FUND FULCRUM

July 2021

SBI Mutual Fund has maintained its top position in the mutual fund rankings with 4% growth in AUM in the first quarter of FY 2022. The fund house managed Rs.5.23 lakh crore assets at the end of June 2021 compared to Rs.5.04 lakh crore at the end of March 2021, according to the latest AMFI data. In absolute terms, the AUM of the fund house rose by Rs 18,743 crore. The rankings of the top 10 fund houses also remained unchanged in the first quarter of the current financial year. In the top 10 list, DSP Mutual Fund registered the highest growth in AUM at 7% followed by Axis Mutual Fund at 6%. The AUM of the two fund houses zoomed by Rs 6,639 crore and Rs 11,593 crore, respectively. The impressive growth in AUM has helped both the fund houses reach new milestones. While DSP Mutual Fund's assets has crossed the Rs 1-lakh-crore mark, Axis Mutual Fund joined the 2-lakh-crore AUM club during the June 2021 quarter. Among the top 20 fund houses, Mirae Asset Mutual Fund was the biggest gainer in terms of rankings. With 12% growth in AUM, the fund house has climbed two positions to occupy the 11th rank in the list of mutual funds. The AUM of the fund house increased by Rs 8,076 crore to Rs 77,647 crore during the period. Tata Mutual Fund and Canara Robeco Mutual Fund rose one position each with 8% and 15% growth in AUM, respectively. Franklin Templeton Mutual Fund slipped three spots to the 14th rank as its AUM declined 27%. Quant Mutual Fund, ITI Mutual Fund, PPFAS Mutual Fund and PGIM India Mutual Fund were the biggest gainers in terms of AUM. In fact, Quant Mutual Fund more than doubled its AUM from Rs 722 crore to Rs 1,642 crore during the period. The fund house now occupies the 34th spot, up two positions from the previous quarter. According to the quarterly data, overall AUM of mutual funds rose 3% to 33 lakh crore from 32 lakh crore during the first quarter of FY 2022.

 

The mutual fund industry saw the number of investors doubling in a matter of 4 years and 3 months. As of June 30, 2021, there were 2.39 crore mutual fund investors as compared to 1.19 crore at the end of March 2017. The data captures the total number of unique PANs which includes both individual and corporate investors. The industry saw 12 lakh new investors joining the mutual fund bandwagon in the first quarter of FY 2022. The number is considerably higher when compared with the total investor addition of 20 lakh during the whole of FY 2021. This can be attributed to the continuous investor awareness campaigns and ease of investment due to digitization for the surge in investor count. Investors now recognize that in addition to providing steady investment performance, mutual funds are well-regulated, transparent and convenient. The stellar role played by distributors and advisors in making funds more accessible and the ‘Mutual Fund Sahi Hai’ campaign by AMFI have aided this momentum. The lockdown could have dampened the momentum last year, however, digital tools including steps such as facilitating e-KYC for registering new investors have made it easier to become a mutual fund investor. Fund houses have also played a significant role through various investor awareness efforts; for instance, the timely #DateyRaho campaign by IDFC MF encouraged many investors to stay the course. The investor awareness campaigns being run by distributors and fund houses have delivered results. AMFI's decision to rope in top cricketers like Sachin Tendulkar and MS Dhoni for its 'Mutual Fund Sahi Hai' campaign also played a major role in igniting interest of tier-II and tier-III investors in mutual funds. However, despite the surge, the total number of mutual fund investors remains low. Comparing the investor count with the total number of PAN cards (51 crore as of June 2020) shows that there is only one mutual fund investor for every 21 PAN card holders in India. 

 

AMFI data shows that the share of individual investors' assets in the mutual fund industry has risen to 53.8% in June 2021 from 50.5% in June 2020. The total assets of individual investors were Rs.18.34 lakh crore in June 2021 compared to Rs.13.18 lakh crore in June 2020. Individual investors include retail investors and HNIs. Meanwhile, institutional investors’ assets in the industry have fallen to 46.2% in June 2021 from 49.5% in June 2020. Institutional investors are mainly banks, insurance, pension funds and large corporates. The rise in individual investors’ assets can be attributed to the current boom in the equity market. The growth in individual assets is largely due to their exposure to equity funds and subsequent rally in the market. Moreover, the mutual fund industry has acquired many new investors over the last three months. Further analysis of the data shows equity schemes account for 88% of the total assets from individual investors. Similarly, debt schemes (62%), liquid schemes (85%) and ETFs, FoFs (90%) get majority of their assets from institutional players. Individual investors hold 72% of their assets in equity-oriented schemes while institutions hold 69% of their assets in liquid / money market schemes and debt-oriented schemes. Depleting asset quality in debt papers and instances of trouble in debt funds in the recent time have kept retail investors away from debt funds.

