Mutual Funds And You

DSIJ analyses MF schemes on various parameters and conducts a relative analysis of schemes to arrive at the result outcome. 

There are different perspectives to look at things and the same applies to mutual fund schemes as well. Schemes should be evaluated on different parameters; the important among these are the profile of the fund house, net assets of the fund, and the fund manager's track record. Nevertheless, every investor is obviously interested in knowing the past returns performance of the scheme they consider to invest their money in. Past performance gives you some confidence but it does not take you far unless you measure it relatively. In the following paragraphs we will be trying to exactly answer your question of where your investment stands in the mutual fund universe and more importantly you could gauge your fund's performance vis-a-vis others in the category. 

The Mutual Fund Universe 

The Indian mutual fund industry has grown by leaps and bound in the past few years. The asset size as well as number of investors have grown significantly. The first mutual fund in India was launched in the 1960's (UTI's 1st scheme-US-64) and it took the industry more than 50 years to attain Rs10 lakh crore of assets under management (AUM). The next Rs 10 lakh crore took less than five years. In terms of number of unique folios (number of investors), the number has risen for the 64th consecutive month (September 2019; 8.56 crore mutual fund investors). 

There are 44 asset management companies (AMC) operating right now in India and managing around Rs 25.6 lakh crore of AUM, as at the end of September 2019. The proportionate share of equity oriented schemes is 42.1% of industry assets in September 2019. Individual investors (Retail + HNI) account for 87% of the overall number of investors in equity oriented schemes while institutional investors account for the rest. Industry data shows that 68% of individual investor assets are held in equity oriented schemes. 

There are more than 400 equity dedicated mutual fund schemes in India as at the end of September 2019. ICICI Prudential AMC is the industry leader and has the largest number of equity funds to offer. 

Fund House, AUM and Returns 

Despite offering the highest number of funds, ICICI Prudential AMC stands second in terms of total assets managed by them. At the end of September 2019, HDFC AMC was the biggest AMC in terms of equity asset under management and manages around Rs 88,000 crore of pure equity fund. The weighted return provided by these funds is ~7.2 per cent. The returns are for last one year and are weighted against the asset size. Therefore, if a fund house has three funds with varied AUMs and different returns, then these returns are weighted against AUMs. 

Example 

The graph below shows the AUM, AMCs and the weighted return provided by them in last one year. 

Followed by HDFC AMC is Aditya Birla Sun Life AMC (in terms of total assets ICICI Pru AMC is the second largest) that manages around Rs70,000 crore of pure equity fund. However, its weighted returns are better than HDFC AMC. It has generated weighted returns of 9.4 per cent in the last one year. 

Nonetheless, the best fund house in terms of return generation in the last one year is Axis AMC. This fund house has generated an average weighted return of 22.7 per cent in the last one year. The best fund within Axis AMC is Axis Blue Chip Fund that has generated a return of 25.97 per cent in the last one year. 

Overall the weighed return of equity funds is 11.9% for the last one year period. 

Mutual Fund Scheme Size and Returns 

In terms of mutual fund scheme size, Kotak Standard Multicap Fund has the largest assets under management as at the end of September 2019. At Rs 26,991 crore of assets at the end of September 2019, it stands tall not only in its category but also within the equity dedicated MF schemes. The next in line is ICICI Prudential Bluechip Fund that has a total AUM of Rs23,018 crore as of September 2019. Nevertheless, in terms of returns, these funds may not be at the top. There are some smaller funds that have generated extraordinary returns in the last one year. For instance, IIFL's Focused Equity Fund with an AUM of Rs258 crore has generated a return of 29.85 per cent in the last one year ending October 25, 2019, while Sundaram Financial Service Operation Fund has delivered a return of 28.86 per cent during the same period. 

The graph below plots the top 20 equity dedicated funds in terms of size, spread across all categories, and their returns respectively. They form around 40% of the entire equity dedicated AUM. The rest 380 funds form 60% of total assets. 

