Big Story

Big Story | Six mutual fund schemes to counter Covid-19 volatility

| Updated on March 28, 2020 Published on March 28, 2020

Investors are well-advised to continue their systematic investment plans in mutual funds in the ongoing decline. Here are six schemes from prominent equity-oriented categories that have contained previous market downturns relatively well

Axis Bluechip: A reliable large-cap fund

Anand Kalyanaraman

The stock market has crashed and turned highly volatile over the past month as the coronavirus storm gained strength. The sharp fall has opened up good buying opportunities for investors with a long-term horizon. But there is no saying how long the pain will continue and whether it can go deeper. In such manic markets, fundamentally strong large-cap stocks — with their advantages of size, market leadership and financial muscle — may be better placed than smaller stocks to both weather the storm and stage a recovery. Investors seeking exposure to equities but also wanting to play it relatively safe at this juncture can consider buying large-cap funds with a strong track record. Axis Bluechip is a fine choice in this category.

Navigating markets well

The fund is among the top-ranked schemes in the large-cap category and has also done much better than its benchmark (Nifty 50 TRI) over both the short and long term.

In the recent crash, too, over the past month, Axis Bluechip has lost less (about 23 per cent) than the large-cap category average and its benchmark (about 29 per cent).

The fund’s ability to contain downsides and participate in upsides has translated into returns of minus 8 per cent over the past year, about 7 per cent annualised over three years, and about 6 per cent annualised over five years — far better than that of the category average and the benchmark.

Except in CY2016, the scheme has been a consistent outperformer both during market upsides and downsides. Given the uncertainties in the market, investors can consider investing in the fund in a staggered manner over the next few months or through the SIP route, rather than lump sums.

Bluechip portfolio

In line with its mandate, Axis Bluechip invests mostly in large-cap stocks (at least 80 per cent of the portfolio) and has the leeway to invest the rest in smaller stocks. The fund follows a bottom-up, fundamentals-based stock-picking approach with a focus on quality businesses with good growth prospects. It seeks to keep risks low by having the portfolio’s target volatility below that of the benchmark.

There is quite some divergence between the components of the portfolio and the benchmark. The fund has a compact portfolio with 23 stocks as of February 2020; the focus on bluechips reduces the concentration risk associated with a relatively small portfolio.

The top holdings in the portfolio are Bajaj Finance, ICICI Bank, Kotak Mahindra Bank, Avenue Supermarts and HDFC Bank.

Other bluechips include Infosys, HDFC, Asian Paints, HUL, Bajaj Finserv, Nestle India, Bharti Airtel and Reliance Industries.

Balancing it out

Deft allocation across asset classes has held the fund in good stead in the past and also in recent times.

For instance, it reduced its equity exposure from about 90 per cent as of January end to 82 per cent as of February end; cash and debt allocation was increased from 10 per cent to 18 per cent.

This would have saved it some pain from the huge market fall in March, and given it dry powder to deploy during the crash. The fund’s minimisation of exposure to smaller stocks and shift towards an almost-entirely large-cap equity portfolio over the past two years have also helped its performance.

Mirae Asset Emerging Bluechip: An outperformer in large- & mid-cap category

 

Yoganand D

With the unprecedented global healthcare crisis and economic slowdown, stocks have crashed across the board. This decline has, however, created some good buying opportunity in the large- and mid-cap fund segment. Investors with an appetite for moderately high risk and willing to stay invested for more than five years can buy the units of Mirae Asset Emerging Bluechip.

Besides, investing through the Systematic Investment Plan (SIP) route can help investors average the value of their holding by buying more units at a lower NAV during market decline. Why this fund?

Performance

One, it has a long-term track record of over seven years in which it has consistently outpaced its benchmark index, the Nifty Large Midcap 250 TRI. Over the past three- and five-year periods, the scheme has delivered returns of minus 2.5 per cent and 5.5 per cent, respectively, and has outperformed the benchmark returns of negative 6 per cent and a marginal gain of 0.3 per cent in these periods.

In the long run, the fund is a table topper, outshining its category peers.

Two, it is a five-star rated fund by BusinessLine Portfolio Star Track MF Ratings. Three, it balances large- and mid-caps well by investing at least 35 per cent in large-cap stocks and at least 35 per cent in mid-caps. The scheme’s recent portfolio is tilted towards large-caps with 58 per cent allocations, which could benefit from the slump in large-cap stocks. It has gradually upped its allocation in the large-cap segment over the past one year.