 

AMFI’s latest data shows that 16% of assets in the mutual fund industry has come from B30 cities amounting to Rs.5.56 lakh crore as on June 2021, rising from Rs.4.01 lakh crore in June 2020. Assets in T30 cities stood at Rs.28.54 lakh crore in June 2021. Further analysis of the data shows that a large chunk of the B30 assets is in equity oriented schemes. Of the total B30 AUM, 70% was from equity-oriented schemes while the remaining 30% belonged to debt schemes as on June 2021. Many people in B30 cities prefer equity funds as they have adequate exposure to debt schemes through bank FDs and pension funds. This ratio is reversed in T30 cities due to presence of institutions and corporate houses. Nearly 60% of the total T30 AUM is invested in debt schemes. Over 26% of the assets held by individual investors is from B30 location. Investors in these locations prefer investing in mutual funds through distributors. AMFI data shows that 86% of the total individual assets in B30 location has been in regular plan. SBI, ICICI Prudential and HDFC were the top three fund houses with highest assets in T30 location as on June 2021. SBI Mutual Fund has retained the top rank in T30 market share. The fund house has 79% of its total assets i.e. Rs. 4.24 lakh crore of the total Rs.5.38 lakh crore in top 30 location. ICICI Prudential Mutual Fund and HDFC Mutual Fund occupy the next two spots with assets of Rs. 3.63 lakh crore each. Aditya Birla Sun Life Mutual Fund and Kotak Mahindra Mutual Fund follow the top three fund houses with assets of Rs.2.39 lakh crore and Rs. 2.30 lakh crore, respectively in T30 location. The next five fund houses with the highest T30 market share were Nippon India Mutual Fund (Rs. 2.01 lakh crore), Axis Mutual Fund (Rs.  1.79 lakh crore), UTI Mutual Fund (Rs.  1.45 lakh crore), IDFC Mutual Fund (Rs.  1.18 lakh crore) and DSP Mutual Fund (Rs. 0.90 lakh crore). These findings are based on the review of monthly AAUM data published by fund houses. T30 refers to the top 30 geographical locations. The total assets of the top 25 fund houses was Rs. 33.68 lakh crore of which 84% i.e. 28.21 lakh crore was from T30 locations. Of these T30 assets, 36% was held in equity (Rs. 10.03 lakh crore) and 49% was debt (Rs. 13.72 lakh crore).

Piquant Parade

After the success of ‘Mutual Fund Sahi Hai’ campaign, the mutual fund industry should focus on inculcating the investing culture through advisors/MFDs by launching ‘Saarthi Zaroori Hai’ campaign, said a 14-point-action document prepared by Boston Consulting Group (BCG) and Confederation of Indian Industry (CII). As the industry has successfully imbibed the notion of ‘Mutual funds sahi hai’ among its investors, it now needs to inculcate the culture of ‘Saarthi zaroori hai’, according to the document. The document has urged the industry to build greater emphasis on role of advisors and expand their productivity and reach by leveraging technology. "The B30 segment offers a wide playfield that is still an untapped territory with low penetration. For expanding this market, all stakeholders – regulators, asset managers, distributors, investors – need to come together to continue with the existing incentive structure and take this business forward by mobilizing increased number of investors," according to the action document. It further stated that the industry needs to attract more people into the business of distribution, which can be done by campaigning within educational institutions and educating people about the profitable aspects of becoming a MFD. Citing a recent Boston Consulting Group (BCG) survey, the release said that 80% of urban consumers who bought mutual fund have digital footprint and 66% of them were influenced digitally during the purchase process. Mutual fund distributors and advisors can leverage this increase in acceptability of digital channels to improve efficiencies in their business model by unlocking significant time earlier spent on physical travel, physical form filling, manual tracking and reporting, etc. Other recommendations for the industry included simplification of offerings, using tech to drive efficiency of fund managers, strengthening internal risk management, communicating risk-return effectively to retail investors and leveraging new strategies to deliver enhanced performance.

