Monday, September 25, 2017

September 2017

Despite decline in key market indices, the average assets under management (AAUM) of the mutual fund industry touched an all-time high of Rs.21 lakh crore in August 2017. AMFI’s latest data shows that AAUM of the mutual fund industry has reached Rs.20.97 lakh crore in August 2017. The average AUM of the mutual fund industry has increased from Rs.19.92 lakh crore in June 2017. However, the monthly AUM of industry stood at Rs.20.59 lakh crore in August 2017. While AAUM is the average assets of the entire month, which is calculated by factoring in all working days of the month, month end AUM is the assets of the industry as of the last working day of the month. The growth has come largely because of higher inflows in arbitrage funds and equity funds through SIPs. AMFI data shows that the industry has received net inflows of Rs.61,700 crore across all categories. The good news is that the industry has mopped up Rs.31,000 crore in equity funds including ELSS, ETFs that tracks indices and balanced funds. AMFI said, “The AUM in the retail schemes (i.e. equity + ELSS + balanced schemes) increased by 3% from Rs.750,699 crore as on July 31, 2017 to Rs.772,246 crore as on August 31, 2017 and registered an increase of 48% YOY. Retail AUM constitutes about 37.5% of the overall Industry AUM, and including debt funds, the overall retail participation in mutual funds was little over 50% of the overall Industry AUM.” Another positive trend for the industry is increasing contribution in mutual funds through SIP. The latest AMFI data shows that the mutual fund industry received a monthly inflow of Rs.5,206 crore through SIPs. The monthly SIP inflows increased by Rs.1,709 crore from Rs.3,497 crore in August 2016, a growth of 48%.

Investors have pumped in close to Rs 62,000 crore into various mutual fund schemes in August 2017, driven by equity and money market funds. With this, total net inflow in mutual fund schemes has risen to Rs 2.2 lakh crore in the first five months (April-August) of the ongoing fiscal, as per the latest data available with Association of Mutual Funds in India (AMFI). The Indian mutual fund industry has been witnessing phenomenal growth since 2014. According to data from AMFI, investors have poured in a net of Rs 61,701 crore in MF schemes in August 2017 as compared to Rs 63,504 crore in July 2017. The latest inflow has been mainly driven by contribution from liquid funds and money market funds. Besides, investors continued to maintain bullish stance on the equity schemes. Liquid or money market fund category witnessed Rs 21,352 lakh crore being poured in August 2017. In addition, equity and equity linked schemes attracted Rs 20,362 crore. Further, balanced and debt funds received Rs 8,783 crore and Rs 8,390 crore respectively. However, gold ETFs continued to see net outflow of Rs 58 crore.

Mutual fund houses saw a surge of over 40 lakh investor accounts during the first four months of this fiscal, taking the total count to an all-time high of 5.94 crore on strong participation from retail investors. This comes following an addition of 77 lakh folios in the entire 2016-17 and 59 lakh in 2015-16. According to SEBI data on total investor accounts with 42 active fund houses, the number of folios rose to a record 5,9,420,864 at the end of July 2017 from 5,5,399,631 at the end of March 2017, a gain of 40.21 lakh. The rise in investors’ accounts has come mainly from the retail category, which is evident by the strong double-digit growth in folios in equity, balanced and debt categories. Notably, participation from retail investors, especially from small towns, has been growing. Besides, steps taken by the Securities and Exchange Board of India such as giving extra incentives for fund houses expanding into smaller cities, coupled with increasing investor education programmes to increase the penetration of mutual funds, is paying dividend. Retail investor accounts — defined by folios in equity, equity-linked saving schemes (ELSS) and balanced categories — grew over 36 lakh to more than 4.8 crore during the period under review.
According to CAMS data, IFAs have created over 11 lakh new SIP accounts between January and June 2017. IFAs are truly the SIP kings as they have created the highest number of SIP accounts. The latest CAMS data, which covers 63% of the industry AUM shows that mutual fund distributors and distributors empanelled with national distributors have created 11.19 lakh new SIP accounts in the first six months of the calendar year i.e. between January and June 2017. While mutual fund distributors have created 5.50 lakh new SIP accounts, national distributors such as NJ India and Prudent who partner with distributors under sub-broking model added over 5.60 lakh folios in January-June 2017. Surprisingly, IFAs have added more SIP accounts in B15 cities than T15 cities. The CAMS data shows that IFAs have created 3.06 lakh SIP folios in B15 cities compared to 2.51 lakh SIP folios in T15 cities. On the other hand, national distributors have created 2.58 lakh SIP folios in B15 compared to 3.04 lakh SIP accounts in T15 cities. The data shows that both IFAs and NDs account for 60% (30% each) of new SIP accounts. Many IFAs cater to retail clients who are salaried employees. These salaried employees are comfortable contributing small amounts every month through SIP instead of lumpsum amount. Banks account for 22% of new SIP registrations with 4.20 lakh SIP accounts. While private banks have created 2.40 lakh SIP accounts, their PSU counterparts registered close to 1.90 lakh new SIP accounts in January-June 2017. However, in B15 cities, PSU banks have created 1.39 lakh SIP folios compared to 1.14 lakh SIP folios of private banks. Overall, the mutual fund industry has created close to 18 lakh SIP accounts in CAMS serviced fund houses.

