well. Debt market experts claim that inflation will soon be under control and, therefore, interest rate hikes may come to a halt. If interest rates do start falling, short-term funds will benefit.
Canara Robeco Equity Diversified (CED): A large-cap-oriented scheme that invests in mid-cap scrips up to 20%, this was one of the most promising equity schemes when we added it into Mint50 earlier this year. In April 2011, its fund manager Anand Shah quit Canara Robeco AMC and Soumendra Nath Lahiri took over. Among his previous stints, Lahiri has worked at DSP Blackrock AMC where he has had a decent track record. It’s too soon to say whether Lahiri will be able to continue the good work that was being done in CED—and we think he most probably would—it’s best to keep this one out of Mint50 for now. If you have a systematic investment plan (SIP) with the fund, continue it. Fresh investors should avoid CED till continuity is established.
Sundaram Tax Saver (STS): This one goes out because we feel its peers in Mint50 are better choices. STS has underperformed the category average in 2010 and also on a three-year basis. Further, equity-linked saving schemes (ELSS) will most likely cease to be among the eligible instruments that qualify to offer tax deduction benefits, once the Direct Taxes Code comes into effect in April 2012. Lastly, while it’s good to have choices of schemes in a category for you to pick and choose from, ideally you should have only one—maximum two—ELSS in your portfolio. The ones that remain in Mint50 should be more than enough.
UTI Opportunities Fund (UOF): Change in fund management is the key reason why we decided to remove UOF though the new fund manager is Anoop Bhaskar, who heads the equity fund management at UTI AMC and therefore lends credibility. Another reason is that we have included UEF—also managed by Bhaskar—in Mint50 this time. Although UOF and UEF have different styles, we see little merit in putting multiple schemes managed by the same fund manager or fund house under the same category. UOF remains a good fund though; continue existing SIPs.
Birla Midcap Fund (BMF): After the start of 2010, BMF has been on a downhill. Few key investment decisions didn’t work out in 2010 and BMF still doesn’t seem to have recovered. After returning 13.3% in 2010 compared with the category average of 19.58%, BMF’s performance so far in 2011 was ordinary, though it outperformed the category average. A large corpus size (Rs1,624.03 crore as on June 2011) doesn’t help either as it makes the fund a bit sluggish. We’ll keep an eye on recovery if and when it happens, but for now we advise a switch to more nimble-footed smaller mid-cap funds that come with a track record.
Reliance Diversified Power Sector Fund (RDPS): The past two years have been brutal on infrastructure funds, especially power sector schemes such as RDPS. Reduced government spending and fewer projects in the absence of key reforms pending to be cleared, infrastructure-related thematic or sectoral funds such as RDPS lie in a limbo. But there’s nothing wrong with the its strategy; it remains a good long-term bet. Existing SIPs may continue; fresh investments may wait for more clarity in the power sector unless you wish to invest in this sector nevertheless.
The others: Canara Robeco Short Term Fund and DWS Short Maturity Fund move out because of two reasons. Though by nature they are short-term schemes, Value Research has classified them as ultra short-term funds because of the fluctuation in their average maturity periods. Also, and partly because of the switch their star ratings have dropped indicating high risk and hence don’t make our mark. We see no problem with their fund management but we suggest you stick to our alternatives for now.
We use a mix of quantitative and qualitative parameters to shortlist schemes. This is a list of equity and debt schemes; we leave out liquid schemes since they are meant for short-term needs and are a parking vehicle for your money till it gets deployed elsewhere. Out of a universe of 836 schemes (excluding fixed maturity plans and liquid funds), we filter out all the 3-star and above rated schemes. This reduces the number of schemes to 306.
We use Value Research, a mutual fund tracking firm, to get the data and their star ratings. Value Research ranks schemes across categories on the basis of their risk-adjusted returns and assigns star ratings to them. While a 5-star fund is a higher-rated fund, a 1-star fund is a lower-rated fund. Star ratings are assigned because the variance between two ranks can be statistically insignificant. For instance, two schemes ranked fifth and seventh may add the same amount of value to your portfolio.
Star ratings depend on a fund’s risk-adjusted returns. It also pays to see the kind of risk the fund takes. Some risks are quantitative and, therefore, can be mathematically arrived at, while few others are qualitative and we need to know the fund manager’s strategy to be able to understand them. Among the former is a number called “downside risk” that measures—to put it simply—a fund’s excess in returns on the downside over a risk-free rate, typically a debt scrip that carries zero risk and gives modest returns. Therefore, in addition to performance, Value Research also looks at the downside risk.
A risk-adjusted return is arrived at by deducting the downside risk from its return. Typically, higher the risk-adjusted return better is the fund because it shows that the fund has average to above-average return with lower risk.
Star ratings are a good indication of how schemes have performed in the past. It is a report card that gives a good insight about a fund’s past, but tells little about how the fund is poised to do in the future. That is where Mint50 comes in. Once we have the basic list of 3-star and above rated schemes, we run qualitative checks such as a study of portfolio strategies, how fund managers manage their schemes, their pedigree, performance in rising and falling markets to be able to cull out a list of 50 schemes that we feel are best suited to perform hereon. Since Mint50 is already in existence—we turned one-year-old in January 2011—this exercise is an audit of existing schemes; which ones should stay inside Mint50 and which ones should move out. A scheme may move out because either it did badly or there is a better alternative outside Mint50. When we started Mint50 last year, we promised to give you a list of schemes that we think would do well over the long term. Most of the schemes would be on track, but some would go astray.
We hope—and aim—to have as few changes as possible because we hate to churn the Mint50 list. If we tell you to stay invested for long tenors, it’s only logical that we do that, too.