 

As Indian investors are warming up to the idea of passive investing, many new and upcoming mutual fund players are planning to offer only passive funds to investors. Among the numerous fintechs and PMS firms in the process of starting mutual fund business, Zerodha and Angel Broking have confirmed that they will sell only passive schemes. While Zerodha is awaiting mutual fund license from SEBI, Angel Broking is in the advanced stage of applying for the regulator's approval. Zerodha said it sees opportunity for a pure passive AMC in India. Very few active managers have consistently added value. Having said that, at the end of the day most investors are not concerned about alpha. They are looking for simple, transparent and easy to understand products that can help them fulfill their long term goals like retirement. Angel Broking will be using the rule-based investment approach to offer smart passive products to investors. A combination of our smart beta funds and passive ETFs (Exchange Traded Funds) would cover the complete investment needs of any investor at far lower costs, enabling new customers to experience equity with ease. Passive investing has gained momentum in India in the last one year or so. There have been a plethora of index fund and ETF launches in recent months. NSE has 100 ETFs listed on its platform and 21 one of them were launched in the last one year alone. The AUM of index funds doubled in the last calendar year from Rs 7,944 crore to Rs 15,359 crore. In addition, the AUM of ETFs (excluding gold) rose 46% from Rs 1.75 lakh crore to Rs 2.57 lakh crore.

Regulatory Rigmarole

The concept of 'Accredited Investor' is now a reality in India. SEBI has approved the proposal to introduce a framework to bring the concept to the Indian securities market. Accredited investors are those investors who have a better understanding of risks and returns associated with financial products. These investors have a higher financial capacity and a greater ability to absorb loss. SEBI said individuals, HUFs, family trusts, sole proprietorships, partnership firms, trusts and corporates can become accredited investors. However, the regulator is yet to announce final parameters for qualifying as accredited investors. According to a consultation paper issued in February 2021, the regulator plans to give accredited investor tag to those investors who have annual income of at least Rs 2 crore. The move opens doors for financial service providers to introduce customized investment products for sophisticated clients. Such products would get relaxation in some of the norms set by SEBI. Among some key benefits to accredited investors are relaxation in minimum ticket size for such investors in AIFs and PMSs, relaxation in investment norms if minimum investment amount in AIF is Rs.70 crore or Rs.10 crores in PMS. Moreover, they can negotiate terms and conditions on fees and services from RIAs. Investors who want to qualify as accredited investors will have to get a license from accreditation agencies, which SEBI is yet to finalize. The regulator said it could allow subsidiaries of depositories and stock exchanges to become accreditation agencies.

 

AMFI has asked fund houses to include SIP and STP along with lump sum contribution to arrive at retail investment for additional TER. With this, the investment from clients will now be consolidated at fund level or PAN level to see if the investment is retail or non-retail to calculate additional TER for fund houses and incentive for MFDs. SEBI rules say that retail investors are those who invest up to Rs.2 lakh per transaction. AMCs can charge additional 30 bps applicable on B30 cities only on assets from retail investors. So far, many fund houses did not consolidate contribution at fund or PAN level to arrive at retail investment. For instance, if an investor has invested Rs.1.50 lakh through lump sum and Rs.1.50 lakh through STP, both the transactions have been treated separately and come under retail account for calculation of additional TER. In its best practices, AMFI said, “It has been brought to AMFI’s attention that some of the AMCs do not club the switch-in transaction for the purpose of determining threshold limit of Rs.2 lakh for additional TER in respect of mobilization from B30 cites, particularly in respect of switch-in transaction received during NFO. Consequently, such AMCs are charging additional B30 TER and paying additional B30 commission to the distributors.”

 

SEBI has done away with the existing norms on skin in the game in which fund houses have to invest 1% of the amount raised during NFO or Rs.50 lakh, whichever is lower. In fact, it has asked fund houses to invest based on risk level of the scheme. Prima facie, it looks like fund houses will have to invest more in riskier schemes like equity funds compared to less risky schemes like debt funds. However, SEBI is yet to clarify how the new skin in the game norms will be put in practice.