Piquant Parade

IDFC Mutual Fund has released a short movie titled ‘Return of One Idiot’ to spread financial awareness among people. This movie is a sequel to its first movie ‘One Idiot’ that was released in 2012. This movie highlights the need to save for retirement. The fund house will screen this movie across the country through cinema halls and distribution networks. In fact, the fund house has received approval from Central Board of Film Certification. The film aptly captures a common challenge in our society and proposes a simple solution to avoid a pitfall of not saving enough for retirement. The idea that your savings will always provide you support, no matter what the future holds is both empowering and liberating. The movie attempts to deliver a simple message in an engaging manner, making it relatable to all. The videos are meant for both advisors and investors. Advisors can use these videos in their IAPs. Another initiative of the fund house is IAP platform for IFAs. The fund house has recently launched a website for IFAs called to help IFAs with content and literature that may come in handy to them to conduct IAPs. The fund house will provide templates such as invitation, presentation and videos. The fund house will also provide financial support to IFAs who conduct IAPs using this content. IFAs need not take formal approval from the AMC official to conduct IAPs. They just need to register themselves with the AMC platform. The AMC will help them with all the support they need to conduct IAPs.

Regulatory Rigmarole

In line with the Government’s instructions to link Aadhaar number with mutual fund folios, Karvy Computershare introduced a host of facilities through which clients can update their Aadhaar number. To start with, Karvy Computershare launched Aadhaar linking facility on their website. Investors can link their Aadhaar through one time password sent to their registered email id and mobile number with Karvy. All the clients need to do is SMS (ADRLNK ) to the designated mobile number mentioned on their website. For example, if the pan number of client is BJQPP5878J and Aadhaar 512245739980, he will have to type ADRLNK BJQPP5878J 512245739980 Y. "Y" in the SMS stands for investor consent to authenticate and seed Aadhaar.  A reply SMS will be sent to the investor saying, thanks for visiting our website, sharing Aadhaar and consent of investors to authenticate and seed, followed by a link to the site as well. However, this facility is not available for PAN exempted mutual fund folios. Another option for investors is to send a self-attested Aadhaar update form available on Karvy’s website. Investors can either submit the forms at Karvy branches, dispatch to Karvy’s HO or submit to their distributors, who in turn will scan & upload on Karvy’s portal, through Distributor log-in services. This mode helps the investors from B15 locations. The mutual fund investors will have to update their Aadhaar number before December 31, 2017. The government will freeze the non-compliant folios after this date.

In a circular, SEBI has announced certain changes in the REITs and InvITs regulations to facilitate growth. SEBI has allowed real estate investment trusts (REITs) and infrastructure investments trusts (InvITs) to raise capital by issuing debt securities, introduced the concept of Strategic Investor for REITs on similar lines of InvITs, allowed single asset REIT on similar lines of InvIT, allowed REITs to lend to underlying Holdco/SPV and amended the definition of valuer for both REITs and InvITs. Further, the Board has, after deliberations, decided to have further consultation with the stakeholders on a proposal of allowing REITs to invest at least 50% of the equity share capital or interest in the underlying Holdco/SPVs, and similarly allowing Holdco to invest with at least 50% of the equity share capital or interest in the underlying SPVs. SEBI rule mandate fund houses to invest up to 10% of NAV in REITs and InvITs. Currently, fund houses can also invest up to 5% in single issuer. REITs invest in rent yielding commercial and residential properties to generate regular income while InvITs invest in infrastructure projects to generate income by way of toll. 

