Monday, September 30, 2019


FUND FULCRUM (contd.)
September 2019

Investor education through digital platform has gained more traction in the past three months compared to ground level programs in the past couple of years. While most AMCs have dedicated portals to educate investors, others are running social media campaigns to promote mutual funds. These digital campaigns focus on educational articles, infographics and videos on their website. In order to reach out to a bigger audience, a few AMCs have launched these campaigns on Twitter and LinkedIn too. Aditya Birla Sun Life, IDFC and UTI are among the more active and creative lot on the digital front. UTI Mutual Fund has a website dedicated to investor education initiative called ‘UTI Swatantra’. The website has a series of educational videos to connect with investors. These videos explain financial jargon related to investments like fiscal deficit, liquid funds, mutual funds and SIP through cricket and Bollywood. UTI has recently released content in regional languages to reach out to a wider audience. Similarly, Aditya Birla Sun Life Mutual Fund has come out with a series of animated videos in regional languages. The idea is to make learning of financial concepts easy and fun for investors. Millennials and women are among the top visitors on videos and podcasts created for investment education. Another way to reach out to investors is through games. IDFC MF has recently launched a game called ‘Game of life’ where participants manage their finances and goals through virtual money. The game puts participants in different circumstances and records their responses to these circumstances. At the end, participants come to know if they have managed their finances well and achieved their financial goals. AMCs are constantly adding features to the investor education website.

Regulatory Rigmarole

AMFI has clarified that PAN is mandatory for mutual funds redemption. With this, PAN exempt folio holders will have to update their KYC details with PAN to redeem their investments from mutual funds. In 2012, SEBI allowed investors to invest up to Rs 50,000 annually in a single mutual fund per year without a permanent account number (PAN). This has come after the recent SEBI inspection of mutual funds in which the market regulator observed that a few AMCs/RTAs have processed redemption requests in respect of non-PAN exempt folios without obtaining the PAN, which is not in line with various SEBI circulars. AMFI said, “It is clear that PAN is required for redemption / repurchase transactions as well in respect of non-PAN-exempt folios, and AMCs/RTAs will be required to collect the PAN of the unitholder(s) at the time of redemption in such cases, if the same has not been provided previously. In short, the redemption transactions received without PAN in respect of non-PAN-exempt folios are liable to be rejected.” AMFI has urged distributors to update PAN details of their clients immediately. AMFI said that the mutual fund industry has 99 lakh folios without PAN as on May 31, 2019.

Mutual funds can now use Aadhar-based KYC to on board investors. This can be seen as a continuation of the government’s proposal in Union Budget 2019-20. The government had proposed to make PAN and Aadhaar interchangeable. While PAN has a concentrated existence, Aadhaar has a widespread presence with 120 crore Indians. Therefore, this move will certainly ease the KYC process and can be a huge boost for mutual fund penetration. However, there is no clarity if the mutual funds can onboard new clients through eKYC. Earlier, an investor could invest up to Rs.50,000 per financial year per mutual fund using OTP based eKYC. Those who wished to invest more than this limit needed to undergo IPV or biometric based authentication at point of service of CAMS and AMCs. Through Aadhaar based eKYC, turnaround time and paper work used to be lesser than usual.

In a move that could help the super rich investing in mutual funds, direct equity, PMS and AIFs, the government has withdrawn enhanced surcharge imposed on super rich only to the extent of LTCG and STCG arising out of transfer of equity shares or units. Earlier in the Union Budget, the government had imposed higher taxes for individuals who earn more than Rs. 2 crore a year. For individuals with taxable income between Rs.2 crore and Rs.5 crore, the surcharge (charged on top of the applicable income tax rate) was increased from 15% to 25%. The government has also increased surcharge on individuals with taxable income of over Rs.5 crore a year to 37%. With this, the effective tax rate for these two groups stood at 39% and 42.74%, respectively. Before the budget, individuals having income between Rs.50 lakh and Rs.1 crore had to pay surcharge of 10% and investors having income of Rs.1 crore and above were paying surcharge of 15%. These tax slabs were applicable to both regular and special income. While regular income includes income from salary, business income or house property, special income takes into account income from long term capital gains or short term capital gains from investments such as mutual funds, equity and fixed income. With the latest announcement, individual having special income will have to pay surcharge of 10% and 15% for income between ‘Rs.50 lakh and Rs.1 crore’ and ‘Rs.1 crore and above’, respectively. However, the relaxation is only applicable to the transfer of units of equity-oriented funds and shares. For instance, if a mutual fund investor books LTCG of Rs.6 crore, he will now have to pay LTCG of 10%+ surcharge of 15%+ 4% cess instead of 10%+ surcharge of 37%+ 4% cess. Simply put, the effective rate of LTCG and STCG on MFs, direct equity, PMS and AIFs, which were increased to 14.25% and 21.37%, respectively, will now be 11.96% and 17.94%, respectively. Equity fund investors have to pay a 10% tax on long-term capital gains above Rs.1 lakh per annum. The LTCG made till January 31, 2018, however, remains grandfathered, i.e., those gains remains tax-exempt.

The government announced reduction in corporate tax rate from 30% to 22%. Including surcharge, the effective tax rate has been reduced from 34.9% to 25.2%. A special 17% rate for new companies starting new manufacturing facilities from October 2019 has also been created. Companies have the option to go for a lower rate or stick to the current rate of 30% if they want to continue to claim exemptions under the Income Tax Act and can move to the lower rate once the exemptions expire. The minimum alternate tax rate has been slashed from 18.5% to 15%. Moreover, government announced that the enhanced surcharge introduced in July 2019 Budget should not apply to capital gains on sale of equity share, which is subject to Securities Transactions Tax (STT). 

Tightening the norms for mutual funds, markets regulator SEBI made it mandatory for liquid schemes to hold at least 20 per cent in liquid assets like cash and government securities in the wake of recent credit crisis. In case, the exposure in such liquid assets falls below 20 per cent of net assets of the scheme, the AMC will have to ensure compliance with the requirement before making any further investments. The new rule, applicable from April 1 2020, is aimed at improving risk management and ensuring sufficient liquidity, SEBI said in a circular. Besides, SEBI said that an AMC will not be permitted to charge investment management and advisory fees for the parking of funds in short-term deposits of scheduled commercial banks. This norm will be applicable after a month. Further, the regulator also barred liquid and overnight schemes from investing in short-term deposits, debt and money market instruments having structured obligations or credit enhancements facilities. However, debt securities with government guarantee will be excluded from such restriction. This rule "shall be effective for all fresh investments with immediate effect" and existing investments in this regard shall be grandfathered", SEBI said. "Mutual Fund shall levy exit load on investors who exit the liquid fund within seven days of their investment. The same shall be effective for all fresh investments from 30th day from the date of this circular," Sebi said. The requirement to levy exit load shall not be applicable to any investments made in liquid funds before the prescribed date. To ensure uniformity across the industry, industry body AMFI has been advised to prescribe the minimum exit load in a liquid fund on a graded basis in consultation with SEBI. The cut-off timings for applicability of Net Asset Value (NAV) in respect of purchase of units in liquid and overnight funds will be 1:30 pm instead of the existing 2:00 pm.

