Can you still bet your money on the winning equity funds of 2015? Do all losing funds need to be shunned?

Related story: How mutual funds fared in 2015

Mid and small-caps heated up Mid- and small-cap stocks stole the show in 2014 and 2015. But the meteoric rise in these stocks has pushed valuations beyond the comfort zone. Today, the BSE Mid-cap index trades at 25.5 times the trailing 12-month earnings of its constituents, compared to the Sensex’s 20.5 times. Small-cap valuations are still steeper, at 54.6 times for the BSE Small-cap index. This makes these stocks quite vulnerable for a steep correction.

Little wonder then, that DSP BlackRock Mutual Fund placed restrictions on investments in its Micro-cap fund in late 2014 itself. With 11 per cent returns, the fund is among the top 10 performers of 2015 and is also a top-ranked fund over one, three and five-year time cycles. So, one needs to tread with care before venturing into mid and small-cap funds now.

However, for those with a high risk appetite and long-term perspective, funds such as Mirae Emerging Bluechip, which contain downsides well in falling markets and also participate well in rallies, may be suitable. HDFC Mid-cap Opportunities fund, with a strong track record of consistency in returns, too, is suitable for such investors. Although not among the top gainers this year (3 per cent returns so far in 2015), HDFC Mid-cap Opportunities boasts a five-year rolling return of over 95 per cent, implying that irrespective of when you invested in the fund during the last five years, it had a 95 per cent chance of beating the benchmark. Although toppers in the current season, investors need to wait and watch for performance of new funds such as Motilal Oswal Focused Mid-cap 30 or Edelweiss Emerging Leaders across market cycles before investing in these funds. Ditto with Escorts High Yield Equity and Escorts Leading Sector funds. Despite being older funds, these toppers of 2015 are still tiny with only ₹3 crore each of assets under management and don’t have a consistent track record.

Prepped for growth Large-cap-oriented funds may have been losers in 2015. But it is actually a good time to invest in these funds which offer value right now. For HDFC Equity, one of the largest funds currently, its strategy of increasing exposure to beaten-down stocks in segments such as public sector banks, infrastructure and industrials, as a bet on economic recovery, was responsible for its underperformance in recent times.

But these may be the sectors that will propel growth over the medium term. Ditto with underperformers such as ICICI Pru Dynamic, which is suitable for investors with low risk appetite. Funds such as Franklin Prima Plus, UTI Equity, and ICICI Pru Focused Bluechip, boast solid long-term track records and can be good bets for your core portfolio.

Caution on MNC funds MNC funds may be toppers, but it may not be a good time to get into these right now. The preference for MNCs in the last two years has seen valuations of these stocks shoot up sharply. The portfolio PE of Birla Sun Life MNC fund, for example, now stands at a high 54.4. Though healthcare/pharma funds may remain attractive as defensives, the timing of entry and exit is vital for any sector fund as they take concentrated exposure. Sector funds go through cycles and there may be several years of underperformance before they pull up again. Since it is a high-risk proposition, it is best to set target returns from sector funds and exit when the target is reached.

Related Topics
comment COMMENT NOW