The capital market regulator has asked Registrar and Transfer (R&T) agents to incorporate multi-level encryptions and firewalls ensuring safety of data. In a move to minimise cyber threats and protect investor data, SEBI has asked R&T agents like CAMS and Karvy Computershare to level up their cyber security system by maintaining a robust cyber security framework in the organisation. The recent ransomware attacks and increasing cyber threats have catalysed this move. R&T agents act as a storehouse for maintaining records of mutual fund transactions on behalf of the fund house through a wide network of their offices across the country. Commenting on the same lines, SEBI said, “Since RTAs perform important functions in providing services to holders of securities, it is desirable that RTAs have robust cyber security and cyber resilience framework in order to provide essential facilities and perform systemically critical functions relating to securities market.” The circular highlighted the broad norms such as authorised access to systems, annual audits, monitoring of suspicious activities and so on that R&T agents will follow. SEBI has clarified that the circular is applicable for R&T agents servicing more than two crore folios.

The Securities and Exchange Board of India (SEBI) is set to usher in rules that will require the mutual fund industry to introduce asset categories, a move that will spark scheme mergers and is aimed at helping investors identify the right plan from within the product heap. The capital market regulator intends to classify mutual fund schemes into three broad product groups — equity, debt and hybrid — which will be sorted further into subcategories as per the investment mandate. There is currently no official classification for mutual fund schemes. Once products are brought under these categories, asset managers will have to merge those that are similar. For instance, a fund house operating two separate schemes that invest in mid-caps will have to merge them or scrap one. SEBI will issue a circular with the list of classifications asking fund companies to comply with the requirement within six months. The regulator's decision to simplify the process of investing in mutual funds comes at a time when retail investors are pouring money into various schemes. India's 42-member mutual fund industry handles over Rs 19.5 lakh crore in assets across 2,000 schemes. Unhappy about the number of products, SEBI has been informally asking fund houses to consolidate the schemes. But with this falling on deaf ears, the regulator has decided to push them into consolidation through new rules. The SEBI-appointed panel has identified a little over 30 subcategories to classify schemes. Within the equity category, there will be eight to 10 divisions such as large-cap, multicap, mid-cap and small cap funds among others. In debt, there will be around 16 categories such as liquid, ultra short term and dynamic schemes among others. In hybrid, there will be four subsections depending on the scheme's exposure to stocks and bonds. The regulator will issue guidelines defining all the categories. For instance, if a scheme has to be classified as a large-cap scheme, it should have invested 80% of its corpus in such stock. The definition will be based on the IISL (India Index Services and Products Ltd) indices. IISL is a National Stock Exchange unit that provides indices and services related to that. SEBI will ask mutual funds to describe the product in a tagline, currently restricted to whether they are open ended or close ended. Once the rules are implemented, the taglines will need to provide more details. The new classification will bring the legitimacy of superiority of comparability and it would be usable. The SEBI-appointed committee also discussed aligning mutual fund regulations with the Companies Act with regard to the appointment of directors, independent directors, trustees and auditors. As per the Companies Act, there has to be a rotation of directors every three years. In addition, there will be an upper age limit of 70 years for directors. The panel also recommended easing rules for mutual funds' exposure to interest rate futures. Till now, mutual funds could only do securities-based hedging in their bond portfolio. Now, SEBI could allow duration based hedging. 

The last three years and especially 2016 have been characterised by large inflows into equity and balanced funds, with increasing participation from retail and HNI investors. Indian investors have now eventually assimilated mutual funds and the credit goes to awareness programmes and endeavours by regulators and asset management companies.

Monday, September 18, 2017


September 2017

It is a common practice across the mutual fund companies to launch NFOs (New Fund Offers) when markets are doing well. As more and more people invest only when markets perform well, automatically it becomes an opportunity for mutual fund companies to come out with new products. In the last few months of bull-run many NFOs have been launched out of which most of them are close ended funds. Hardly there is any company left which has not launched an NFO. In addition, the number of NFOs which were launched in the bear phase of 2009-2013 equals the number of NFOs launched in the last year.

NFOs of various hues adorn the September 2017 NFONEST.