Come April 1, 2020, liquid funds will become more volatile and at the same time safer. In its latest guidelines, SEBI has introduced new valuation metrics to be followed by AMCs. Among the key changes is the introduction of mark-to-market valuation for all debt securities, irrespective of their maturity. The market regulator has asked fund houses to follow waterfall approach for valuation of money market and debt securities irrespective of their maturity. Currently, credit rating agencies follow waterfall valuation approach for debt securities having maturity of over 30 days. Under this approach, while rating agencies consider 1-hour trading volume to arrive at valuation of government securities like g-sec and T-bills, they take into account the trading volume of entire day to arrive at valuation of other debt papers like CPs and CDs. Once they arrive at these valuations, they send the weighted average price of these securities along with the last traded price of these securities to a polling team, which has 25 members from various institutions including banks, mutual funds, insurance and pension funds. Based on the poll, rating agencies decide if a security is valued at weighted average price or its last traded price. Now with the latest regulations, fund houses will have to follow this approach for securities having maturity of less than 30 days too.
Currently, fund houses broadly follow three metrics to arrive at NAV in a liquid fund
·         For a portion of portfolio having exposure to government bonds like g-sec, treasury bills or state development loans (SDLs), the fund house has to rely on credit ratings agencies
·         For repo, tri party repo (TREPS) and short term deposits, the fund house has to follow internal valuation metrics i.e. amortization based valuation i.e. average yield of such securities divided by 360
·         For other securities like derivatives, CPs, CDs and market linked debentures (MLDs), fund houses have two options – a. amortization based valuation and b. follow valuations given by rating agencies. However, the difference between traded price (amortization based valuation) and price quoted by rating agencies of a security should not exceed 0.025%
However, from April 1, 2020, while the first two clauses remain unchanged, fund houses having exposure to other securities like derivatives, CPs, CDs and MLDs in their liquid funds will have to follow rates or price quoted by rating agencies. This essentially means that liquid fund returns would go down by 5-7 bps as there will be no amortization method to arrive at valuation. Fund managers would not take undue risks to deliver attractive performance in liquid funds. Fund managers will now increase average maturity in liquid funds from 30 days to 45-50 days to outperform overnight funds.
Other key changes announced by SEBI are
·         Fund houses will have to upload NAV of all schemes by 11 pm. Currently, the cut off time to upload NAV is 8 pm
·         Below investment grade would be securities having long term rating of below BBB- or short term rating of below A3
·         A security will be termed default if it fails to oblige principal or interest payment on time
·         Fund houses will have to declare their exposure to below investment grade papers
·         Inter scheme transfers (ISTs) will be allowed only if AMCs seek prices of IST from valuation agencies subject to a specific turnaround time

AMFI has modified its due diligence process asking distributors to now give additional details like customer complaints and pending KYC details. The new due diligence process seeks details on nature of complaints received by distributors over the last three financial years i.e. from FY 2016 to FY 2018. Among the key areas of nature of complaints are non-receipt of statement of accounts, discrepancy in statement of accounts, wrong switch between schemes, unauthorized switch between schemes, deviation from scheme attributes, non-updating of email, mobile no, bank details, non-receipt of redemption proceeds, non-receipt of dividend and mis-selling or wrong scheme sold. Distributors are required to share the status of the resolution i.e. how many complaints have been resolved and pending with AMFI. Another modification is seeking details of clients who have not completed KYC, non-PAN folios and FATCA non-compliant accounts. Currently, distributors who have a  presence in more than 20 location or AUA of Rs.100 from individual investors or earn commission of Rs.1 crore and above a year or commission of Rs.50 lakh from a single fund house have to do due diligence under AMFI norms.

NRIs are increasingly taking part in India’s growth story through mutual fund route. NRI Investments in Indian mutual funds now account for nearly 4% of the industry’s total AUM, according to the RBI’s ‘Survey of Foreign Liabilities and Assets of Mutual Fund Companies’ for FY 2018-19. Of the total AUM of Rs.25.50 lakh crore, NRIs’ investments accounted for Rs.93,500 crore as on March 2019. The value of NRIs’ investments in Indian MF industry was Rs.86,000 crore a year ago. Among NRIs, the UAE (16%), the UK (9.6%) and the USA (8.3%) were the largest investors in the Indian MF industry. These three regions account for one-third of the MF units held by all NRIs. While NRIs from most countries increased their investment in Indian MFs, units held by non-residents of Mauritius and Singapore declined. This was following the amendment of Double Taxation Avoidance Agreement (DTAA) with these countries, according to the central bank survey. To put this NRIs’ investment number into context, not all of the 44 Indian MF companies accept investment from NRIs. In fact, only around 8-10 fund houses accept investments from NRIs residing in the US and Canada. This is because of the cumbersome compliance requirements under Foreign Account Tax Compliance Act (FATCA). Under FATCA, it is compulsory for all financial institutions to share the details of transactions involving US citizens, including NRIs with the US Government. Moreover, even among the fund houses that allow NRIs to invest in their schemes, there are some restricting conditions. While some fund houses allow investments only through offline transaction with additional declaration signed by the client, a few fund houses allow clients from US and Canada to invest in close-ended funds.

The Rs.25 lakh crore MF industry requires 4 lakh new ARN holders to achieve Rs.100 crore AUM in ten years, says a report released by AMFI and BCG titled ‘Unlocking the Rs.100 Trillion Opportunity’.