Swing pricing is adjustment of NAV such that if outflow is higher than pre-determined level, the NAV goes down for investors redeeming MF units. Similarly, the NAV price goes up if investors invest more than pre-determined level. Currently, swing pricing has two types – full swing and partial swing. While NAV is adjusted on every calculation day in full swing (applicable during market dislocation), partial swing is applicable only if a scheme witnesses high inflows/outflows on a given day compared to pre-determined level. Partial swing can be applicable on normal market scenario. SEBI hints to implement hybrid model which would be combination of both – full and partial swings. To start with, SEBI may introduce swing pricing mechanism in riskier debt schemes. The market regulator may look to extend such an option in equity funds at a later stage. AMCs can choose to levy higher swing factor and SEBI will determine ‘market dislocation’ after consultation with AMFI. Swing pricing helps fund houses to achieve fairness in treatment of entering and exiting investors. There will be no first move advantage i.e., investors redeeming earlier sensing market dislocation cannot benefit at the cost of other investors. It reduces risk of impact of high redemption pressure on scheme. If large and small investors redeem on a same day, the latter can get lower NAV. Swing pricing can address issue of heightened redemption pressure especially during volatile market conditions, protect investors from underperformance of a scheme due to significant outflows and lower daily NAV volatility.

 

India’s financial wealth has been growing since 2015. In fact, the financial wealth of India has grown by 11% per annum between 2015 and 2020 to reach $3.4 trillion and is to continue to grow by 10% per annum to $5.5 trillion by 2025, according to a report released by the Boston Consulting Group (BCG). The report reveals that India is expected to lead growth in financial assets in terms of percentage. Retirees, one of the world’s fastest-growing demographics, are an appealing market for wealth managers. Globally, individuals over 65 own $29.3 trillion in financial assets accessible to wealth managers. That figure will grow at a CAGR of close to 7% over the next five years. By 2050, 1.5 billion people globally will fall into the category above 65 years of age, representing an enormous source of wealth. Liabilities are expected to grow by 9.4% per annum to $1.3 trillion by 2025. Bond markets are expected to grow the fastest with 15.1% per annum. Life insurance and pensions will be the third largest asset class in the future. North America, Asia (excluding Japan), and Western Europe will be the leading generators of financial wealth globally, accounting for 87% of new financial wealth growth worldwide between now and 2025. China is on track to overtake the US as the country with the largest concentration of ultra HNIs by the end of the decade. The faces of the ultra HNIs are changing too, with the rise of the next-generation segment. These individuals, between 20 and 50 years of age, have longer investment horizons, a greater appetite for risk and often a desire to use their wealth to create positive societal impact as well as earn solid returns. Many wealth managers are not yet ready to serve these new ultra HNIs. High-growth markets represent a massive opportunity but wealth managers must build a genuine understanding of local differences and also key demographic changes. For example, women now account for 12% of ultra HNIs, most of whom are based in the US, Germany and China. The next generation segment is also going to be an influential driver of future growth in the next decade or so. Wealth managers should offer a personalized service in order to effectively capture the next wave of growth.

 NFONEST

July 2021

Five NFOs of various hues are open at present and find a place in the July 2021 GEMGAZE.   

Kotak Global Innovation Fund of Fund

Opens: July 8, 2021

Closes: July 22, 2021

Kotak Mutual Fund launched Kotak Global Innovation Fund of Fund, an open ended fund of fund investing in global stocks such as Amazon, Facebook, VISA, AstraZeneca, Netflix and so on. The primary investment objective of the scheme is to provide long-term capital appreciation by investing in units of Wellington Global Innovation Fund or any other similar overseas mutual fund schemes/ETFs. Being a Fund of Fund, this scheme will invest 95% of its assets in units of Wellington Global Innovation Fund and/or any other similar overseas mutual fund schemes/ ETFs. It will also invest up to 5% of its assets in debt and money market instruments in order to meet the liquidity requirement of the scheme. The underlying fund of the scheme is Wellington Global Innovation Fund. US based Wellington Management manages AUM of over US$ 1 trillion. The scheme will benchmark its performance to the MSCI All Country World Index TRI. The fund is managed by Mr. Arjun Khanna.

 

PGIM India Small Cap Fund

Opens: July 9, 2021

Closes: July 23, 2021

PGIM India Mutual Fund has launched PGIM India Small Cap Fund, an open-ended scheme which aims to achieve long-term capital appreciation by investing predominantly in small cap companies. PGIM India Mutual Fund’s performance will be benchmarked against Nifty Small Cap 100 TRI (Total Return Index). Mr. Aniruddha Naha is the equity fund manager for the scheme, Mr. Kumaresh Ramakrishnan is the debt fund manager for the scheme and Mr. Ravi Adukia will manage the overseas investments for the scheme.

