Mutual Funds

Why L&T India Value Fund is a good bet for investors with a moderate risk appetite

Yoganand D BL Research Bureau | Updated on April 17, 2021

The fund’s strategy of taking advantage of valuation anomalies is promising

To ride out the market volatility that has been on since mid-January 2021, equity funds that adopt a value-oriented investment strategy could be a better bet for investors with a moderate risk appetite and willingness to stay invested for the long term.

The over 11-year-old L&T India Value fund, with a satisfactory long-term track record, is a good option in this category, given its strategy of taking advantage of valuation anomalies, typically caused when companies experience temporary setbacks that tend to push their stock price down. The fund’s multi-cap approach provides it with the flexibility to shift allocations across the market-cap spectrum and adjust risk depending on the market scenario. To lower investment costs, consider investing via the Systematic Investment Plan (SIP) route, which will also mitigate risk.

Performance

L&T India Value was among the top two best performers in its category in 2014 and 2015. As markets shifted towards growth stocks, value went out of favour. Following a lacklustre performance in the years 2018 and 2019, the fund managed to recover lost ground in a highly volatile 2020 when it delivered a 14.6 per cent gain, ahead of peers such as HDFC Capital Builder Value, Quantum Long Term Equity and Tata Equity P/E.

Given that value funds are better assessed over a longer cycle, such as five years or more, investors must be willing to bear the short-term divergence in returns compared to the general indices. Importantly, over the past five-year period, the fund has delivered 14.8 per cent against the benchmark return of 13.3 per cent and also beaten a majority of its peers.

Also, the ability of the fund to handle low-return/negative return years is an important factor to consider. In years such as 2013, when the S&P BSE 200 inched up by 4.38 per cent, L&T India Value generated 225 basis points of alpha. In a year such as 2015 when markets dipped slightly, the fund gained nearly 13 per cent.

In terms of risk metrics, the fund sports a Sharpe ratio of 0.24, better than the category — indicating that it provides higher returns for every unit of risk undertaken.

Strategy and portfolio

L&T India Value,currently has about 58 per cent of its portfolio in large-caps and 29 per cent in mid-caps while small-cap exposure is limited to about 11.5 per cent. The fund adopts a bottom-up approach in stock selection with a focus on picking stocks with reasonable valuations.

Over the past one year, the fund has been fully invested in equity, with 98-99 per cent allocation. With a well-diversified portfolio, the fund holds about 54 stocks. Also, barring the top 7-8 stocks, the allocation towards other individual stocks is less than 3.5 per cent, which mitigates portfolio risk of the fund.

The top-weight stocks, such as ICICI Bank, Infosys, HDFC Bank, Reliance Industries and Deepak Nitrite, have delivered good returns over the past one-year period, boosting the fund’s NAV. The fund added SBI, M&M and Federal Bank to the portfolio in 2020.

The fund has 28 per cent allocation to banking and finance, which has lagged many sectors in the upturn and is expected to be a strong beneficiary when the economic recovery picks up pace.

It is currently overweight on software, construction and chemicals sectors compared with the value-oriented category, while being underweight on automobiles, energy, pharma and FMCG.

Published on April 17, 2021

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