Here are some key findings of the AMFI-BCG report
·         Indian MF industry’s AUM growth outperformed global peers between 2007 i.e. before the economic meltdown and 2018. While most major economies like North America, Europe, Asia (excluding India) and Middle-East and Africa saw many ups and down in their AUM, Latin America and India witnessed a consistent growth in their AUM
·         Globally, India ranked 17 in the asset management industry based on AUM. Interestingly, India has surpassed China in its penetration as a percentage of GDP
·         Contribution from B15 cities increased by 34% in the last three years. As on March 2018, the industry had 25% of assets coming from these cities
·         Mutual fund was the fastest growing financial asset. Over the last four years, household contribution towards mutual funds grew from 3% to 6%. However, small savings like FDs, RDs, direct equity and insurance contributed to a larger portion of household financial savings. Currently, financial savings is 60% of the total household savings
·         MFs accounted for 16% of the total debt market as on March 2018. It was just 3% in March 2012
·         Contribution of top ten fund houses to the overall AUM in India was 83%. This number in US was 62%, UK 47%, China 46% and Brazil 92%.
·         Individual investors i.e. retail and HNIs accounted for 58% of the industry AUM. A major portion of their assets or 65% was in equity funds
·         The proportion of equity assets to the total AUM was 45%. Globally, only the US was ahead of India in such an asset mix. US had 54% of its assets in equity followed by UK and India at 45% as on March 2018
·         IFAs and NDs accounted for 55% of retail assets and 40% for HNIs
·         MF penetration in households was 7% in India
·         There were 10% households having annual income of Rs.10 lakh and above, 37% with annual income between Rs.3 lakh and Rs.10 lakh and 53% with less than Rs.3 lakh
·         Percentage of wealthy households would go up to 17% (over Rs.10 lakh income) and middle income group 46% (Rs.3 lakh and 10 lakh) by 2025
·         To achieve Rs.100 lakh crore AUM in 10 years, the MF industry needs 10 crore investors, 5 lakh distributors and 50% of industry’s assets should be in equity funds
·         Mutual fund, SIP calculator and SIP were the most searched keywords on google
·         Of the total google searches, 38% of users were from B15 cities
·         After ‘MF Sahi Hai’ campaign, the industry added over 50 lakh new investors within 12 months
·         Only 9% of first time investors came to know about mutual funds through IAPs. On the other hand, 40% of first time investors came to know about mutual funds through friends, family members and CAs

India has 37% households having an annual income between Rs.3 lakh and Rs.10 lakh. This population is set to increase to 46% by 2025. For India’s MF industry to reach Rs.100 lakh crore AUM with an investor base of 10 crore in next ten years, tapping the aspiring Indian middle class will be crucial. Currently, the Indian MF industry has around Rs.25 lakh crore AUM and an investor base of 2 crore, says an industry report by AMFI and BCG. Among the ways, which the report noted for expanding coverage to middle-income households, is simplification of the current products. The MF industry offers over 2000 schemes, ranging across asset classes, strategy and risk return profile. Moreover, the industry is laden with complex jargon around product strategies, expense ratios and returns. This difficult jargon along with the wide range of product offerings and extensive KYC paperwork often discourages first time investors from switching from the simple traditional investment products such as bank deposits. To overcome such challenges, the report suggested global examples of ‘solution or goal oriented’ offerings. Some AMCs are already offering benefit-linked MF offerings such as linkages with insurance and medical payment. Further, the report said that the current onboarding processes need to be simplified. Extensive KYC paperwork often discourages first time investors from switching from the simple traditional products. The report suggested standardization of KYC norms across CKYC, KRA, eKYC. It also pitched for digitization of RTAs, which will enable seamless on-boarding experience and better customer engagement. The relatively low share of debt mutual funds means there is significant headroom for penetration. Currently, share of debt mutual funds is less than 25% in individual investors’ AUM. A focused awareness campaign may be needed to highlight the benefits of debt-oriented funds vis-à-vis other debt investment products like fixed deposits. Simplifying debt is of paramount importance.

It is indeed heartening to note that Indians are increasingly moving away from physical savings to financial savings. However, the realization that to beat inflation they will have to change from traditional saving options to equities and mutual funds is happening at a much slower pace. While AMFI’s investor awareness campaign, ‘Mutual Funds Sahi Hai’, is a step in that direction and has met with encouraging success, we are preparing for a concerted strategy that would over time help the saver community across the country to gradually depart from traditional and financially-inferior ingrained attitudes and habits.

Monday, September 23, 2019


FUND FULCRUM
September 2019


The mutual fund industry's asset base rose to Rs 25.47 lakh crore in August 2019 from Rs 24.53 lakh crore in July 2019. The mutual fund industry has added around 5 lakh investors' account in August 2019, taking the total tally to 8.53 crore, amid volatile market conditions. In comparison, the industry had added 10.29 lakh new folios in July 2019. According to data from Association of Mutual Funds in India, the number of folios with 44 fund houses rose to 8,52,81,222 at the end of August 2019, from 8,48,00,409 at the end of July 2019, registering a gain of 4.81 lakh folios. The total folio count stood at 8.38 lakh in June 2019, 8.32 lakh in May 2019 and 8.27 lakh in April 2019. So far in FY 2019-20, the MF industry has added around 5.05 lakh folios in April, 5.05 lakh folios in May, 5.30 lakh folios in June and 10.29 lakh folios in July. Addition of folios suggests that investors were undeterred by the market volatility. Besides, it indicates their understanding of the market risks associated with the mutual fund schemes. Number of folios under the equity and equity-linked saving schemes rose by 4.11 lakh to 6.16 crore in August 2019 as compared to 6.12 crore at the end of the preceding month. The addition of folios was largely driven by open-ended equity funds. With 1.23 lakh new folios in August 2019, large cap funds saw the highest addition among all equity schemes with its total folio count touching 92 lakh folios. The next in the list was multi cap funds that added 87,896 folios to reach 87 lakh folios. Another notable category of equity funds was ELSS. This category added 61,931 folios in August 2019, as against 72,923 new folios in July 2019. At the end of August 2019, the total number of folios in this category stood at 1.17 crore folios. For hybrid schemes, it was a mixed bag. Dynamic asset allocation/balanced advantage and arbitrage funds saw addition of 18,917 and 10,084 folios respectively. However, categories such as conservative hybrid fund, balanced hybrid fund/aggressive hybrid fund and equity savings fund witnessed a decline in their number of folios.The debt oriented scheme folio count went up by 1.15 lakh to 66.75 lakh. Within the debt category, liquid funds continued to top the chart in terms of number of folios at 16.42 lakh, followed by low duration fund at 9.15 lakh. Most debt fund categories witnessed an increase in August 2019. With over 34,000 new folios, liquid funds witnessed highest number of folio addition in August 2019. The total folio of the category went up to 16.42 lakh.  