Axis Floater Fund

Opens: July 12, 2021

Closes: July 26, 2021

Axis Mutual Fund has launched Axis Floater Fund, an open-ended fund predominantly investing in floating rate instruments and fixed rate instruments swapped for floating rate returns. The fund aims to navigate a possible rising interest rate environment. The fund will invest in a mix of high-quality instruments and AA issuers. It targets a portfolio average maturity of 6-18 months. The fund is suitable for investors looking to park short-term surplus funds or for those looking to limit the interest rate risks in their debt portfolio. Floating rate bond fund invests in floating rate bonds as and when the interest rate moves up. The idea is to offer the new adjusted rate which is higher than the existing papers to offer a higher interest. The scheme will benchmark its performance to the NIFTY Ultra Short Duration Debt Index. The fund is managed by Mr. Aditya Pagaria.

Tata Business Cycle Fund

Opens: July 16, 2021

Closes: July 30, 2021

Tata Mutual Fund has launched an open-ended equity scheme, Tata Business Cycle Fund. The scheme will follow business cycles-based investing theme. The investment objective of the fund is to generate long-term capital appreciation by investing with focus on riding business cycles through allocation between sectors and stocks at different stages of business cycles. Under normal circumstances, 80% to 100% of the fund’s portfolio will be invested in equity and equity related instruments selected on the basis of business cycle. The scheme will invest 0% to 20% of its assets in other equity and equity related instruments, up to 20% of its assets can be invested in debt, money market instruments and Gold ETFs and 0% to 10% of its net assets may also be invested in units issued by REITs and in VITs. Tata Business Cycle Fund’s performance will be benchmarked against Nifty 500 TRI (Total Return Index). The fund will be managed by Mr Rahul Singh (equity), Mr Murthy Nagarajan (debt), and Mr Venkat Samala (overseas).

 

Trust Short Term Fund

Opens: July 20, 2021

Closes: August 3, 2021

Trust Mutual Fund has launched its third fund, Trust Mutual Fund Short Term Fund, an open-ended liquid scheme, which aims to build a portfolio of the highest-rated issuers for investors to benefit from the persistent steepness in the Yield Curve in the 1 to 3-year segment. The fund will invest in top quality securities having AAA rating with maturity of up to three years. The objective of the scheme is to provide reasonable returns at a high level of safety and liquidity through investments in high quality debt and money market instruments. The fund will follow a structured investment approach backed by unique methodology, with the objective of delivering consistent risk-adjusted returns. The robust methodology has been developed in collaboration with CRISIL$, the knowledge partner for the initial debt schemes of TRUST Mutual Fund. The highlights of the fund include focus on consistent risk adjusted returns in back testing of Model Portfolio by CRISIL, quality investible universe of filtered AAA on issuers, steepiness in the yield curve combined with roll down opportunity providing an opportunity to generate capital gains and some cushion against yield increase and current curve far steeper than historical averages providing better opportunities. The scheme will benchmark its performance to the CRISIL Liquid Fund Index. The fund will be managed by Mr. Anand Nevatia.

 

Kotak Nifty 100 Low Volume 30 ETF Fund of Fund, Kotak Nifty Alpha 50 ETF Fund of Fund, UTI Nifty Midcap 150 Quality 50 Index Fund, ICICI Prudential S & P BSE 500 ETF FOF, ITI Pharma and Healthcare Fund, TRUSTMF Fixed Maturity Plan, ITI Focused Equity Fund, ITI Flexi Cap Fund, ITI Banking and Financial Services Fund, TRUSTMF Overnight Fund, Union Innovation Fund, Kotak Consumption ETF, Kotak Midcap 50 ETF, Kotak MNC ETF, DSP Global Innovation Fund of Fund, Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 2026 Index and Aditya Birla Sun Life Business Cycle Fund are expected to be launched in the coming months.

GEMGAZE

July 2021

All the GEMs from the 2020 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2021 GEMGAZE too. 

HDFC Midcap Opportunities Fund Gem

A silent consistent performer over the years, the Rs. 29,508 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. HDFC Mid-Cap Opportunities Fund invests 86.07% in a mix of mid-caps and small-cap stocks. HDFC Mid-Cap Opportunities Fund holds a well-diversified equity portfolio with the top three sectors, Finance, Chemicals and Engineering constituting 48.15% of the portfolio. None of the holdings have an exposure of over 5% in the portfolio. Out of the 69 stocks in the portfolio, the top 5 holdings command an allocation of 22.77%. 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 15.49% and 17.61% as against the category average of 15.57% and 17.12% 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. Its return since inception is 16.34%. The fund is benchmarked against the NIFTY Midcap 100 TRI. The expense ratio is 1.76% and the turnover ratio is a meager 10.22%. 