ICICI Prudential Sensex Index Fund
Opens: September 14, 2017
Closes: September 18, 2017

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Sensex Index Fund, an open ended index fund. The objective of the fund is to invest in companies whose securities are included in the S&P BSE Sensex Index and subject to tracking errors, to endeavour to achieve the returns of the above index as closely as possible. This would be done by investing in all the stocks comprising the S&P BSE Sensex Index in approximately the same weightage that they represent in S&P BSE Sensex Index. The fund will not seek to outperform the S&P BSE Sensex Index or to underperform it. The fund will invest 70%-100% of its assets in debt instruments including government securities and invest up to 30% of assets in money market instruments with low to medium risk profile. The fund will not have any exposure to derivatives and if the fund decides to invest in securitized debt (Single loan and / or Pool Loan Securitized debt), it could be up to 25% of the corpus of the Plan. Benchmark Index for the fund is S&P BSE Sensex Index. The fund manager is Kayzad Eghlim.

Sundaram Long Term Micro Cap Tax Advantage Fund Series VI
Opens: June 23, 2017
Closes: September 22, 2017

Sundaram Mutual Fund has launched a new fund named as Sundaram Long Term Micro Cap Tax Advantage Fund Series VI, a 10 year close ended equity linked savings scheme. The tenure of the fund is 10 years from the date of allotment of units. The investment objective of the fund is to generate capital appreciation over a period of ten years by predominantly investing in equity and equity related instruments of companies that can be termed as micro-cap. For the purpose of investment by the fund Micro cap stock is defined as one whose market cap is equal to or lower than the 301st stock by market cap (after sorting the securities in the descending order of market capaitalization) on the National Stock Exchange of India at the time of investment. The fund will allocate 65%-100% of assets in equity and equity related securities of companies of micro-caps as defined in the objective, invest up to 35%-100% of assets in other equity and equity related securities with high risk profile and invest up to 20% of assets in fixed income and money market securities with low to medium risk profile. The performance of the fund will be benchmarked against Nifty Small Cap 100 Index. The fund will be managed by S Krishnakumar & Dwijendra Srivastava.

SBI Dual Advantage Fund –Series XXIV
Opens: September 11, 2017
Closes: September 25, 2017

SBI Mutual Fund has unveiled a new fund named as SBI Dual Advantage Fund - Series XXIV, a close ended hybrid fund. The tenure of the fund is 1100 days from the date of allotment. The primary investment objective of the fund is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the fund. The secondary objective is to generate capital appreciation by investing a portion of the fund’s corpus in equity and equity related instruments. The fund will invest 55%-95% of assets in debt and debt related instruments, invest up to 10% of assets in money market instruments with low to medium risk profile and invest 5%-35% of assets in equity and equity related instruments including derivatives with high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Fund Index. Rajeev Radhakrishnan shall manage debt portion and Ruchit Mehta shall manage investments in equity and equity related instruments of the fund.

UTI Focussed Equity Fund –Series IV
Opens: September 13, 2017
Closes: September 25, 2017

UTI Mutual Fund has launched the UTI Focussed Equity Fund, an open ended growth fund. The investment objective of the fund is to generate long term capital appreciation by investing predominantly in equity and equity related securities of listed companies. The fund is benchmarked against S&P BSE 200 and the fund managers are Anoop Bhaskar / Lalit Nambiar.

BNP Paribas Focused 25 Equity Fund
Opens: September 15, 2017
Closes: September 29, 2017

BNP Paribas Mutual Fund has launched the BNP Paribas Focused 25 Equity Fund, an open ended growth fund. The investment objective of the fund is to generate long-term capital growth by investing in a concentrated portfolio of equity and equity related instruments of up to 25 companies and the balance in debt securities and money market instruments. The fund is benchmarked against Nifty 100 and the fund managers are Mr. Abhijeet Dey and Mr. Karthikraj Lakshmanan.


September 2017

All the GEMs from the 2016 GEMGAZE but DSP Blackrock Equity Fund have performed reasonably well through thick and thin and figure prominently in the 2017 GEMGAZE too. DSP Blackrock Opportunities Fund has been accorded a red carpet welcome.

