FUND FLAVOUR

June 2020

Multifarious…

The equity market continued to witness higher volatility in 2019 and 2020 with the deepening of liquidity crisis in NBFCs, weak consumption growth, lower industrial and agricultural output, and global factors such as the US-China trade war. If you invest in diversified equity funds, it can provide the much needed stability to tide over turbulent market conditions. So if you are looking to grow your wealth in 2020, but at a lower risk, consider adding diversified equity funds to your portfolio. Diversified equity funds are launched with the specific purpose of giving investors the opportunity to benefit from financial growth of companies of all sizes (across market capitalization) and across industries and sectors. These sectors include Pharmaceuticals, Banking and Financial Services, IT, Engineering, FMCG, Oil and Gas, Power and Utilities, Automobiles, Real Estate, etc. Investments can also include other assets like cash, bonds and even commodities such as gold and other precious metals. This enables investors to control the risk that may be involved in a certain stock or sector. Not just that, it also offers the scope of potential rewards through wider exposure to a varied range of stocks and sectors.

Multi-faceted…

A diversified equity fund, invests in companies regardless of whether they are large caps or midcaps or small caps. There are broadly three market capitalization segments – a company is classified as large cap if it has over Rs 15,000 to 20,000 crores of market capitalization, companies with market capitalizations ranging from Rs 5,000 crores to Rs 15,000 - 20,000 crores are classified as midcap companies and companies with market capitalization of below Rs 5,000 crores can be classified as small cap companies. Each of these market capitalization segments, large cap, mid cap and small cap has their own risk/returns characteristics. For example - large cap companies are perceived as less volatile equity investment options compared to small and mid-cap companies which are perceived as being more risky than large cap companies. In fact small cap companies are the most risky. Diversified equity funds, which invest across market capitalization segments and industry sectors, can have 45 – 75% of their portfolio invested in large cap funds and the balance in small and midcap funds. Different segments of the market outperform each other in different market cycles. For example large cap companies outperform midcap companies in bear market conditions and at the starting phase of the bull market. During bull market rallies, the valuations (P/E multiples) of large cap stocks can run up fast and the valuations can look stretched, making the investors wary. Midcap companies start outperforming large cap companies in the mid and end phases of the bull market cycle. Diversified equity mutual funds have both large cap and midcap companies in their portfolio, and therefore, have the potential to deliver superior return on a more consistent basis in the long term. It diversifies investments across the stock market in a bid to maximize gains for investors. On risk-return parameters, diversified equity funds can offer steady growth with lower risk making it safest among equity funds. Diversified equity funds can provide market-beating returns over the long-term and can arrest the downside risk better compared to their pure mid-cap counterparts and even large and mid-cap peers. Thus, diversified equity funds are suitable if you have a moderately-high risk appetite and investment horizon of at least five years.

Paragon on the Pedestal

 

Suitable for Diverse Market Caps and Sectors

Diversified Equity Mutual Fund is suitable across sectors and market caps. While mid-caps and Large-caps invest in specific market capitalization, multi-cap funds invest across market caps. Investing in different market caps and companies across sectors helps you avert unsystematic risk that may arise from investing in limited sector-specific funds or stocks. These funds are not completely risk-averse. However, if you understand the risks, you can take decisions accordingly.

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 Net Asset Value (NAV) of your mutual fund.

Diversity in Prices of Shares

The diversity is applicable to the price of shares as well, starting as low as Rs. 500 and running into a few lakhs. This makes it a much preferred option for new and first-time investors looking for exposure in the investment market. It is also well suited for those with a low risk appetite.

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. In addition, 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.

Avail Diverse Modes of Investments

Diversity in Diversified Equity Mutual Funds further extends to the available modes of investing - Systematic Transfer Plans (STPs) and Systematic Investment Plans (SIPs). You can opt for a monthly SIP, where a pre-determined amount is deducted from the selected bank account, encouraging a healthy saving habit. STP enables you to initiate a monthly transfer from a debt fund to an equity fund. There are also Systematic Withdrawal Plans (SWPs) that allow you to withdraw a pre-defined amount at regular intervals. You can also seamlessly enter and exit from these schemes as per your convenience.

Preferred Paradigm

There is an extensive range of over 450 diversified equity mutual funds offered by as many as 44 asset management companies (AMCs). This makes it a challenge for investors to select one that is a perfect fit for their risk appetite and meets their financial goals. 