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. 27,723 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 (92.14% 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, Technology and Energy constituting 59.69% of the portfolio. Out of the 59 stocks in the portfolio, the top 5 holdings command an allocation of 37.76%. 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 thirteen years, it has not seen a serious bear market since inception in May 2008. 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, Anish Tawakley since September 2018 and Vaibhav Dusad since January 2021. In the past five- and ten-year periods, the scheme has delivered 13.73% and 13.16% returns, while the category average has been 13.96% and 11.76% in the same period, respectively. The fund is benchmarked against the NIFTY 100 TRI. The expense ratio is 1.73% and the turnover ratio is 15%. Investors looking to invest in an ‘all-weather’ and ‘true to-its-label’ large cap portfolio can consider 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. 6,515 crore fund, incorporated in May 2000, is a flexi-cap fund with no pre-defined market capitalization limits. The fund had a bias towards large caps. But, in recent times, the fund has maintained a 56.69% plus large-cap exposure, with mid-cap stocks at about 43.31%. It holds a well-diversified equity portfolio with the top three sectors, Finance, Construction and Technology constituting 52.05% of the portfolio. Out of the 60 stocks in the portfolio, the top 5 holdings command an allocation of 28.59%. The expense ratio is 1.93% and the turnover ratio is 70%. The fund has been managed by Rohit Singhania since June 2015 and Charanjit Singh since January 2021. In the past five- and ten-year periods, the scheme has delivered 16.16% and 14.58% returns, while the category average, has been 14.74% and 14.41% in the same period, respectively. The fund is benchmarked against the NIFTY Large Midcap 200 TRI. The scheme has been a consistent outperformer in recent years.

Axis Bluechip Fund Gem

Axis Bluechip Fund has been one of the most consistent diversified equity funds since its inception in January 2010. This fund has generated significant alpha when compared to the category over a decade with a return of 14.33% as against the category average return of 11.76%. Its five-year return is 16.4% as against the category average return of 13.96%. The fund is benchmarked against the NIFTY 50 TRI. Good performance resulted in assets expanding to over Rs 28,233 crore. With 95.5% of the portfolio in equities, the fund has a bias for large cap growth oriented stocks. Large cap stocks account for 98.95% of the portfolio value at present. In terms of sector allocation, the portfolio has a bias towards sectors like Finance, Technology and Services which comprise about 61.63% of the portfolio value. In terms of company concentration, the fund is fairly well diversified, with the top 5 companies, Infosys, HDFC Bank, Bajaj Finance, ICICI Bank and Tata Consultancy Services accounting for only 41.92% of the portfolio value. The fund has around 36 stocks in the portfolio. The expense ratio of the fund is 1.77% and turnover is 48%. The fund has been managed by Shreyash Devalkar, well-known for his deftly managed investment strategy, since November 2016.

Mirae Asset Largecap Fund Gem

Mirae Asset Largecap Fund has been one of the most consistent diversified equity funds since its inception in April 2008. This fund has generated significant alpha when compared to the category over a decade with a return of 15.55% as against the category average return of 11.76%. Its five-year return is 15.99% as against the category average return of 13.96%. Good performance resulted in assets expanding to over Rs 25,721 crore. With 98.6% of the portfolio in equities, the fund has a bias for large cap growth oriented stocks. Large cap stocks account for 86.58% of the portfolio value at present. In terms of sector allocation, the portfolio has a bias towards sectors like Finance, Technology and Energy which comprise about 62.35% of the portfolio value. In terms of company concentration, the fund is fairly well diversified, the top 5 companies, HDFC Bank, Infosys, ICICI Bank, Reliance Industries and Axis Bank account for only 40.17% of the portfolio value. The fund has around 58 stocks in the portfolio. The expense ratio of the fund is 1.62% and turnover is 24%. The fund has been managed by Harshad Borawake since May 2017 and Gaurav Misra since January 2019. But a steady management team manages the fund with style continuity. Mirae Asset Largecap Fund has built a strong reputation as a wealth creator for its investors.

