Portfolio

Sifting for the best choices

Parvatha Vardhini C | Updated on January 15, 2018

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The equity fund report card for 2016 raises a question as to whether the toppers of this year can be sure-fire bets for next year. It need not be so. Here’s why:

Mid- and small-caps need caution

Mid- and small-cap stocks have stolen the limelight for three years now. The continual rise in these stocks, despite some corrections, has pushed valuations beyond the comfort zone. Today, the BSE Mid-cap index trades at 27.2 times the trailing 12-month earnings of its constituents, compared to the Sensex’s 20.4 times. Small-cap valuations are steeper, at 63.7 times for the BSE Small-cap index.

This makes these stocks quite vulnerable to a steep correction in future, especially if global and local cues remain weak. The cracks are already visible. For one, while the BSE Midcap index has so far gained 7.1 per cent this year, the Small-cap index sports a marginal fall. Barring DSPBR Micro-cap which has recorded about 9.7 per cent returns so far, none of the other five small-cap funds has made it to the top quartile of diversified funds.

Secondly, although mid-cap funds are still among the toppers this year, the number of funds outperforming the Midcap indices (benchmark) has narrowed. In 2015, about 70 per cent of the mid-cap funds did better than the BSE Midcap/Nifty Midcap 100 index. In 2016, only 45 per cent of the mid-cap funds have managed this feat. With its asset size swelling to over ₹3,000 crore, Mirae Emerging Bluechip, the topper among mid-cap funds with 12 per cent returns, recently suspended fresh lumpsum subscription until further notice. Similar restrictions are in place for DSPBR Micro-Cap as well. So, one needs to tread with care before venturing into mid and small-cap funds now. However, long-term investors can continue to place their bets on time-tested funds such as HDFC Mid-Cap Opportunities.

Value may pay off

But the good run may continue for large-cap funds and multi-cap funds with a tilt towards large-caps. If the ongoing volatility were to continue, large-cap oriented funds will be able to contain losses better than mid- and small-caps. Also, they will be better placed to gain from a broader recovery in economic growth in the months to come. Considering the overheated scenario among growth stocks, funds focused on value may continue to deliver. Hence, toppers of this year such as Tata Equity PE, ICICI Pru Dynamic, Quantum Long-Term Equity, HDFC Top 200 and HDFC Equity are a good fit for the core portfolio of long-term investors.

Go slow on new and sector funds

With no track record to rely on, the performance of new funds must be watched over a few years and across a market cycle before hopping on to them. Consider new mid-cap funds such as Motilal Oswal Focused Mid-cap 30 or Edelweiss Emerging Leaders. These were among the top 10 funds in the diversified category in 2015. But in 2016, despite the mid-cap theme winning once again, these funds find a place only in the third or bottom quartile. Many other seasoned mid-cap funds have done better.

As regards sector funds, they are a high-risk proposition. The timing of entry and exit is vital as they take concentrated exposure. Also, it is not easy to second-guess what themes will work in a particular period of time. Sector funds go through cycles and there may be several years of under-performance before they pull up again. These funds are best assigned a small portion of your surplus and, more importantly, exited after a set target return is reached.

Published on November 20, 2016

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