Home / Money / Personal Finance /  Why flagship MF schemes don’t always deliver

Mutual fund schemes delivering strong performance, with good distribution and selling, eventually become flagship products of an asset management company (AMC).

Yet, most flagship schemes have been unable to deliver superior returns consistently, as per a Mint analysis. This is depicted by the accompanying graphic which charts the performance of some flagship schemes three years after garnering good inflows. For each calendar year, from 2014 to 2018, one or two schemes have been chosen based on the highest increase in AUM (assets under management), and the popularity of the fund in that year.

The analysis highlights two trends. First, flagship schemes tend to mean revert, implying that they outperform with lower margin or flat-out underperform in the subsequent years. Second, there is a frequent reshuffle in league tables. For example, when growth stocks started beating value stocks after 2017, ICICI and HDFC AMC schemes that follow the ‘value’ style began to underperform. At the same time, Axis AMC schemes, which follow the ‘growth’ style, began to outperform. This seesawed again in 2022, with value players staging a comeback.

HDFC’s Flexi Cap and Mid-Cap Opportunities (Class of 2014)

HDFC Flexi Cap Fund was the top scheme with the highest incremental change in AUM in 2014. “Back then, the fund got everything right: the fund’s age, size of the AUM, the pedigree of company, good track record of performance and its fund manager," said Santosh Joseph, founder and managing partner of Germinate Investor Services.

Subsequently though, market conditions did not favor the ‘value style’ approach. The fund experienced a rough time for a stretch of many years after garnering good inflows.

Though the fund has been bouncing back in the current market, experts believe that there are better alternatives to this fund in the flexi-cap category. “While there is no problem with the fund inherently, it scores, relatively lesser in terms of the risk-adjusted performance over a longer period of time," said Nirav Karkera, head of research at Fisdom.

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On the other hand, HDFC Mid-Cap Opportunities Fund, which also attracted good inflows in 2014, continued the good show in subsequent years, almost beating the benchmark and the category average returns in the long run. Experts say the current size of the fund at about 29,000 crore could hamper the performance of the fund, going ahead.

Axis Long-term Equity (Class of 2015)

This diversified equity-linked saving scheme (ELSS), relatively gained good traction in 2015. “This fund, launched in 2013 when markets were in turmoil, proved its mettle in two to three years’ time," said Joseph.

The fund follows the ‘growth’ style and delivered a decent performance in the past both in the short and long term. “It is a good fund, but the current market condition is not favourable for ‘growth’ style. I would ask investors to pause monitoring it for a while," said Karkera.

ICICI Pru Value Discovery; ABSL Frontline Equity Fund (Class of 2016)

ICICI’s Value Discovery Fund was one of most favourite picks of the advisors a few years ago (around 2015-16), given the stellar past performance of the fund, according to experts Mint spoke to. But as in the case of HDFC’s Flexi-Cap Fund, this fund too followed the ‘value’ strategy, was wrongly positioned in the market cycle after 2015 and witnessed underperformance compared to its peers for a prolonged period of time.

“This is not an evergreen fund, but it is a very strong tactical bet when you know how the economic or market cycle is positioned. This is one of the very few funds which can play the ‘value’ style really well," said Karkera.

In 2016, ABSL Frontline Equity Fund was also another top fund in terms of increase in AUM size. After showing consistent performance for many years by sticking to its growth mandate of investing in large-cap stocks with a diversified portfolio until 2017, the scheme has been under tremendous pressure to meet the benchmark returns and is also lagging the category peers as well.

Kotak Flexi Cap; Axis Focused 25 Fund (Class of 2017 and 2018)

Kotak Flexi-Cap Fund with a blend (growth plus value) investment strategy and Axis Focused 25 Fund with a growth focus were the two schemes with a meaningful increase in their AUM in 2017 and 2018, respectively.

Both the funds showcased good performance in the past. “Kotak’s fund captured the upside well while deftly handling the downside of the market; Axis’s Focused Fund manoeuvres strategies rather effectively across market cycles," added Karkera.

Having said that, the recent performance of both has been weak with the shift in market cycles.

The takeaway

From the above analysis, it is clear that not all flagship schemes will continue to deliver attractive returns. “There is no fund in the entire world that can outperform in all the market cycles," said Arun Kumar, head of Research at FundsIndia.

Thus, it is advisable to build a balanced blended fund portfolio with a mix of funds following different styles, so that underperformance in one fund can be compensated by outperformance in another fund, which may smoothen portfolio returns. However, this will come at the cost of a complex portfolio and payment of high expense ratios to various fund houses. A second alternative is to go for index funds and ETFs which simply track a benchmark index such as the Nifty or Sensex rather than seeking to outperform it.

ABOUT THE AUTHOR

Satya Sontanam

Satya Sontanam is a senior content creator at Mint with a keen interest on data crunching, analysis and the story behind trends. She writes on personal finance including investments, regulations and data stories. Before joining Mint in December 2021, Satya worked as research analyst and also a personal finance writer at The Hindu BusinessLine. Satya is a qualified chartered accountant. In her free time, she enjoys doing yoga and listening to podcasts.
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