HDFC Equity Fund Gem
2016 and 2017 were testing years for investors in HDFC Equity Fund given its poor showing compared to other large cap Indian mutual funds. The fund has invested 97.89% in equities, 76.96% in large caps, 54.09% in the top 10 holdings and 57.29% in the top three sectors, finance, energy and construction. One-year return of the fund is 14.23% as against the category average of 15.92%.The expense ratio is 2.05% and the turnover ratio is 24%. The 19,832 crore HDFC Equity’s prospects are not blemished by its recent underperformance. An unwavering focus on the long-term and willingness to back conviction bets are integral to manager Prashant Jain’s investment approach. Hence he does not shy away from trading near-term pain for long-term gains. This approach was on display not so long ago (in 2015) when Jain held on to his investments in public-sector banks (particularly SBI) despite it running into rough weather, and the fund languishing in the bottom performance quartile. This was not surprising as the manager has long favoured public-sector banks in his portfolios as he believes that they will be major beneficiaries of India’s long-term structural growth. Notwithstanding short-term blips, Jain has demonstrated considerable skill in navigating the fund through varying market conditions over the years. Expectedly, he made a promising comeback this time around as well with his conviction in public-sector banks paying off well, helping it to record top-quartile performance. An exceptional manager backed by a strong team, a robust investment approach, and one of the best asset managers in the industry add up to a best-in-class offering. The fund is positioned in the top quartile of the large-cap fund category over one, three and five-year time frames. Research is central to the investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. In a downturn, Jain’s policy of staying fully invested could lead to underperformance as compared to peers that get their cash calls right. Yet, the process will hold long-term investors in good stead.

Sundaram Select Midcap Fund Gem 
Sundaram Select Midcap Fund has an AUM of Rs. 5,573 crores and is being managed by the well-known fund manager, Mr. S. Krishna Kumar since 2012. Sundaram Select Midcap Fund is one of the consistently performing equity mutual funds in the mid cap category. The fund aims to achieve capital appreciation by investing in high growth mid-cap stocks. The fund defines 'midcap' as a stock whose market capitalization shall not exceed the market capitalization of the 50th stock (after sorting the securities in the descending order of market capitalization) listed with the NSE. As the risk and return grade of the fund is ‘Above Average’ it could be a good pick for those willing to take high risk in order to get higher return by investing in midcap stocks. 47.81% assets of Sundaram Select Midcap are currently invested in three sectors -finance, energy and services. The 3, 5, and 10 year annualised returns of the fund is quite impressive at 19.95%, 26.14%, and 16.87% respectively. The fund has beaten the Benchmark S&P BSE Mid Cap Index with very good margin. The one-year return of the fund is 17.76% as against the category average of 18.24%. The expense ratio of the fund is 2.24% and the portfolio turnover ratio is 45%. True to its nature, the fund can be very volatile in the short term, reflecting the market conditions. It is not for the faint hearted. Krishnakumar is valuation-conscious while investing in stocks, but is willing to stay invested in companies with higher valuations if longer-term growth prospects appear favourable. The investment style is essentially bottom-up with a buy-and-hold philosophy on high-conviction names. Krishnakumar’s in-depth understanding of companies and background in researching small- and mid-cap stocks is an advantage. He typically seeks to invest in quality companies with differentiated businesses. Although the fund’s allocations towards large caps have gone up slightly over the past year, it continues to remain true to its mandate and has a higher exposure to small- and mid-cap stocks than its category peers. The fund’s long-term orientation could lead to a divergent performance profile compared with the competition and index over shorter periods. However, the investment process should hold the fund in good stead over the long term.

ICICI Prudential Dynamic Fund Gem

While it looks like market volatility will remain an issue for at least some more time, funds that contain downsides and handle it well are good bets. The 7,382 crore ICICI Prudential Dynamic Fund, an equity fund benchmarked against the Nifty index, fits the bill. By its mandate, the fund shuttles between asset classes based on market valuations. If valuations turn expensive, equity exposure, 76.03% (at present), is cut in favour of debt. Though the fund can invest across market capitalisations, it puts 70-75% (68.04% at present) of its portfolio into large-cap stocks. In its debt portfolio, the fund has usually invested in fixed deposits, other short-term debt instruments, or held cash. In rallying markets, while the fund does not put up chart-topping returns, it still does better than its benchmark and the category. The expense ratio of the fund is 2.25% and the portfolio turnover ratio is 239%. The one-year return of the fund is 14.03% as against the category average of 15.92%. This is manager Sankaran Naren’s second stint after running it from September 2006 to February 2011. He relinquished fund management duties for about a year and returned to the helm in February 2012. However, the investment strategy remained unchanged. The ability to think differently and pick stocks that have the potential to become a big thing tomorrow is critical in this strategy. When markets run up and valuations seem stretched, Naren reduces net equity exposure in the portfolio. He deploys a rules-based approach using the historical price/book value of the market to determine fair value and in turn tweak cash allocations. His philosophy is to ensure the fund performs better than peers when markets fall, even if the strategy hurts performance in rising markets, thereby ensuring robust performance over a market cycle. Naren is willing to back his conviction even if it means underperforming over shorter time frames. He takes sector bets and aggressively trades his large-cap picks, but such tactics are not without risk. The fund has been jointly managed by Ihab Dalwai since Jun 2017. The fund can hold investors in good stead over a market cycle.