 FUND FLAVOUR

July 2021

Diversified Equity Funds…

A Diversified Equity Fund refers to any equity fund that invests in companies across multiple sectors and industries. While an ordinary equity fund selects stocks, from a pool of listed stocks, that comply with the investment strategy, a diversified equity mutual fund invests in stocks across companies, industries and market capitalization. These mutual funds seek to participate in the overall economic growth, considering they are not limited to a specific industry or market capitalization. Generally, a diversified equity fund can invest in companies across the Pharmaceuticals, Automobiles, Engineering, Power/Utilities, Technology, Oil and gas, Banking and finance and FMCG sectors. Diversified Equity Funds are categorized into the following on the basis of the size of companies initiating the investments.

·         Small-cap Diversified Funds: Small-cap Diversified Mutual Funds offer high returns and are best suited for young investors below 35 years of age 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 capitalization 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 capitalization 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.

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 minimize risks, proving to be a smart long-term investment option that accrues good returns even during 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.

 …one up on other funds

Investing in diversified equity funds is a prudent long-term investment strategy that has the potential to generate sizeable returns even when the market is not performing at optimum capacity. Some of the benefits have been stated below:

·         The key benefit of a diversified fund is its potential to contain volatility as a result of its diversified investment portfolio which helps distribute the equity investment risk across multiple investments. Additionally, as these schemes invest primarily in equities, they have the potential of delivering high returns, especially in the long term. They invest in companies across different market caps and hence reduce the amount of risk in the fund. Diversification helps prevent events that could affect a single sector and hence reduce risk. Since equity investments are inherently risky in nature, investors with moderate to high-risk tolerance can consider investing in diversified equity funds. Investing in companies across industries and market capitalization helps avert unsystematic risks that may result from sector or market cap-specific stocks or funds.

·         A diversified equity mutual fund invests in stocks starting from Rs.500 to ones that may run into lakhs. This is beneficial particularly for first-time investors seeking exposure to the equity market. Investors with a smaller risk appetite can benefit as well.

·         Investments in diversified equity mutual funds saves expenditure on monthly transaction cost associated with regular portfolio management to overcome booking profits and laggards, and opting for other stocks that show the promise of high capital gains leading to further transaction costs. Purchase or sale of these funds in volumes ensures higher economies of scale, even if the guidance of a fund manager is opted for. What is more, short-term capital gain tax is not incurred, enabling higher return on investments. The only additional cost that needs to be paid is the minimal expense ratio, which is an annual expenditure.

·         An expert fund manager, with his professional management skills, can help tide over challenging economic scenarios by enabling informed decision-making, thereby keeping market volatility at bay.

·         Systematic Investment Plan (SIP) that allows investment in small amounts periodically (can be weekly, monthly or quarterly) instead of a lump sum can be leveraged. This serves to encourage financial discipline.

Criteria for choice…

 

·         Diversified equity funds are suitable for investors who have a long-term investment horizon. The important factor here is to stick to the period of investment in order to obtain handsome high returns. These funds experience a lot of fluctuations in the short-term but are better performers in the long run.

·         Diversified equity funds come with a diversified investment strategy, they are considered beneficial for achieving the long-term objectives of the investors like retirement planning, child’s education etc. If the investors are invested for their investment period, these funds accumulate a substantial level of wealth in terms of returns.

·         Similar to various other funds, diversified funds also charge a fee to manage investor’s money, also known as the expense ratio. Since these funds are managed to take advantage of the changing market scenarios, these funds might have a high turnover ratio and related transaction cost. However, despite having the costs at a higher-end, these funds perform better than large-cap and small-cap stocks in terms of returns.

·         Diversified equity funds aim to achieve wealth creation by investing in stocks across market capitalization. Their portfolio comprises large-cap, mid-cap and small-cap stocks and are relatively less risky as compared to pure mid-cap stocks. The fund manager also considers factors such as PE ratio, EPS etc. before investing in a stock.

·         As with other funds, diversified equity funds also face market-risks depending on the overall market conditions. A fund manager plays an important role in changing the sub-asset allocation across the portfolio to take advantage of the changing market conditions.

·         In the case of diversified equity funds, it is important to evaluate the history of the fund along with the fund manager. A fund manager plays a crucial role in terms of taking advantage of the market conditions and creating wealth for investors. Ideally, investors should be looking for past performance, market reputation and the workings of the fund. Furthermore, it is important to keep a track on the fund manager and the changes, if any.