Nonetheless, if we purely measure weighted returns, we see that Axis Long Term Equity Fund has performed best. With an asset size of little more than Rs20,000 crore, the fund was able to generate returns slightly lower than 23 per cent. Most funds with a high asset base are either from large cap or multicap category. Only fund that does not belong to the above category in the above top 20 lists is HDFC Small Cap fund. With an asset size of ~Rs9,000 crore, the fund has generated negative returns in the last one year. It has generated a return of – 3.76 per cent in the last one year period. Despite producing negative returns, the fund has been able to beat its category and benchmark return. The last one year has not been very good for small cap stocks and resultantly equity funds dedicated to this category have suffered in performance. 

Category, AUM and Returns 

There are around 19 categories in the equity dedicated mutual fund space including thematic and sectoral funds. In terms of asset size, multi-cap funds have the largest AUM followed by large cap funds. These funds, however, do not top the returns chart. The category that has generated the best return is the Financial sector themed funds. In the last one year, they have generated an average return of 18 per cent. There are a few companies from the financial space that have really performed well in these turbulent times, that propelled the performance of this category. 

Financial sector has been followed by consumption sector oriented funds. On an average, these funds have generated a return of 15 per cent in the last one year. While the best performers are from the sectoral category, even the worst performers are from this category. Auto and Pharmaceutical oriented funds remained at the bottom of the performance charts and have generated negative return of -4 per cent and -1 per cent, respectively. 

Fund Manager, AUM and Returns 

It would not be imprudent to say that fund managers are the most important link in the entire mutual fund industry. Therefore, it becomes important to know the fund manager who is managing your fund and what is the return that has been generated by the funds that he is managing. The highest equity AUM in the industry is being managed by Prashant Jain from HDFC AMC. He oversees ~Rs40,000 crore of pure equity dedicated funds. He is followed by Chirag Setalvad, again from the same fund house. He manages ~Rs32,000 crore of funds. 

Although they are managing sizable assets, the returns generated by their funds on an average are not the best. There are some lesser known fund managers, such as Shreyash Devalkar from Axis AMC, who has generated the best weighted returns in the last one year among all fund managers. The six funds managed by the fund manager have generated an average return of 24% in the last one year period. Another fund manager from the same fund house, Jinesh Gopani, closely follows him and funds managed by him has generated an average return of 22% in the same period. 

Company Vs AUM 

In India there are more than 4,000 listed companies, however, the number of investible companies are lesser than one fourth of that. Even within 900 unique companies, where the equity dedicated mutual funds have invested, there are few that dominate. The top 25 companies command 50% of the total AUM. India's largest bank by market cap, HDFC Bank has the highest weightage and contributes about 7.06% of the total AUM of the equity dedicated schemes at the end of September 2019. There are 294 funds that hold shares of HDFC Bank in their portfolio. 

Followed by HDFC Bank, is ICICI Bank to command investment interest of mutual funds. A little more than 6 per cent of the total equity dedicated AUM is being held in ICICI Bank. There are 300 funds that are holding this stock. Beside these, Infosys and Reliance Industries are other top companies whose shares are widely held by equity mutual funds. 

A large part of the performance of mutual fund schemes is dependent on the performance of these stocks. Most of these companies have performed well in last one year, despite overall market being volatile. Therefore, funds with higher weightage to these companies have outperformed their benchmarks and category in the last one year. For example, the best performing fund in the last one year, 'IIFL Focused Equity', holds ICICI Bank and HDFC Bank as its top holdings and has almost one fifth of its entire portfolio invested in these stocks. 

Mutual fund universe and you 

The paragraph above clearly shows how equity mutual funds are stacked under different parameters. You can see where your mutual fund investment stands in this mutual fund universe. If you are one of those who had invested in the fund dedicated to Financials, which had invested more in the large cap companies, you would have earned better returns on your investments. Nevertheless, had you bet on a Pharmaceutical sector recovery in 2019, you would have been a loser. 

The way the different parts of the universe are dynamic and keep on changing their position, the performance of mutual funds is no different and is very dynamic. The above analysis or picture is a snapshot taken on October 25, 2019 based on portfolio data of September 2019. If we analyse the same funds couple of months ahead, the picture may change completely and position might have moved. Therefore, as an investor once you have invested and made your mutual fund portfolio, the mantra to achieve your financial goals is to always keep a track of their performance relative to the mutual fund universe. Once you observe that they are deviating from their desired path you should take corrective action. This will help you to achieve your financial goals and investment experience smooth.