Revamp your equity fund portfolio now

The market's recent rout has even seen some good funds take a knock on their returns and it could be a while before things recover. So, what next?

If you are getting anxious about your equity fund investments, you are not alone.

It has been a tumultuous three months for the stock market, due to the rupee facing a severe sell-off, the Reserve Bank of India clamping exchange controls and growth tending to slip.

Stock markets are going through a choppy ride, resulting in some sharp one-day declines in the past four years.

These tough conditions are drying liquidity in the market. Investors are finding it difficult to sell stocks, with some of the top counters seeing no buyers.

Mutual funds are said to be facing difficulties in selling their large holdings and the impact cost of selling stocks is too high.

Equity funds have been badly hit in the past six months. Of 249 funds, returns of 224 schemes are in the red, show data from Value Research. Some of the top funds haven't been spared either.

PLAN B FOR YOUR FUNDS

• Assess why your equity funds have slipped, especially for sectoral allocations and calls that have gone wrong.
• Don’t rotate your funds unnecessarily, unless you are convinced that you need a different equity strategy
• Select those funds that can do sector rotations, depending on market conditions. But, keep a balance.
• Keep your SIPs active. However, you may choose to switch between funds. One can accumulate more stocks in a down market.
• You should hold different types of equity funds for diversification. But don’t invest in more than five.
• The onus of taking cash calls is on you. So, choose to occasionally hold back on investing in equities and buy at an opportune time. Equities still are the best performing asset class.

HDFC Top 200 dipped -9.2 per cent, as the fund manager was overweight on the financial sector, which has been badly.

Says Dhruva Chatterji, senior investment consultant, Morningstar India: "Mutual funds have taken a bad beating as they are exposed to the broader markets. Many funds had invested in banking, infrastructure and industrial. All are doing badly."

Franklin India Blue Chip (-6.3 per cent) was also among the large-cap funds hit. Kotak 50 also lost 5.9 per cent.

For other fund houses, such as Reliance MF, the story isn't very different. Reliance Vision lost 11 per cent in six months.

This flagship fund was among the favourites with investors. It has been struggling due to economy-related calls on capital goods and automobiles. HDFC Growth (-10.77) and HDFC Equity (-10.72) have lost in six months. DSP BlackRock's Focus 25 has also slipped -9.45 per cent.

Better ones
Fund managers that have taken calls on the economy in sectors such as infrastructure and banking were among the most hit. Managers who were too aggressive in either of these calls were the among the worst performers.

To be fair, a few houses have performed well in the recent past.

In six months, Axis Equity has managed to hold up on the positive side with gains of 1.6 per cent, due to high exposure to defensive sectors such as healthcare, fast-moving consumer goods (FMCG) and, to an extent, technology.

Its exposure to healthcare and FMCG accounts for about 20 per cent of its portfolio.

Of the schemes that outperformed the broader index, the majority had churned their portfolios significantly in six months by increasing their exposure to defensive sectors.

Funds that have rotated their sectors have fared well.

The broader market is what has hit funds really hard. The market is just favouring a few stocks and sectors.

Says Mehraboon Irani, head, private client group, Nirmal Bang: "The market is polarised and just a few stocks are holding up. The broader market is completely washed out."

Lessons for equity investors
For equity fund investors, there are a few lessons.

First, not all funds do well all the time. At times, fund managers' calls would be right and the fund would deliver superior returns. But studies have shown it's difficult for all fund managers to beat the markets consistently.

On the other hand, it's unlikely that equity funds will be able to better their performance any time soon, as large- and mid-cap funds invest in a whole host of sectors for diversity.

Says Chatterji: "Unless the broader market recovers, it's unlikely equity funds will pick up in the next few months."

Onus on investor
Besides, fund managers are almost always invested in equities. Usually, they don't sell stocks and hold cash instead. So, in a bad market, funds take a beating if they are fully invested in equities.

On the other hand, if you stay in cash when markets tumble, your capital is preserved.

As a result, the onus of staying invested in equities is on you. Fund managers don't take that call for you because at all times they are fully invested.

For now, most experts recommend it's not the best time to invest in equities until the horizon clears.

However, if you are running a systematic investment plan (SIP) continue to do so, unless you can time your entry into the market. This is a difficult thing to do, say experts. SIPs work best over the long run.