·         It is important to compare the 5 – 10 year returns of the fund. The funds that have beaten their benchmark indices can be considered for the investments. Furthermore, it is also important to compare the returns of the fund with peers. This will lead to a better understanding for the investors.

·         Apart from the benchmark index evaluation, investors should also evaluate the historical performance of a fund and weigh the consistency of the fund. In the long term, many diversified funds tend to plunge during the market downturn, with the plunge even below their benchmark indices and category average. Only a few tend to sustain their performances in all market conditiohns. Picking a fund that performs well in upturns and downturns is important, else the fund selected may do well, but only to see later that all returns get wiped out in a downturn. Thus, an investor should make sure that the most consistent performers are included in the portfolio.

·         Sharpe ratio is considered as an important metric when it comes to diversified equity funds. The Sharpe ratio measures the performance of the investment as compared to a risk-free asset. It is calculated by taking the difference between the returns of the investment and the risk-free return divided by the standard deviation of the investment. The higher the Sharpe ratio, the better is the risk adjustment of that fund.

 

Performance estimate…

Return on diversified mutual fund can be estimated through the following formula:

Diversified Fund Returns = Real GDP Growth Rate + Inflation + P/E expansion delta + Market segment risk premium + Fund Manager Alpha

The real GDP growth and inflation determine the Earnings Per Share (EPS) growth of the overall economy. When P/E expansion (Price-to-Earnings) of the market, which is the benchmark, is added the estimated return on diversified mutual fund is obtained. Market segment risk premium is unique to every fund. Historical returns do not usually determine future returns, but an estimate of market benchmark index returns may enable investors to get an idea of the alpha that the fund manager has created. The alpha generated by the fund manager is directly proportional to the wealth created over a long term, that is, the higher the alpha created, the higher will be the return on investments.

 

…and reality

The category is facing a mini crisis as most of the large diversified equity funds have underperformed their benchmark like BSE Sensex and NSE Nifty 50 index. Their underperformance has been really stark during the COVID-19 pandemic. Reliance Industries alone accounts for nearly 30 percent of the rise in Nifty 50 index from March lows and two-thirds of all returns in the last six months has come from six stocks. Diversified mutual funds, however, by definition invest in a diversified portfolio containing dozens of stocks so as to minimize downside risk from any particular stocks. The industry regulator Securities and Exchange Board of India (SEBI) also caps the maximum exposure of a fund in a particular stock. This is pushing investors to sector-specific funds. For example, the last six months have been one of the best periods for Pharma or IT & Technology Funds. The period also saw the rise of index funds whose portfolio mimics the composition of benchmark indices such as Sensex or Nifty. Till a few months back, index funds and other such passive funds were a niche category in India as actively managed funds usually did better. All said and done, diversified funds are still the best for equity investors especially retail investors.

On the pedestal…

Diversification is an important aspect of investing that helps mitigate the risk. As a result, most equity mutual funds hold around 50-80 stocks in their portfolio. Diversified equity mutual funds are now a popular investment vehicle for investors because of poor show by other assets, with the exception of gold, in the last 5-6 years. However, gold is a pure play capital asset and it does not provide any yield or interest on the initial investment. In contrast, most top stocks pay annual dividends to investors. Moreover, equity mutual funds are a convenient means for investors and savers to take exposure to equity. The process has been aided by a massive investment in the mutual fund industry in marketing and distribution. Historically diversified mutual funds were the default port of call for investors and the industry. The category became so popular with investors that five biggest diversified funds now have combined assets under management of Rs 1.17 lakh crore, according to data from Mutual Fund India. The sectoral and thematic funds may provide superior returns in the short-to-medium term but they are very risky. A big negative news in one top stock in that sector or a global development in that sector can wipe-out years of gains in a matter of weeks. In comparison, returns in diversified funds are much less dependent on a particular stock or a sector. There is now a similar risk in index funds due to the ever-growing weightage of top stocks. The top 5 stocks now account for 45 percent of the combined market capitalization of all 50 stocks in the Nifty 50 index. Five years ago, the share of top five stocks was only 29 percent. Even worse is that top 3 stocks now account for nearly 35 percent of the index market capitalization against 19 per cent five-years ago. What this means is that a big negative development in any top stocks could translate into a sharp correction or volatility in the index and the index funds that mimics it. Given this, diversified equity funds provide the best risk reward ratio to investors even if they underperform in the short to medium term, so much so that most investors concentrate on diversified mutual funds, which play a vital role in the stock market.