LARGE-CAP FUNDS are considered the safest in equity mutual fund category. The challenge lies in finding funds that can return more than the benchmark, that is, Nifty50. According to Fortune India-SecureNow study, Canara Robeco Bluechip Equity is the number one fund in the category. UTI Mastershare Unit and Kotak Bluechip are second and third, respectively. The study took into account not just one and three-year rolling returns but also standard deviation, risk-adjusted returns, down capture ratio and assets under management. The down capture ratio measures an investment manager's performance in falling markets. Canara Robeco Bluechip gave 18.74% three-year annualised returns as on December 15, 2022, data from Morningstar shows. UTI Mastershare Unit and Kotak Bluechip returned 17.43% and 17.68%, respectively. The equity mutual fund category delivered 15.95% during the period.
What worked for the winners? "Our portfolio has been a blend of compounding businesses and alpha generators. This allows the portfolio to compound money through economic cycles with downside protection," says Shridatta Bhandwaldar, head of equities, Canara Robeco Asset Management Company. Canara Robeco Bluechip Fund's top sectors are banking, IT, diversified FMCG and automobile.
UTI Mutual Fund followed 'growth at a reasonable price' strategy with focus on companies with strong competitive advantages. "The fund desires to hold on to these names as long as their competitive advantage is intact. This ensures lower portfolio churn," says Swati Kulkarni, vice president & fund manager at UTI AMC. Kulkarni has been managing the fund since December 2006. It has returned 11.9% during this period. Karthikraj Lakshmanan, who has been co-managing UTI Mastershare Unit Scheme with her since September 2022, will soon replace her as lead fund manager. The fund is overweight on private sector banks where valuations are relatively attractive.
It has good exposure auto and healthcare as well. In consumer space, it is overweight on discretionary and underweight on staples. It is neutral on IT and underweight on capital intensive and cyclical sectors such as energy, power utilities and metals.
Kotak Bluechip has gained from exposure to traditional sectors such as cement, gas utilities, capital goods, industrials and automobiles. "Over last three-six months, we have reduced weight of IT and gone overweight on pharma from neutral. We have booked profits in capital goods and industrials but are still overweight on auto and auto ancillaries," says fund manager Harish Krishnan. "Our fund has three sleeves–Nifty50, NiftyNext50 and the mid-cap universe. In Nifty50, the focus is on eliminating companies with low pricing power and less competitive advantage. We haven't owned 20-30 companies from Nifty50 in last eight years. In Nifty Next50, we pick companies with clear earnings visibility and higher growth than others. These are our high conviction names. Then comes the mid-cap universe," says Krishnan.
MID-CAP FUND managers hunt for multi-baggers that can grow to become large-caps. As per Sebi classification, companies ranked 101 to 250 in market capitalisation are known as mid-cap companies. Mid-cap fund managers have to create 65% of their portfolio from this basket. The rest can be large-caps, small-caps or cash.
The top three mid-cap funds, according to the study, are PGIM India Midcap Opps Fund, Kotak Emerging Equity Fund and Nippon Midcap Fund. "We focus on companies with strong cash flows and clean balance sheets. We don't like companies with debt or corporate governance issues. These are our safety parameters. This helps us eliminate bad businesses," says Aniruddha Naha, head, equities, PGIM India. Data from PrimeInvestor shows the fund has generated alpha across periods (one year, three years and five years) compared to its benchmark Nifty150 Midcap index. The fund has delivered 4.88% in one year, 38.67% in three years and 19.43% in five years as on November 25, 2022. In comparison, Nifty150 Midcap Index has generated 2.51%, 24% and 11.41% in one, three and five years, respectively.
Kotak Emerging Equity has been managed by Pankaj Tibrewal since inception from March 30, 2007. Arjun Khanna co-manages the fund with him. "Kotak Emerging fits five-seven year and longer portfolios. It can be used as the only mid-cap exposure or along with another mid-cap fund or aggressive large- and mid-cap fund depending on your investment amount. You must cap mid-cap exposure at 30% no matter how high a risk-taker you are," PrimeInvestor says in its report on this fund.
Tibrewal says the fund's top three sectors are capital goods and manufacturing, consumer discretionary (footwear, wedding apparel) and financials. "Around 68% funds are in mid-caps. The rest are in small-caps, large-caps and cash," he says. The ₹22,500-odd crore fund has beaten its benchmark Nifty150 across time frames by delivering 6.78%, 26.21% and 14.95% over one, three and five years, respectively.
Nippon Midcap Fund is managed by Manish Gunwani, CIO–Equity & Dhrumil Shah, fund manager, Nippon India Mutual Fund. "We believe the fund has two important differentiators. First, the width and depth of our in-house research coverage is much superior to the industry average. This is exhibited in parameters like size of research team, number of stocks under coverage and experience of research team. Second, comprehensive risk management guidelines which ensure that portfolio skew based on macro parameters, quality of stocks, style factors, etc., is controlled," says Shah.
