Mutual Funds

Why Nippon India Value is a good investment

Yoganand D BL Research Bureau | Updated on August 04, 2021

The fund’s top holdings have delivered healthy returns over the past one year

Investors looking for a portfolio that has potential to deliver market-beating returns at lower risk can consider buying the units of Nippon India Value Fund. Since inception in 2005, the fund has delivered a compound annual growth rate (CAGR) of 16 per cent, beating the broader markets. Over the past ten-year period, the fund has clocked 14.1 per cent, in line with the value fund category average return of 14.4 per cent.

The fund seeks to identify undervalued stocks based on long-term growth trajectory. Risk-averse investors can take the Systematic Investment Plan (SIP) route to buy the units, which helps to ride out market volatility.

Returns

Nippon India Value Fund spots undervalued stocks based on the evaluation of various factors. Over the last three- and five-year periods, the fund has delivered returns of 15.5 per cent and 14.7 per cent respectively against the new benchmark Nifty 500 TRI returns (w.e.f May 19, 2021) of 13.6 per cent and 14.4 per cent. Previously, the scheme was benchmarked against S&P BSE Enhanced Value TRI until May 2021. In the above-mentioned time frames, the fund has outperformed some of its peer funds, namely Templeton India Value, Aditya Birla Sun Life Pure Value and L&T India Value.

The fund has marked a turnaround of sorts. After a lacklustre performance in 2018 and 2019 when it delivered below category-average returns, the fund recovered in 2020 and had clocked returns of 16.4 per cent that is almost in line with the category average return of 16.8 per cent. An extended period of under-performance is not unusual in value-oriented funds. Since 2020, the fund has stayed in the top two quartiles of the category across all-time frames.

Importantly, Nippon India Value delivers better risk-adjusted returns than peers and category. The fund’s three-year monthly sharpe ratio, which measures how much return an investor is getting in correlation to the level of risk, is one of the highest at 0.1828. Opting for the direct plan would ensure lower expenses (1.48 per cent) compared with the regular option (2.11 per cent).

Portfolio and strategy

While Nippon India Value invests across the market capitalisation spectrum, at present it is biased towards large-cap stocks with 58 per cent holdings, followed by mid- and small-caps with 22.5 per cent and 15.8 per cent respectively. Between March 2020 and June 2020 when the markets were in a state of uncertainty, the fund reduced the equity exposure and gradually upped the allocation thereafter.

The fund has a well-diversified portfolio with 74 stocks in its basket. Barring the top 5 holdings, the allocation in the other individual stocks is less than 3.3 per cent of the equity allocation, which mitigates risk. Banking is the top preferred sector with 18.5 per cent allocation. Over the past six months it has trimmed the allocation in finance sector from 12.7 per cent to 7 per cent, which de-risks the portfolio to some extent.

In this period, the fund added new sectors such as insurance, transport and chemicals to its portfolio. It exited media & entertainment and services sectors, which were badly hit by the Covid pandemic. The fund has also slightly reduced allocation in consumer durables and petroleum products, while upping exposure in the ferrous metal and healthcare services sectors.

The fund’s top holdings, namely Infosys, ICICI Bank, HDFC Bank and Larsen & Toubro, have delivered good returns over the past one year. Some of the recent additions to the portfolio are Bank of Baroda, Indian Railway Finance Corporation, Jindal Steel & Power, Zensar Technologies, SBI Life Insurance Company and HCL Technologies.

Published on July 31, 2021

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