DSP Blackrock Opportunities Fund Gem
DSP Blackrock Opportunities Fund is a 3,364 crore fund that invests 71.52% in large caps and 59.45% in the top three sectors, finance, construction and energy. The expense ratio is 2.52% and the portfolio turnover ratio is 107%. The one-year return of the fund is 16.71% as against the category average of 15.92%. Large and small/mid cap stocks are different beasts that can deliver widely divergent performances. Rohit Singhania, the fund manager since June 2015, joined the fund house’s PMS division as research analyst in 2005 and moved to the equity investment team in June 2009. While Singhania is a seasoned analyst, over the years he has matured as a portfolio manager as well. However, it should be noted that he has a track record in managing the DSP BlackRock TIGER fund, which has a thematic bent since June 2012. In fact, Singhania runs this fund in line with its investment mandate, which allows him to adopt a fluid investment approach without any bias or restrictions in terms of stocks or sectors. In the manager’s own words, this fund does not have a defined investment approach; this provides him the liberty to capitalise on any investment opportunity that he sees in the market, provided it makes a grade on his selection parameters. Consequently, the fund’s portfolio turnover tends to be on the higher side. While an unconstrained process can be very rewarding, it is fairly risky, too. A wrong bet can lead to significant underperformance. It must be noted that the success of the investment process largely depends on Singhania’s execution skills.

Aditya Birla Sunlife Frontline Equity Fund Gem

The 18,948 crore Aditya Birla Sun Life Frontline Equity Fund is a diversified fund with a bias for large cap stocks but it does take advantage of select mid cap opportunities from time to time.  The fund invests 82.64% in large caps and 53.77% in the top three sectors, finance, energy and automobile. The expense ratio is 2.14% and the portfolio turnover ratio is 77%. The one-year return of the fund is 17.16% as against the category average of 17.25%. A skilled manager and his well-executed investment approach make this fund a compelling choice for investors. Manager Mahesh Patil is evidently mindful of the benchmark index S&P BSE 200 while investing. For instance, he invests largely in stocks chosen from the index. Year-on-year, Patil has ensured that the fund has delivered consistent returns. Its success can be attributed in no small measure to Patil’s deftly implemented investment approach. The manager’s stock-picking has been impressive. Discipline, bottom-up stock picking, and profit booking at opportune moments have stood the fund in good stead. Numbers are in its favor, consistency is clearly visible, and one can comfortably invest in this fund. 

Monday, September 04, 2017

September 2017

Broad approach with…

Diversified equity funds, also known as multi-cap or flexi cap funds, invest in stocks of companies across market capitalization i.e., large cap, mid and small cap stocks. In other words, they have the flexibility to adapt their portfolios according to the market. They typically invest anywhere between 40-60% in large cap stocks, 10-40% in mid-cap stocks and about 10% in small-cap stocks. Sometimes, the exposure to small-caps may be very small or none at all. Diversified funds do not have any limitations on market caps from an investment point of view. They do not follow a sectoral approach. Instead, they adopt a growth or value investing strategy, buy stocks whose prices are relatively lower than their historical performance, book value, earnings, cash flow potential and dividend yields. These funds balance out the risk and reduce the volatility that usually comes with stock investments by investing across market capitalizations and sectors. Larger companies tend to perform better during tough market times than the smaller companies, and they can provide investors with better investment returns. Mid-cap stocks can stabilize portfolio returns with higher growth potential than the large cap stocks and lower risk than the small cap stocks.