About 36 per cent of the portfolio is allocated to mid-caps; the scheme has drastically reduced its allocation to small-cap stocks to around 5 per cent.

Four, the fund has contained downsides well in the past as well as in the current market decline. In the past year, it has delivered a negative return of 26.4 per cent, whereas the benchmark has tumbled 31.8 per cent and the category average has plunged 28.5 per cent.

The next big names

Lastly, the Mirae Asset Emerging Bluechip has a well-diversified portfolio with 59 stocks. It adopts a bottom-up approach, driven by value-investing in growth-oriented businesses that have the potential to be the next bluechip companies. Apart from the top 5-6 stocks, the holding in other individual stocks are less than 3 per cent, which mitigates risks well.

Banking is the top sector choice with 25 per cent allocation, including private and public sector banks, followed by pharma sector, a defensive, with 9 per cent allocation. HDFC Bank, ICICI Bank, Reliance Industries, Axis Bank, State Bank of India and Larsen & Toubro are some of the top stocks in the kitty.

 

 

SBI Equity Hybrid: This aggressive hybrid gives best of both worlds

 

Dhuraivel Gunasekaran

SBI Equity Hybrid is one of the top-performing schemes under the aggressive hybrid funds category.

The funds under the category allocate 65-80 per cent in equity and the rest in debt instruments.

Hybrid schemes are a preferred investment option during uncertain market conditions such as the present one, wherein the debt portion in the funds performs the task of protecting the downside and the equity portion works towards attaining growth.

The scheme was called SBI Magnum Balanced earlier, and has been consistently delivering above-average returns over the past 20-plus years. Performance, as measured by the five-year rolling return calculated from the past seven years’ NAV history, shows that the fund delivered a compounded annualised return of 14 per cent, while the category clocked 11.5 per cent.

It has been rated five-star by BusinessLine Portfolio Star Track MF Rating.

By taking exposure to low-risk instruments and investing mainly in quality large-cap stocks, the fund has ensured outperformance vis-à-vis its benchmark and several peers across market conditions.

Cushions the blow well

The performance of the fund has been notable, especially during equity market corrections. For instance, in the past seven years , the fund has managed to place itself in the first quartile in terms of performance in four out of the six bear phases. For instance, during the equity market downturns in 2015 and the period between June 2019 and September 2019, the fund contained the fall well by delivering negative returns of 8 and 4.3 per cent, respectively, while its category corrected 12.5 and 6.4 per cent, respectively.

The performance in the recent fall was also decent as the fund fell 27.5 per cent and the category was down 29.3 per cent.

The scheme’s performance during bull markets has also been decent. In the five bull phases that we considered for our study, the fund managed to position itself in the first and second quartiles.

Portfolio

SBI Equity Hybrid manages its asset allocation quite well to cash in on conducive conditions across equity and debt markets.

Over the past five years, the fund has actively shifted its equity allocation between 64 per cent and 72 per cent of its assets. In volatile times, it reduces the equity allocation and increases its cash position to up to 12 per cent.

The scheme mostly maintains two-thirds of its equity portfolio in large-caps and the rest is mid- and small-cap stocks.

The debt portion is managed with a combination of credit, interest rate and duration calls. In most periods, one-third of the debt portfolio has been deployed in high-yielding credits (minimum rating of A). Though this pegs up the credit risk, it increases the overall portfolio yield.

The rest have been invested in G-Secs and AAA corporate bonds.

UTI Nifty Index, ICICI Pru Nifty Next 50 Index: Go passive with index funds

 

Parvatha Vardhini C

Index funds mirroring large-cap indices have been able to match average returns of actively managed large-cap funds over three- and five-year time-frames.

They are a good addition to your portfolio if you already own active funds or are new to stock market-investing and want to take a relatively safer route. UTI Nifty Index Fund and ICICI Prudential Nifty Next 50 Index Fund are good choices.

Why these

Large-caps contain losses better in a fall and are also quick to recover. The Nifty 50 and the Nifty Next 50 indices best represent this category of stocks. While the Nifty 50 comprises the top 50 stocks based on free-float market capitalisation, the Nifty Next 50 comprises 50 companies from the Nifty 100 after excluding the Nifty 50 companies. In other words, the Nifty Next 50 index represents companies that have the potential to be future bluechips.

