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After oscillating in a band for nearly five years, the benchmark stock indices made a new high in March this year. More importantly, sector rotation seems to have ended and investors are now showing aggression and risk appetite after a long time.
The current rally is being led by interest rate-sensitive and high-beta stocks, in sectors such as capital goods, real estate, construction & infrastructure, metals and public sector banks. Till recently these stocks were laggards and spurned by investors. Instead the preference was towards capital protection over growth and money moved to top quality stocks in defensive sectors such as consumer staples, information technology services and pharma.
This was reflected in the performance of equity mutual funds. Thematic funds focused on IT, pharmaceutical companies and FMCG, followed by those with higher weightages to private sector banks and top large-cap stocks.
That equation is changing. The top performing stock in our universe is Birla Sun Life Pure Value Fund whose net asset value is up 16.1 per cent in the past three months, followed by Pinebridge Infrastructure and Economic Reform Fund (up 15.7 per cent) and UTI Transportation and Logistics Fund (up 15.6 per cent). The BSE Sensex is up by only 5.7 per cent during the period. (NO TWO SECTORS MOVE IN TANDEM...)
In contrast, past winners such as ICICI Prudential Technology Fund (- 3.2 per cent in three months) and Reliance Pharma Fund (up 4.2 per cent) have underperformed. The classical diversified equity funds such as HDFC Equity Fund and HDFC Top 200 are in the middle.
The analysis is based on open-ended equity schemes with assets under management of Rs 50 crore or more at the end of March. This excludes the bottom third of the equity schemes in terms of AUMs, according to data provided by ICRA Online.
Given this, experts are advising mutual funds investors to rejig their portfolio. "What worked in the past may not work any more," says Sanjay Sinha, founder Citrus Advisors.
Rajesh Saluja of ASK Wealth Advisors agrees, but advises caution. "It's okay to take some risks and invest in upcoming funds but we cannot dump time-tested funds completely," he says.
Selecting the right basket of funds to gain from the current market dynamics is not easy. Decisions are mostly taken either on the basis of a fund's historical performance or a fund's popularity among investors and distributors. This works against smaller and less popular funds.
To overcome this, we have come up with a list of India's best upcoming funds. These are not necessarily the biggest and most popular funds in the market, but show the promise to shine in the new environment. These funds offer the best combination of growth, low volatility, reasonable downside protection and low portfolio concentration.
Topping the chart is SBI Magnum Mid-cap Fund, followed by HDFC Mid-cap Opportunity Fund, Religare Invesco Mid & Small Fund and SBI Magnum Global Fund 94. These have made it to the list thanks to strong long-term and short-term performance and reasonably high risk-reward ratio.
SBI Magnum Mid-cap, for instance, has delivered 11.6 per cent absolute returns in three months and has been the fifth best performing in the past year, with 42 per cent returns. In all, the fund's net asset value (NAV) has grown at a compound annual growth rate (CAGR) of 28.6 per cent in five years. That's higher than the 18.2 per cent and 20.4 per cent returns by the S&P BSE Sensex and the S&P BSE Mid-cap during the period. More important, the fund manager delivered this without taking too much risk.
The fund was ranked 18th in terms of Sharpe Ratio and Sortino Ratio. While the former measure returns volatility, the latter captures a fund's downward volatility. The fund has low portfolio concentration risk, with the top 10 holdings accounting for only 40 per cent of its portfolio. This provides the fund manager with large headroom to rejig the portfolio to take advantage of emerging opportunities.
Some experts, however, are dead against a portfolio rejig based on short-term changes in the market direction. "If an investor has the skill or time to take a sector or stock call, why will she invest in mutual funds? The primary objective of MFs is to provide risk diversification and large diversified funds are best positioned to provide this," says Vidya Bala, head of research at Funds India.
Methodology
The funds were selected through a three-stage filtering process. We began with two-thirds of all open-ended equity schemes by size. This means dropping all schemes with AUMs of Rs 50 crore or less and younger than 5 years. This left us with 204 equity schemes. In the first stage, all schemes were ranked according to their performance in the past three months, one year, three years and five years. Then, we calculated the best performing scheme by giving the highest weightage (30 per cent) each to their three-month and one-year performance and the least weightage (15 per cent) to their five-year performance. In the second stage, we picked funds that offered the best risk-reward ratio by giving 35 per cent weightage to their growth rank and 25 per cent and 40 per cent weightage each to their rank on Sharpe and Sortino ratios. The top 25 so selected were ranked according to the share of the top 10 holdings in their portfolios - the lower the better. We got the final list by giving 60 per cent weightage to a scheme ranked on risk-reward parameters and 40 per cent to their rank on portfolio concentration.
Data provided by ICRA Online