…superior risk-adjusted returns

However, irrespective of the market caps, all stock investments carry a certain level of risk, and investors should closely monitor their investments as business conditions can change daily. Given that the underlying investment is equity, there is a risk of loss of capital that can occur in the short term. Nevertheless, diversified funds have exceptionally performed well over the past 3 and 5 years, returning 23% p.a. and 21% p.a. for the last three and five years, respectively. Research shows that in terms of risk return characteristics, diversified equity funds have given superior returns than large cap funds. The annual returns of diversified equity funds as a category have always been superior to large cap funds in most of the last 12 years -- starting from 2004 to 2015 -- except in the years 2006, 2008 and 2011. 2006 was an exceptional year when large cap returns were better than that of diversified equity funds. 2008 and 2011 were the years when markets gave negative returns. Even after the great fall in 2008, the diversified equity funds gave almost 85% return in 2009 when the markets rallied, compared to around 65% returns by large cap funds. Similarly, after a subdued performance in 2013 by both the categories, the diversified equity funds again bounced back by giving 50% return compared to around 35% return by large cap category in the year 2014. Even in terms of annualised returns, the trailing returns of diversified equity funds were superior to that of large cap funds over the last 1, 3, 5 and 10 year periods. In this context, however, you may find that while investing in diversified equity funds is a better option for seasoned investors, for new investors, large cap mutual funds can still be the best option.

Better bet in the long term…

Large cap funds offer higher safety on the relative basis, particularly during high volatility. Such funds restrict their investments to blue-chip companies. Large cap companies are generally associated with better liquidity, are well-researched and are managed by promoters or management with good track record. This helps infuse a sense of comfort and safety among investors. Large cap stocks are inherently less volatile as compared to mid and small cap stocks, as their businesses are generally quite evolved to sail through business vagaries. Within active equity mutual funds, large-cap schemes are least volatile and are relatively safer bets. In the past one year, however, mid-cap and small-cap schemes have outperformed large cap funds.  One year average return for midcap and small cap schemes is 26% and 30%, respectively as against 20% in the case of large cap funds. If you have an investment horizon of five years or more, which generally takes care of the risks in the stock markets, it is preferable to have two-thirds of exposure to largecaps and rest to mid-caps. Portfolios focusing on stocks with adequate diversification are still likely to deliver better point-to-point returns than large cap portfolios over the long term, provided you are ready to take possibly higher intermittent volatility.

…with a clear edge

As diversified funds or multi-cap funds invest across market caps, they have several benefits compared to funds focused on any one particular market cap. Some of these are discussed below:
·         The foremost advantage of diversified funds is that it reduces the need to keep a track on multiple funds in the portfolio distinctly. The need to maintain separate large cap funds, mid and small cap funds is eliminated.
·         During bull market phases, diversified funds tend to outperform large caps (in the long term) by capturing some of the upside offered by small and mid-cap funds. In the bull market rallies, the large-cap valuations (P/E multiples) run up faster to a point where they appear stretched.  In such scenario mid-cap stocks tend to outperform.
·         Since, diversified funds have all three large cap, mid cap and small cap companies in their portfolio, they have potential to deliver good performance on a consistent basis.
·         In the bear market phases, small and mid-cap stocks tend to suffer sharp declines and liquidity issues. Also, consequently, they face liquidity constraints when redemption pressures increase during phases of bear markets, especially when investors are exiting investments. On the other hand, diversified funds do not face liquidity problems as much—as large cap stocks comprise a sustainable portion of the portfolio.
·         Investing in diversified or multi-cap funds helps to prevent the tendency of investors to switch between large cap funds and mid-cap/small-cap funds based on short-term performance.
·         Different sectors play out differently in various market cycles. While the large cap holdings of the diversified equity fund provide a certain degree of stability in volatile market conditions, the small and midcap holdings enhance the returns over a long investment horizon. 
·         Instead of choosing many funds from different categories you can choose a couple of diversified funds and remain invested for the long term.
·         Diversified funds can provide superior returns compared to large cap and sector funds over a long investment horizon. The underperformance of one sector or market cap segment gets compensated by good performance of another sector or market cap segment. 
·         Diversified fund rebalances the risk. As you are investing across sector/market and capitalisation, your risk also gets rebalanced.

First time investors, investors not well-versed with the technique of asset allocation in respect to investments and investors who have a lower risk appetite and who wish to have an exposure in equities can park their funds in diversified equity funds.