The 44-player mutual fund industry witnessed a net outflow of Rs 2,270 crore from credit risk funds in August 2019, the highest among all categories. It was also its fifth consecutive month of outflows. But the data provided a silver lining. Outflows fell from July 2019, when the segment saw investors pull out Rs 3,411 crore, according to data released by the Association of Mutual Funds in India (AMFI). The back-to-back downgrade of debt instruments from Infrastructure Leasing & Financial Services (IL&FS), Dewan Housing Finance (DHFL) and Reliance Home Finance by rating agencies has hurt the performance of credit risk funds. Since April 2019, AMFI has followed a new format to release data, as mandated by market regulator SEBI. The format requires categorisation of schemes into various segments: open-ended, close-ended and equity-oriented schemes. Under income/debt-oriented schemes, another category that saw a significant drop was medium-duration funds, which registered outflows of Rs 561 crore last month as against outflows of Rs 956 crore in July 2019. In the same category, liquid funds, which are used by companies to park surplus cash, saw robust inflows of Rs 79,428 crore in August 2019 as against inflows of Rs 45,441 lakh crore in July 2019. Inflows in balanced funds category reversed in August 2019, with outflows of Rs 879 crore as against inflows of Rs 674 crore in July 2019. On the equity front, despite volatility in the equity markets, funds saw inflows of Rs 9,090 crore in August 2019, up 12.3 percent month-on-month. Net inflows, largely in all categories of equity funds, especially in small and mid-cap funds, as also in ELSS segment, signify heightened confidence and interest in emerging businesses and disciplined tax planning.

SIP continued to be the preferred route for retail investors to invest in mutual fund as it helps them reduce market timing risk. The mutual fund industry managed to garner Rs 8,231 crore through systematic investment plans (SIPs) in August 2019, 7.5 per cent higher than Rs 7,658 crore clocked in the same month last year. In July 2019, the industry had collected Rs 8,324 crore. It had garnered Rs 8,122 crore in June 2019, Rs 8,183 crore in May 2019 and Rs 8,238 crore in April 2019. Inflows into SIPs have averaged about Rs 8,000 crore for the 12 months till August 2019. The total SIP contribution in the first five months of the current fiscal rose to Rs 41,098 crore as compared to Rs 36,760 crore in April-August 2018, according to AMFI. Going ahead, SIPs would witness robust flows on equity side in September 2019, while on the debt side liquid funds may see volatility owing to quarter-end phenomenon. Over the past few years, investment through SIPs has been rising as investments of close to Rs 92,700 crore through the mode were seen in 2018-19, over Rs 67,000 crore in 2017-18 and more than Rs 43,900 crore in 2016-17. Currently, mutual funds have 2.81 crore SIP accounts through which investors regularly invest in Indian mutual fund schemes. The industry, on an average, added 9.39 lakh SIP accounts each month during the current fiscal (2019-20), with an average ticket size of about Rs 2,900.

CAMS data that covers 65% of the industry’s AUM shows that the MF industry has added 5.41 lakh net SIP accounts between April-July 2019. Of these net SIP accounts, 53% or 2.85 lakh net SIP accounts came from regular plans. The remaining 47% or 2.55 lakh accounts were from direct plans.The number of net SIP accounts is calculated by deducting SIPs ceased and SIPs expired from the number of new SIP accounts. Interestingly, the growth in net number of SIP accounts in regular schemes has witnessed an upward trajectory compared to direct schemes that saw a downfall. In case of direct schemes, the highest number of SIP accounts has come in April 2019 and the lowest in July 2019. On the other hand, in regular schemes, the highest number of SIP accounts has come in June 2019 and the lowest in April 2019. Direct plan investors pull out quickly in the absence of guidance and handholding by advisors in volatile markets. If we segregate the number of SIP accounts based on its geographical location, around 3.24 lakh accounts or 60% came from T30 cities. The remaining 40% or 2.16 lakh accounts came from B30 cities. 
While the top five states (based on AUM) still dominate the MF industry, their total AUM share declined from 72% to 70% in the past five years. This is due to faster growth in other regions. Back in March 2014, Gujarat, Karnataka, Maharashtra, New Delhi and West Bengal were among the top five states in terms of AUM. Among these states, Gujarat had the highest allocation of 30% to equities. Karnataka, Maharashtra, New Delhi and West Bengal had 23%, 16%, 14% and 24% respectively, allocated to equity. Between 2014 and 2019, share of equity-oriented funds in these five states increased significantly. As on June 2019, Gujarat’s asset allocation to equities rose to 42%. For Karnataka the number rose from 23% to 40%, for Maharashtra from 16% to 39%, for New Delhi from 14% to 38% and for West Bengal 24% to 41%. In terms of the total AUM, while these top five states still dominate the mutual fund industry with around 70% share of the industry’s AUM, their share have declined slightly from 72% as of March 2014. This is due to faster growth in other states and union territories over the past five years. While the AUM of these top five states grew at a healthy pace of 21.5% CAGR between March 2014 and June 2019, assets of the remaining states and union territories grew at a faster rate of 24.4%. Maharashtra remained at the top of the table even as its AUM share came down to 42% in June 2019 from 47% in March 2014. On the other hand, New Delhi, which is placed at the second spot, saw its AUM share rise from 8% to 9% during this time. Karnataka, Gujarat and West Bengal followed the list of being the top state in terms of total AUM. While Karnataka’s AUM share remained flat at 7%, for Gujarat and West Bengal the number remained unchanged at 5% each over the past five years.
According to an industry report by CRISIL and AMFI, individual investors put nearly 83% of their total assets in regular plans, an indication that they prefer handholding by distributors. The remaining 17% AUM of individual investors comes through direct plan. A lion’s share of individual investors’ assets coming via regular plan is understandable. This is because IFAs not only guide the average investor in scheme selection; they also handle operational works such as updating KYC as per latest norms, facilitating minor to major transfer, inheritance transfer and transaction processes. Moreover, with the recent revision in expense ratios, the difference between regular and direct plans is likely to reduce. Highlighting other trends among individual investors, the report says that AUM of individual investors has surpassed AUM of institutional players in the past 5 years. AUM of individual investors grew from Rs.4 lakh crore in March 2014 to Rs.14 lakh crore in June 2019, logging a 27% CAGR. Consequently, its share in the total AUM increased from 48% to 58%. AUM of institutional investors, on the other hand, logged a slower 18.1% CAGR from Rs 4.3 lakh crore to Rs 10.2 lakh crore. On the preference of asset class, the report said that individual investors deploy assets mainly in equity funds. As of June this year, 57.4% of individual investors’ AUM was in equity-oriented funds. Around 11.7% of individual investors’ AUM was in aggressive hybrid funds and 24.3% in debt funds and 6.4% in liquid/money market funds. Institutional players, however, preferred the fixed-income segment, which constituted 77.2% of their assets. Around 21.4% of institutional investors’ AUM was in equity funds.