At present, there are 15 index funds based on the Nifty 50 and five based on the Nifty Next 50 in the market. UTI Nifty Index has a track record of 20 years and sports the lowest tracking error (the difference between the returns of the fund and that of the underlying index) of 0.01 per cent in its category. This is calculated on the basis of the last two years’ data, post the announcement of TRI as a benchmark.

While the expense ratio of its peers range up to 1.36 per cent, the fund charges only 0.17 per cent.

Among the Nifty Next 50 index-based funds, ICICI Prudential Nifty Next 50 is among the schemes with a reasonable corpus; it also has a long-term track record of nearly 10 years.

Its expense ratio is 0.85 per cent and tracking error is 0.09 per cent.

In comparison, expense ratios of actively managed large-cap funds go up to 2.7 per cent.

Trumps large-cap funds

Over three- and five-year periods, the Nifty 50 TRI and the Nifty 100 TRI have outperformed the average returns of large-cap funds by 1-2 percentage points.

On rolling returns, calculated on the basis of the past seven years’ NAV history, the performance of the Nifty 50 TRI is on par with the average of large-cap funds in three- and five-year periods, while the Nifty 100 TRI has marginally outperformed large-cap funds’ average in the same time-frames.

Besides, on a rolling return basis, the returns of the Nifty Next 50 TRI are better than the average of large- & mid-cap, and multi-cap categories over three and five years.

That said, actively managed large-cap funds cannot be entirely written off. While their average returns have lagged behind, some of the better-managed funds have posted superior returns.

Index funds act as a low-cost diversifier to your portfolio. Unlike ETFs (exchange-traded funds), you can take the SIP route to invest in index funds. You also don’t need a demat account.

Kotak Standard Multicap: A multi-cap for volatile markets

Radhika Merwin

Mid- and small-cap stocks have been underperforming large-cap stocks over the past two years, and the market carnage over the past month has only extended the pain for these stocks.

In 2020 so far, benchmark indices — S&P BSE Sensex, S&P BSE MidCap and S&P SmallCap — have fallen 30-31 per cent.

Though the market has been rebounding over the past few days, there could be bouts of volatility. If you are a long-term investor, it may be a good time to invest in small portions — across large-, mid- and small-cap stocks.

Multi-cap funds have the flexibility to invest across the spectrum of market capitalisation based on market conditions. Kotak Standard Multicap has been a top performer within its category.

While the recent market crash has impacted its returns across one-, three- and five-year periods, the fund has been a steady performer across various market cycles.

Conservative

The scheme, which was earlier known as Kotak Select Focus, was renamed after SEBI’s recategorisation norms. However, its mandate and strategy has broadly remained the same.

The fund follows a fairly conservative approach which has helped it cap losses in volatile markets, making it a good bet at this juncture. For instance, in the lacklustre 2016 market, the scheme kept its equity holdings to 90-95 per cent and large-caps comprised 75-78 per cent of its equity portfolio.

The higher allocation to large-caps that performed better than mid- and small-cap stocks that year helped it outperform the category average by 5 percentage points.

In the iffy 2018 market, the scheme kept its equity allocation to 90-94 per cent of assets; moving to cash and debt helped the fund cap its loss to less than 1 per cent when the category delivered a 5 per cent loss during the year.

The fund has allocated 75-80 per cent of its equity to large-caps on an average over the past 3-4 years, even in market rallies. For instance, in the 2017 market rally when mid- and small-cap stocks had a splendid run, the fund kept its mid- and small-cap allocation to 17-20 per cent.

The conservative strategy led to the fund slightly underperforming the category. But over the long run, the measured approach has worked well for the fund. In 2019, as large-caps outperformed the smaller stocks, the fund’s high allocation to bluechip stocks helped beat the category by a notable margin.

The schemes’ bet on HDFC, Whirlpool, Shree Cement, SRF, Bajaj Finance, ICICI Bank, Indraprastha Gas and insurance companies worked in its favour in 2019.

Currently, the fund holds about 80 per cent of its equity portfolio in large-caps (market capitalisation of over ₹25,000 crore). Its allocation to financials is about 34 per cent. Top stocks include solid names such as ICICI Bank, RIL, HDFC Bank, L&T, Axis Bank and Infosys.

Methodology: The schemes were selected by Dhuraivel Gunasekaran, based on an analysis of equity MF schemes in various bear and bull phases over the last seven years. The top quartile schemes in most bear phases were first selected. Performance during bull phases, rolling returns and BusinessLine Portfolio Star Track MF Ratings were then factored in, to get the final picks.

Published on March 28, 2020

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.