• ·         Select a category: Select the category (Large-Cap, Mid-Cap, Small-Cap) wisely. Each of the categories has different return limits and also varying risk factors. Whichever category you may select, always have a long-term perspective in your investment.
• ·         Analyze the past performance: Thoroughly study the track record (both qualitative and quantitative) of the diversified equity funds you are planning to invest into. There are a number of companies providing different types of diversified equity funds. Wisely choose from them.
• ·         Consistency in performance in the last three years: Apart from peers and benchmark index evaluation, a diversified equity fund must be judged based on its historical performance. Many diversified equity funds do not stay stable over the years, they take a dip during recessions sometimes even below their benchmark indices and category average. Only a handful of diversified equity funds go strong against all odds and display steady performance. Those warriors who brave rough times and display stability are the ones to add to your portfolio and you should beware of the meek ones. Do not accord importance to the short-term market outlook or depend extensively on the past track-record of a scheme.
• ·         Determine your risk-bearing capabilities: Risk factor is the most prominent one while investing in the capital market. Fix a limit up to which you can bear the risk.
• ·         Cost of investment: In order to plan your investment through diversified mutual fund you also need to analyze the cost that the companies are charging under various schemes. You should choose a scheme fitting your budget.
• ·         Compare different schemes: With the list of options available in diversified equity mutual fund category comparison is of paramount importance.

It is of utmost importance that your investment objective is in tune with the diversified equity fund’s investment objective. For example, if you want to avoid risk, it is advisable for you not to invest in a small-cap diversified equity fund that invests in small size companies and can yield volatile returns. Any investment should be undertaken against the backdrop of your personalized asset allocation.

Finesse…

The front line stock market indices are making their all-time highs or are hovering around their high levels. With this, almost all diversified equity mutual fund categories are back in green and showing positive returns over different periods. Over the shorter term as short as 3 months to over 10 years, the returns are in positive territory across equity fund categories. Whether it is a large-cap, mid-cap or small-cap fund, the absolute returns for periods less than a year and compounded annualised growth rate (CAGR) for returns over one year are positive. As per Valueresearchonline data, as on November 1, 2019 the large-cap category had generated 2.6 per cent, 3.71 per cent, 7.75 per cent and 14.15 per cent over the 1-week, 1-month, 3-month and 1-year tenure. The Sectoral Fund categories such as Pharma and Information Technology are, however, in the red across some time periods. Even though the MF categories are in positive territory, individual MF portfolio may still not have recovered, especially for those who had started investing in the recent past. Several diversified equity MF schemes especially mid-cap schemes are still in the red. But, that should deter investors as an investment in equity schemes are meant for long term. Those investors who already have the SIP in the chosen schemes may continue linking them to a long term goal. It is absolutely impossible to predict the stock market movements and one should refrain from trying to time the market as well. Equities as an asset class hold the potential to generate high inflation-adjusted returns over the long term compared to other asset classes. As a new investor, there is always a conundrum to face - whether to invest through SIP or as a lump sum. The jury is still out as the answer also depends on the situation, but the following factors may help you decide better:

• ·         For a salaried individual and even for a non-salaried individual, SIP is the right approach to keep saving on a regular basis.

• ·         But, if intermittently you have a lump sum to invest for a goal that is away at least 7 years or more, invest the lump sum as and when markets tend to remain tepid.

Choosing the right MF scheme is also important. Even though the category returns may paint a rosy picture, not all MF schemes may perform in a similar manner. Let us look at the large-cap index which has given 14.15 per cent over the 1-year period. As on date, the best MF scheme in the category is Axis Bluechip fund, giving 26.66 per cent while several of the schemes are in lower single digits. However, do not merely look at the short term scheme performance while choosing funds. Look at the scheme’s consistency in generating returns over longer periods. A fund beating its benchmark as well category return may be preferred over others. Also important is that you diversify your MF portfolio across large-cap and mid-cap funds and also across market capitalisation. The small-cap and sector funds are highly volatile and can change the fortunes of your portfolio on either side. Get into them if risk profile allows as frequent tracking is equally necessary for them.

…in a fleeting market

The word diversified means variegated or different. We all have heard the phrase “Strength lies in differences and not in similarities”. The same is conceptualized in the mutual fund industry. Just imagine if you put all your money into a single stock and the share price of that company hits the rock bottom. What would be your reaction? - anxiety, depression, financial loss, moral weakness and in extreme cases nervous breakdown. There is a way to avoid all these problems in one shot. And the answer to this is “Diversified Equity Funds”.