Piquant Parade

SEBI has recently given in-principle approval to Samco Securities to set up its AMC business, shows the latest data on ‘Status of Mutual Fund Applications’. Earlier, SEBI had given in-principle approval to Muthoot Finance and Trust Investment. While Muthoot Finance is reportedly in talks with a few fund houses to acquire a stake, there is no update on Trust Investment. Samco Securities approached SEBI in June 2018. Samco Securities founded by Jimeet Modi is an online discount brokerage firm like Zerodha. The Mumbai based company has also online mutual fund distribution arm called Rank MF. Meanwhile, SEBI data shows that Frontline Capital, Karvy Stock Broking and NJ India are awaiting approval from SEBI to launch mutual fund business in India. SEBI rules say that the sponsor applying for a mutual fund licence is required to be in the financial services business for five years and needs to have a positive net worth for five years. The sponsor should have earned profits in three of the previous five years, including the latest year. SEBI conducts an on-site due diligence of sponsors before granting approval.

to be continued…

Monday, September 16, 2019


NFONEST
September 2019

NFOs of various hues adorn the September 2019 NFONEST.

 

ICICI Prudential Global Advantage Fund
Opens: September 16, 2019
Closes: September 20, 2019
ICICI Prudential Global Advantage Fund is a Fund of Funds scheme with the primary objective to generate returns by investing in units of one or more mutual fund schemes/ETFs (managed by ICICI Prudential Mutual Fund or any other Mutual Fund(s)) which predominantly invest in international markets. A certain corpus of the scheme will also be invested in units of domestic mutual fund schemes/ETFs managed by ICICI Prudential Mutual Fund or any other Mutual Fund(s). Benchmark Index for the scheme is S&P Global 1200 TRI (80), S&P BSE Sensex TRI (20). The fund managers are Mr. Sankaran Naren and Mr. Dharmesh Kakkad.

SBI CPO Fund – Series A (Plan 6)
Opens: September 12, 2019
Closes: September 26, 2019
SBI Mutual Fund has unveiled a new fund named as SBI Capital Protection Oriented Fund - Series A (Plan 6), a close-ended Capital Protection Oriented Scheme. The tenure of the scheme is 1350 days from the date of allotment. The investment objective of the scheme endeavors to protect the capital by investing in high quality fixed income securities that are maturing on or before the maturity of the scheme as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. The scheme will invest 80%-100% of assets in debt instruments (including debt derivatives) and money market instruments (including Triparty Repo, Reverse repo) with low to medium risk profile and invest up to 20% of assets in equity and equity related instruments (including derivatives and ETFs) with high risk profile. Benchmark Index for the scheme is CRISIL Hybrid 85+15 - Conservative Index. The fund managers are Mr. Rajeev Radhakrishnan (debt portion) and Mr. Ruchit Mehta (equity portion).

 ITI Long Term Equity Fund

Opens: July 15, 2019
Closes: October 14, 2019
ITI Mutual Fund has launched the ITI Long Term Equity Fund, an open-ended ELSS fund (Equity Linked Saving Scheme) with a statutory lock in of 3 years and tax benefit. The investment objective of the fund is to provide long-term capital appreciation by investing predominantly in equity and equity related securities. According to ITI Mutual Fund, the fund will invest in a diversified basket of equity stocks spanning the entire market capitalisation spectrum and across multiple sectors, debt and money market instruments. The fund would identify companies for investment, based on good track record of the company, potential for future growth and industry economic scenario. ITI Long Term Equity Fund will also invest a portion of the funds in initial offerings and other primary market offerings. Risk will be managed through adequate diversification by spreading investments over a wide range of companies. The scheme may take advantage of special situations that present an investment opportunity to the fund manager who can judge the implications of that opportunity that can unlock value for investors. Some of these situations are merger of businesses or companies which may result in synergies in business activities. Demerger may result in separation/spin-off of business operation/activity from some other business operation/activity. Companies may consider a buy-back of their shares from the market due to various reasons (like company has substantial free reserves, management is confident of the future growth potential, meeting with the regulatory norms, etc.) The fund is benchmarked against the Nifty 500 Total Return Index. Mr. Pradeep Gokhale and Mr. George Heber Joseph will manage the fund.
ICICI Prudential ESG Fund, ICICI Prudential India Equity Fund, Axis Sustainable Equity Fund, Tata Focused Equity Fund, Principal Mid Cap Fund, Principal Global Equity Fund, Principal Value Fund, Edelweiss Equity Yield Fund and Baroda Banking and PSU Bond Fund are expected to be launched in the coming months.

Monday, September 09, 2019


GEMGAZE
September 2019

The dip in the one-year performance of the diversified equity fund category as a whole has created a dent in the performance of all the GEMs. Inspite of this, all the GEMs from the 2018 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2019 GEMGAZE too. 

Birla Sunlife Frontline Equity Fund Gem
Birla Sun Life Frontline Equity Fund has been one of the most consistent diversified equity funds since its inception in August 2002. This fund has generated significant alpha when compared to the category over a decade with a return of 11.79% as against the category average return of 9.81%. Its five-year return is 7.49% as against the category average return of 7.01%. Good performance resulted in assets expanding to over Rs 20,584 crore by August 2019. With 97.13% of the portfolio in equities, the fund has a bias for large cap growth oriented stocks. Large cap stocks account for nearly 85% of the portfolio value. In terms of sector allocation, the portfolio has a bias towards sectors like Banking and Finance, Energy and Technology which comprise about 62.02% of the portfolio value. In terms of company concentration the fund is fairly well diversified, the top 5 companies, HDFC Bank, ICICI Bank Infosys, State Bank of India and Reliance Industries, all Sensex heavyweights, account for only 32.91% of the portfolio value. The fund is well diversified with around 61 stocks in the portfolio. The expense ratio of the fund is 1.79% and turnover is 51%. The fund has been managed by Mahesh Patil, well-known for his deftly managed investment strategy since November 2005. But a steady management team manages the fund with style continuity. Birla Sun Life Frontline Equity Fund has built a strong reputation as a wealth creator for its investors.
HDFC Midcap Opportunities Fund Gem
A silent consistent performer over the years, the Rs. 20,944 crore HDFC Mid-Cap Opportunities Fund, launched in June 2007, has made its name among consistent performers in the mutual fund arena. This fund is an open ended scheme managed by star fund manager Chirag Setalvad since inception and Amar Kalkundrikar since January 2019. HDFC Mid-Cap Opportunities Fund earlier had a mandate to invest in a mix of mid-caps and small-cap stocks (97.06% at present). However, the aim now will be to predominantly build a portfolio of mid-cap companies (79.75% at present) that have reasonable growth prospects, sound financial strength, sustainable business models, and acceptable valuation that offer potential for capital appreciation. HDFC Mid-Cap Opportunities Fund holds a well-diversified equity portfolio with the top three sectors, Finance, Chemicals and Engineering constituting 43.67% of the portfolio. None of the holdings have an exposure of over 5% in the portfolio. Out of the 71 stocks in the portfolio, the top 10 holdings command an allocation of 31.19%. Over the past five years, HDFC Midcap Opportunities Fund has taken a lead over the benchmark right from the very beginning. The five-year and ten-year returns of the fund are 9.19% and 16.91% as against the category average of 8.51% and 10% respectively. In terms of long-term performance, HDFC Opportunities Fund has generated strong returns in the market rallies of the past and has been able to restrict losses in a bear market. The expense ratio is 1.71% and the turnover ratio is a meager 3%. 