Four verticals form core of the portfolio — financials, consumer discretionary, healthcare and outsourcing to global corporates. "We believe these large verticals in general tend to grow faster than nominal GDP." Only this can ensure long-term success.
SMALL-CAP FUNDS, the riskiest among equity funds, can give huge rewards to those who can take high risks. Small-cap funds are mandated to invest 80% assets in small-cap companies, the ones ranked 250th and after in market capitalisation. Pankaj Tibrewal, senior executive vice president and fund manager at Kotak Mahindra Mutual Fund, says this stock universe is a "minefield" of opportunities. "You need to avoid mistakes. Our process of elimination helps us stay away from bad names. We track only about 450 companies, 10% of the stock market, to avoid getting carried away," says Tibrewal. His Kotak Small Cap Fund has emerged as the best in the small-cap category. The fund's one-year and three-year rolling returns stood at 26.32% and 23.56%, respectively, on November 24, 2022. It is bullish on companies in home improvement, industrial and chemical sectors. Tibrewal gives a lot of weight to company managements and how they behave with employees, vendors, distributors and customers. Equally important are cash flows and clean balance sheets. "Topline is vanity, bottom line is sanity and cash in bank is reality," he says.
The second spot in the category has gone to SBI Small Cap Fund, run by R. Srinivasan, which has outperformed the benchmark by a huge margin. PrimeInvestor data shows 9.68% one-year rolling returns compared with over 11% drop in Nifty100 Smallcap index as on November 25, 2022. Its three- and five-year rolling returns stood at 30.15% and 15.98%, respectively. Nifty 100 Smallcap Index has returned 19.45% in three years and 2.42% in one year. "The fund is up 10 times in nine years since November 2013. Our USP is the large research team that drives investment decisions," says Srinivasan.
Nippon India Small Cap Fund, the third in the category, is more than 12 years old. "We focus on extensive in-house research, supported by a dedicated research team, to identify opportunities bottom-up. Our research meets managements, supply chain stakeholders and end-users. It also carries out quantitative financial analysis," says Samir Rachh, fund manager, Nippon India Mutual Fund. The fund's top three sectors are industrial products, banks and auto components. "The fund follows a bottom-up approach. The allocations, both at sector and stock levels, may change depending on market conditions," says Rachh.
THE YOUNGEST EQUITY MUTUAL FUND category was launched in November 2020 after market regulator Sebi came out with new reclassification norms to ensure that funds stick to their stated investment mandate. Before this, funds used to even invest in stocks not in their universe; for example, multi-cap funds used to buy mostly large-caps and not stocks across market caps. Flexi-cap funds were given freedom to invest in stocks across market capitalisations. Two years since launch, flexi-cap has become the biggest equity MF category in terms of assets under management (AUM). It accounted for 16.29% (₹2.48 lakh crore) of equity MF AUM of ₹15.22 lakh crore as on October 31. The top three funds in the category are Parag Parikh Flexi Cap Fund, PGIM India Flexi Cap Fund and IIFL Focused Equity Fund. All three were multi-cap funds before Sebi re-categorisation.
Parag Parikh Flexi Cap Fund was started by Neil Parikh, CEO, PPFAS Mutual Fund, who used to run a portfolio management service (PMS). Post global financial crisis, he decided to launch a mutual fund house to give investors tax advantage and an avenue for investing in global stocks (PMS schemes are not allowed to invest in global stocks). This global diversification helped PPFAS MF create a niche in the Indian MF industry and maintain consistent outperformance. The fund might have given only about 6% returns in last one year, but its three-year annualised returns were 22.13% as on December 5, 2022, according to Valueresearch.
"What works for us is our consistent approach. We were the first to reduce country-specific risk by going global. The volatility in our scheme is less, so the downside is protected. Globally, we are investing in companies such as Google and Amazon whose alternatives are not available in India," says Rajeev Thakkar, fund manager, Parag Parikh Flexi Cap fund. Top five holdings of the fund are HDFC, Bajaj Holdings and Investment, ITC, ICICI Bank and HCL Technologies.
PGIM India Flexicap Fund has delivered more than 25% annualised returns over three years compared to 17% category return. "We did well because we had ample exposure to mid- and small-cap stocks. Going forward, there could be a time correction in flexi-cap funds if markets don’t do well," says Aniruddha Naha, head of equities at PGIM India Mutual Fund. Top five holdings of the fund are HDFC Bank, ICICI Bank, Reliance Industries, Axis Bank and Bank of Baroda.
IIFL Focused Equity Fund gave 22% returns in last three years as on December 5, 2022. The top five stocks in its portfolio are ICICI Bank, HDFC Bank, Infosys, Bharti Airtel and Larsen & Toubro. The top four sectors owned by IIFL Focused Equity are financials, IT, auto and capital goods. "Sectors that are inward facing (dependent on domestic economy) are better placed than sectors that are outward facing (dependent on global economy). We are positive on the investment cycle and, therefore, domestic cyclicals like financials, auto and capital goods are well-placed in the current environment," says Mayur Patel, SVP & fund manager for listed equity, IIFL AMC.