The curve ball of demonetisation has stumped the market. Experts are divided on whether the pain will be short-lived or prolonged. In times like these, an opportunistic investment with the flexibility to peg up or reduce risk seems a smart bet.

Enter multi-cap funds that have the leeway to hop between relatively safer large-cap stocks and riskier (but more rewarding) mid and small-cap counters. L&T India Value is among the best funds in this category, topping the charts over three and five years with annualised returns exceeding 25 per cent.

Over these periods, the fund’s outperformance over its benchmark S&P BSE 200 has been in the range of 12-17 percentage points. The winning consistency has improved significantly over time. The fund’s annual returns, rolled over daily, have been higher than that of the benchmark all the time in the past three years, and more than nine times out of 10 in the past five years.

While the fund always outperformed convincingly during market rallies, it has also been containing losses much better in recent years. For instance, its loss during the downturn between January 2015 and February 2016 was 11 per cent, compared with 20 per cent dip in S&P BSE 200.

Mitigating risk

While significant exposure to mid and small-cap stocks aid L&T India’s returns, risk is contained thanks to the fund’s value focus, large portfolio of stocks and adept asset allocation changes based on market conditions. Currently, more than 95 per cent of the portfolio is in equities — more than a third of the corpus is in mid- and small-caps and 60 per cent in large-caps.

The allocation to smaller stocks has varied from more than half the portfolio during the bull run of 2014 to less than a quarter during the difficult market of 2013. Exposure to large-caps went up to even 80 per cent during iffy markets, for instance in August 2013. The fund also takes big cash calls when needed — about 18 per cent of the corpus was in cash equivalents during the weak market in early 2016; this was gradually deployed in equities in the subsequent rally.

Also, a largely value-investing approach with a focus on quality offers good scope for gains and limits downside risk. Stocks such as The Ramco Cements and HCL Technologies, bought cheap, turned multi-baggers over the past few years.

The fund also books gains on stocks that may have turned pricey. For instance, it sold NBCC and VST Tillers Tractors last year at handsome profits. Still, the fund’s portfolio turnover is not very high, indicating a buy-and-hold strategy, giving time for the value buys to play out. Besides, with 70-80 stocks in the portfolio, the risk is mitigated.

The fund’s search for value saw it up its stake in beaten down PSU Banks last year. Holdings have also increased in metal and NBFC stocks. This suggests a contrarian bet in the context of demonetisation. On the other hand, the fund trimmed holdings in cyclicals such as autos and defensives such as software .

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