ICICI Prudential Bluechip Fund (erstwhile ICICI Prudential Focused Bluechip Fund) Gem
Among mutual fund schemes that have singular focus on large-sized companies, the Rs. 21,125 crore ICICI Prudential Bluechip Fund has distinguished itself by consistently beating its benchmark and peers by a reasonably good margin. The fund has traditionally had a higher-than-category allocation to large caps (94.49% at present). Its mandate earlier called for a concentrated portfolio, with the stock picks drawn from the top 200 stocks by market cap. Post SEBI reclassification, the fund is repositioned as a pure large-cap fund. This will not materially change its risk or return profile, given that the market-cap range is practically the same. The 'focused' approach has been dropped from the mandate. It holds a well-diversified equity portfolio with the top three sectors, Finance, Energy and Technology constituting 56.64% of the portfolio. Out of the 52 stocks in the portfolio, the top 5 holdings command an allocation of 30.61%. This is in any case a positive, given that the fund's burgeoning size made a very compact portfolio difficult. The only limitation to assessing this fund is that despite its consistent show in the last eleven years, it has not seen a serious bear market since inception. In 2011 and in 2015, it managed to contain downside well relative to the market. The fund has been managed by Rajat Chandak since July 2017 and Anish Tawakley since September 2018. In the past ten- and five-year periods, the scheme has delivered 12.85% and 8.10% returns, while the category average has been 9.81% and 7.01% in the same period, respectively.  The expense ratio is 1.83% and the turnover ratio is 24%. Investors looking to invest in an ‘all-weather’ and ‘true to-its-label’ large cap portfolio can considr investing in this scheme. 

DSP Equity Opportunities Fund (erstwhile DSPBR Equity Opportunities Fund) Gem
A very steady performer in the multi-cap category, this Rs. 5157 crore fund, incorporated in May 2000, is a flexi-cap fund with no pre-defined market capitalisation limits. The fund had a bias towards large caps. But, in recent times, the fund has maintained a 52% plus large-cap exposure, with mid-cap stocks at about 48%. It holds a well-diversified equity portfolio with the top three sectors, Finance, Healthcare and Technology constituting 51.75% of the portfolio. Out of the 59 stocks in the portfolio, the top 5 holdings command an allocation of 26.69%.The expense ratio is1.96% and the turnover ratio is 132%. The fund has been managed by Rohit Singhania since June 2015. In the past ten- and five-year periods, the scheme has delivered 12.16% and 9.58% returns, while the category average, has been 11.37% and 8.06% in the same period, respectively. The scheme has been a consistent outperformer in recent years.

Monday, September 02, 2019


FUND FLAVOUR

September 2019


‘Diversified’ is the name of the game!


Diversified Equity Funds, as the name suggests, diversify their assets across companies and sectors. Investing in several securities across sectors and market-caps enables you to overcome the unsystematic risk that arises from investing in limited stocks or sector-specific funds. Diversified Equity Mutual Funds aim at diversifying investments in companies across a wide range of sectors, irrespective of their size or whether they are large-caps, mid-caps or small-caps. These sectors usually are Pharmaceuticals, Banking and Financial Services, IT, Engineering, FMCG, Oil & Gas, Power and Utilities, Automobiles, Real Estate, etc. Large-caps refer to large companies with vast market capitalisations. Similarly, as their names suggest, mid-caps refer to mid-sized companies that offer medium capitalisations and small-caps refer to smaller companies with small market capitalisations. The primary aim of Diversified Equity Mutual Funds is to achieve long-term capital appreciation through diversified investments across the stock market. Besides, investing in different sectors also minimise risks, proving to be a smart long-term investment option that accrues good returns even during inflation and challenging economic scenarios. Diversified equity funds help investors meet long-term financial goals like children’s education, marriage, retirement plans, etc. Diversified equity funds offer investors the opportunity to benefit from the economic growth of the company that they have invested in. When a company achieves financial growth, a certain percentage of these gains automatically get passed on to investors who have invested in the company by purchasing their stocks or shares. HDFC Equity Fund, Reliance Growth Fund and ICICI Prudential Dynamic Plan are some good examples of diversified equity funds.

 Size matters…



Diversified Equity Funds are categorised into the following on the basis of the size of companies in which investments are made.
·         Small-cap Diversified Funds: Small-cap Diversified Mutual Funds offer high returns and are best suited for young investors below 35 years of age and with a high risk appetite. It is essential to manage these funds judiciously to reduce the risk of losses and ensure good returns.
·         Mid-cap Diversified Funds: Mid Cap Diversified Mutual Funds invest in companies with market capitalisation between Rs. 4000 crores and Rs. 20,000 crores. These funds are less risky in comparison to small-cap diversified mutual funds and usually offer high returns in the long term.
·         Large-cap Diversified Funds: Large-cap Diversified Equity Mutual Funds invest in companies with market capitalisation of at least Rs. 20,000 crore. Investors invest in stocks or shares of renowned blue chip companies that consider Nifty as their benchmark index. Investments in leading global companies ensure minimal risk, fetching good returns at the same time.

 

Diversified Equity Funds - one up on other funds


Diversified Equity Mutual Funds are suitable across sectors and market caps. These funds are not completely risk-averse. However, if you understand the risks, you can take decisions accordingly and reap rich rewards that these funds offer.


Professional Management

Fund managers are experts in portfolio management because they have extensive experience and knowledge about financial research. If you are not a seasoned investor, you can seek the help of a fund manager to guide you through unpredictable economic scenarios. Other than the expertise to anticipate market movements, fund managers are equipped with a team of research analysts who keep a close watch on changing market trends. They abide by an investment procedure and apply risk management strategies that they have improved upon through the years. You can make the most of the years of experience of these professionals in lieu of a small charge, referred to as an Expense Ratio, which is deducted from the NAV or Net Asset Value (NAV) of your mutual fund.

 

Lower entry level
If you plan to create a diversified portfolio of over 50 stocks, you would need an investment amount of Rs 25,000 - above Rs 1 lakh, depending on the price of the individual stocks. For example, the stock price of Maruti Suzuki India is around Rs 6,000, while that of Eicher Motors alone is Rs 25,000. Therefore, if you plan to have these stocks in your portfolio, you will need much higher capital to create a well-diversified basket of stocks. You simply cannot own one stock of Rs 25,000. This will account for 25% of the portfolio, for an investment of Rs 1 lakh.
The advantage you receive through mutual funds is that you can invest as little as Rs 500 and benefit from the diversification over 50 stocks or more; an approach that would have otherwise posed to be challenge. This is especially encouraging for investors who start small and at the same time get exposure to multiple securities.

Economies of scale
By investing in diversified equity funds, you can save lakhs in transaction costs over the long run. Imagine if you plan to invest some amount in equity stocks every month. Assuming you own a basket of even 20 stocks, you will incur high transaction costs. Going ahead if you actively manage your portfolio by scrapping laggards or booking profits and moving to other high growth stocks, you will incur further transaction costs. If you sell a stock before a year, the gains will attract a short-term capital gain tax @15%. Therefore, when investing in stocks directly, do not ignore the costs. If the costs work out to greater than 3% of your portfolio value and the returns are lower than the average equity funds, it is time you move to equity funds. When you invest in mutual funds, the voluminous purchase or sale of securities by the fund house results in greater economies of scale, than if you were to buy and sell a handful of securities yourself. In addition to this, the fund house does not incur short-term capital gain tax. This translates into better return on investments for you, while bearing a small expense ratio annually in your journey to wealth creation.

 

Save on Additional Costs

Investments in diversified equity mutual funds save you from spending on monthly transaction cost that is applicable on non-equity fund investments. Regular portfolio management to overcome booking profits and laggards, and opting for other stocks that show the promise of high capital gains lead to further transaction costs. Purchase or sale of these funds in volumes ensures higher economies of scale, even if you opt for the guidance of a fund manager. What is more, you also do not incur short-term capital gain tax, enabling you to avail higher return on investments. The only additional cost that you need to pay is the minimal expense ratio, which is an annual expenditure.

Innovative plans/services for investors
If you wish to invest directly with the fund house, direct plans are the way to go. These plans come with a lower expense ratio and you will save much more over the long term. The regular plans cost higher because they include distributor commissions. Hence, if you route your transactions through a distributor, you will get access only to the higher cost regular plans. Besides, there are two modes of investing: Systematic Investment Plans (SIPs); and Systematic Transfer Plans (STPs). You can set up a monthly SIP, through which a predefined amount is deducted from your bank account and invested in the selected mutual fund. This will allow you to average out your investment cost and will develop a regular saving habit. Under STP you can set up a monthly transfer from a debt fund to an equity fund. Further, some funds facilitate tactical asset allocation plans and trigger the facility to manage your portfolio from a financial planning perspective too. Also, if you wish to withdraw a certain amount at regular intervals, you have Systematic Withdrawal Plans (SWPs). These features allow you to seamlessly enter/exit funds, or switch from one fund to another.

 

Steps in the selection…


There is an extensive range of over 450 diversified equity mutual funds offered by as many as 44 asset management companies (AMC). This makes it a challenge for investors to select one that is a perfect fit for their risk appetite and meets their financial goals. While selecting a fund, you need to analyse the fund from different angles. There are various quantitative and qualitative parameters, which can be used to arrive at the best Diversified Equity Funds in accordance with your requirements. Additionally, you need to keep your financial goals, risk appetite, and investment horizon in mind. Let us look at a few criteria that you need to consider while purchasing a diversified equity mutual fund.

Quantitative criteria:

Fund returns and risk analysis

Fund performance by way of annualised returns is considered to be a crucial factor for the selection of funds. Investors may look for returns for a period of at least five years to ten years. One may, in fact, select funds that have consistently beaten their benchmark indices (index to which a fund’s returns are compared). They should also fare reasonably well when compared with their peer set over the longer time frames. You need to ensure that the fund has the ability to perform consistently across multiple market cycles, i.e. bull and bear phases. Therefore, compare the performance of the schemes vis-à-vis their benchmark index across bull phases and bear market phases. A fund that performs well on both sides of the market should rank higher on the list. The fund needs to be ranked on quantitative parameters like rolling returns across short-term and long-term durations, such as 1-year, 3-year, and 5-year periods, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

 

Compare Estimated Returns Across Funds under the same Category

One of the primary factors to be considered for benchmarking is comparing funds that are enlisted under the same category. If you are aiming to invest in a certain large-cap diversified equity mutual fund, you have to compare its estimated returns with other large-cap diversified equity funds. Comparing it with small-cap or mid-cap funds cannot be a suitable yardstick for accurate estimates, since the risk-reward relationship varies among the market caps. While evaluating diversified equity funds, you also have to assess the long term returns that they are expected to deliver on the basis of their performance in the recent past. This is because equities offer higher returns when you invest in them for a period between 3 years to 5 years. Therefore, calculating their expected returns for a period below 3 years would not give you a conclusive picture of how the fund has been performing over a stock market cycle. Evaluating the performance of the fund across various market phases in comparison to the category average will help you in analysing the consistency of returns that has been generated by the fund.

Compare Returns against the Benchmark Index

All funds are expected to mention their individual benchmark index in their Offer Document. Apart from keeping a tab on the past performance of the fund, you also need to evaluate it on the basis of its benchmark index. Most equity funds perform better than their benchmark indices over the long-term of 3 years to 5 years, unless the economy is faced with turbulence.

Compare Against its own Past Performance

Besides comparing a fund with others from the same category and benchmark index, investors should take into consideration the past performance of the same fund as well. This will give you a clear insight into its stability and sustainability during market downturn and across the market cycle. This way you can track the most consistently performing funds and invest accordingly.

Check the Additional Charges Involved with the Fund

Check the additional charges, including the expense ratio that you will have to bear on investing in the fund as it will affect the net returns of the fund. Expense ratio is the annual expense incurred by funds, expressed as a percentage of their average net asset. It is charged from the overall returns earned by the fund. Expense ratio is what the mutual funds charge investors for investing on their behalf to manage their money. Direct mutual funds tend to have lower expense ratio as compared to regular mutual funds. You can save a lot on distributor commissions. You need to choose a fund which has a lower expense ratio. You also have to be aware of the exit load, that is, the fees levied by a mutual fund scheme on redemption before the pre-determined stipulated period. However, the exit load will not be applicable if you invest in the fund over a long term.


Qualitative Parameters:

Fund Objectives

Diversified Equity Funds aim at achieving wealth accumulation by investing in stocks that offer the best combination of high growth, risk, and value. The stock picking is based on investing style, which can be value investing or growth investing. Additionally, the fund manager may consider other quantitative measures such as P/E ratio, EPS, etc. to ensure that the portfolio is composed of only quality stocks.

Investment Horizon

Diversified equity funds are suitable for individuals having a medium or long-term investment horizon. Usually, the fund experiences a lot of fluctuations during the short-run which averages out over the long-run. Those who choose diversified equity funds need to be prepared to stick around at least for the said period to enable the fund to realise its full potential.

Financial Goal

Diversified equity funds are ideal wealth creators because these funds may accumulate more substantial wealth for achieving long-term financial goals like children’s higher education or retirement planning. Being a high risk-high return haven, these funds are capable of generating enough wealth, which may help you to retire early and pursue your passion in life.

Portfolio Quality
The portfolio quality of a fund points at how it is likely to perform in the future. Here is what you should pay attention to:
Adequate Diversification - The fund should not hold a highly concentrated portfolio. A concentrated portfolio heightens the risk involved. Hence, the portfolio of a fund should be well-diversified and the exposure to the top-10 stocks should be ideally under 50% while concentration to one particular sector should not exceed 30-35%.
Low Churn - Engaging in high churning of your portfolio can result in trading and high turnover costTherefore, you also need to consider the portfolio turnover ratio and expenses and penalise funds involved in high churning, i.e. those funds with a turnover ratio of above 100%.

Fund history and Fund manager

In case of diversified equity funds, along with the fund history, fund manager plays a vital role in running the entire show on expected lines. A strong parentage from a trusted fund house is necessary before you invest in a fund. You need to look into the past performance and reputation of the asset management company. Ideally, it should also have a clean and long business history of at least say five years. It ensures that the fund has seen all the market cycle of slumps and rally.
Quality of Fund Management
Further, consider the fund manager’s experience, his workload, consistency in clocking returns, and proportion of the Assets Under Management of the fund house that are actually performing. Therefore, check the following points before investing:
The fund manager’s work experience  He/she should have a decent experience in investment research and fund management, ideally over a decade. But also note that mere experience is not enough. Some schemes managed by fund managers with 15-20 years of experience have never done consistently well for a long time.
The number of schemes managed – A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.
The efficiency of the fund house in managing your money – You need to check if the fund house is consistent in performance across schemes or if only a few selected schemes are doing well. A fund house that performs well across the board is an indication that sound investment processes and risk management techniques are in place.

The above list is a lot for an average investor to look at. It involves a lot of number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.


How they have fared…

 

The year 2018 was a volatile one for equity markets, which is an ideal situation to study the effect on equity funds as there was no steep rise or fall through the year. If we study the performance of systematic investment plans (SIPs) of diversified equity funds till November end, it will reveal a sorry picture for 1-year return, with 126 out of the 137 funds or almost 92 per cent of the diversified equity funds generating negative returns for the investors. The most battered funds were risky small-cap ones with as much as -33.3 per cent loss, while most of the 11 funds that gave positive returns were part of relatively lower-risk large-cap category with highest 1-year return of 5.75 per cent. By seeing the 1-year performance, you must be thinking, it would have been better to invest in fixed deposit (FD) with higher and guaranteed return. Now move to 2-year SIP returns of the same category of funds. In two years, 42 out of the 137 funds or 30.66 per cent diversified equity funds had generated negative returns with steepest loss of -15.81 per cent and highest return of 13.13 per cent. Now the category is still risky, but the highest return, again from large-cap category, is nearly double the prevailing FD returns. As we examine the 3-year returns of the diversified equity funds, we may see that the effect of market volatility further fades and only 5 out of the 137 funds or only 3.65 per cent of the funds end up in negative zone with maximum loss of -4.87 per cent, while the highest compound annual growth rate (CAGR) moves up to 14.03 per cent. The 4-year returns see that only 1 fund out of 134 funds has ended up in negative zone with -1.1 per cent return and rest 99.25 per cent funds giving positive returns with the highest CAGR of 14.56 per cent and average CAGR of the category hitting 7.81 per cent, which is equivalent to prevailing FD interest rates. From fifth year onwards, the impact of market volatility was completely faded out and no diversified equity fund had given negative return. The 5-year average CAGR of the category hit 10.45 per cent mark, with highest CAGR of 19.05 per cent of a small-cap fund and lowest of 2.51 per cent of a mid-cap fund. The average 6-year CAGR of diversified equity funds category was 12.91 per cent, with highest CAGR of 23.11 per cent and lowest of 3.47 per cent, while the 7-year average CAGR was 13.98 per cent, with highest of 24.26 per cent and lowest of 3.32 per cent. As we move to 10-year performance, the average CAGR was 14.15 per cent, with highest CAGR of 21.77 per cent and lowest of 8.17 per cent and the 12-year average CAGR was 12.78 per cent, with highest of 19.58 per cent and lowest of 7.59 per cent. Going to further long-term performances, the 15-year average CAGR was 13.47 per cent, with highest CAGR of 18.36 per cent and lowest of 7.86 per cent, while the average 20-year CAGR of the diversified equity funds category was 18.18 per cent, with highest of 22.01 per cent and lowest of 10.78 per cent.

About 75% diversified equity schemes have trailed the benchmark index. Fund managers faced a tough time beating the benchmark in 2018, with nearly three in four diversified equity schemes underperforming their respective underlying indices. A study of 235 equity schemes that includes direct plans shows that 168, or 71 per cent, have underperformed their respective benchmarks. This can be attributed to large sums chasing too few stocks, and the impact of regulatory changes such as categorisation of schemes as well as the introduction of total returns index, in lieu of a simple price index.

Over the last one year, despite the market turbulence Axis Equity Fund, UTI Equity Fund, Canara Robeco Equity Diversified Fund, ICICI Prudential Multicap Fund and Mirae Asset India Equity Fund have generated luring returns. The other diversified equity funds, which are not in the aforesaid list, but hold the potential to do well in 2019 and beyond are Aditya Birla Sunlife Equity Fund and Franklin India Equity Fund. Relying only on large caps might save you from volatile markets to an extent, but in case markets take a U-turn and rise sharply, large-cap funds might underperform  mid and small cap schemes. Thus, investing in diversified equity funds in 2019 makes a lot of sense. But remember not to pick a diversified equity fund by giving importance to the short-term market outlook, ignoring your personalized asset allocation, depending extensively on the past track-record of a scheme, relying blindly on star ratings, disregarding qualitative aspects associated with mutual fund selection and relying on the advice given by friends and relatives unqualified to give you advice on mutual funds.

 Is it for you?


For an investor with appetite for equities and long-term goals like retirement planning, saving for child’s education or child’s marriage, diversified equity funds either on a standalone basis or in a portfolio with other investments can prove useful. If you are one such investor, planning to invest in equity mutual fund schemes that have no market capitalisation bias, Diversified Equity Mutual Funds are the right choice for you.