Model Fund Portfolio Unveiled

The equity market is witnessing a sharp and unprecedented correction due to the corona virus pandemic.
The pace of correction is more than what we witnessed during the global financial crises of 2008. The pace of correction has been so sharp that the S & P BSE Sensex fell from its all-time high of 42,273.87 on January 20, 2020 to a low of 25,638.90 in a matter of just 48 days. During this period it fell by 38 per cent. You would be wondering how it impacted the mutual fund investors and what their response was. This fall was spread between three months and hence its reaction was not visible through the monthly numbers released by the industry body, Association of Mutual Funds in India (AMFI). 

For example, in February 2020, the S & P BSE Sensex slid close to 1,500 points which is around 4 per cent. The monthly numbers released by AMFI recorded that mutual fund investors didn’t pull out money. In fact, if we look at the monthly report of the AMFI, we can see that the assets under management (AUM) of open-ended equity mutual funds have reduced by only 4 per cent but the inflows have increased by almost 37 per cent on a sequential basis. Even investments through the popular investment route for retail investors, systematic investment plan (SIP), didn’t witness a major decline .

The investment via SIP stood at Rs8,532 crore in January 2020 and Rs8,513 crore in February 2020, a decline of mere 0.22 per cent. Does it mean that Indian investors are now matured and have not pressed the panic button on their portfolio after they saw it turning red? This we will come to realise once the monthly data for the month of March 2020 is released. March 2020 is the month wherein the S & P BSE Sensex witnessed a loss close to 23 per cent. Nonetheless, going by the investment made by MFs in the equity market in the last one month, there is an indication that the outflow would be minimal. 

Unique Opportunity
It is believed that such crashes offer a great investment opportunity as quality stocks are available at a cheaper valuation. Therefore, many fund houses, especially those holding more in cash, might take a call to invest in such quality stocks. There are various studies carried out to seek market behaviour during and post the epidemic such as corona virus. These studies show that the markets do correct during such epidemics. But, it even rewards investors by compensating the losses caused by them. This can be seen in the table below: 

The above table shows how S & P BSE Sensex performed during the outbreak and in the one-year and three-year period post the outbreak. As can be seen, the major falls during SARS-CoV, bird flu and ebola epidemics were rewarded by superlative surge in the one-year and three-year periods. That said, it doesn’t hold true for the rest of the two epidemics. Though the loss was covered, superlative return was not visible. No wonder these studies have made investors ask if it is the right time to get into equity. Surely, it is, but in a staggered manner. This means even though you invest now you might witness some corrections. This is provided there are no strong positive signs visible regarding the corona virus pandemic

Therefore, investing in a staggered manner should be the right call. This may lead you to wonder that since there are hundreds of equity mutual funds to invest in, which would be the right ones to park your funds in? As a solution to this we have created a portfolio of equity mutual funds. However, one should remember that this portfolio is created with a perspective that investors would remain invested for at least five years to derive maximum benefit out this portfolio. This portfolio is purely for wealth creation and not to be allocated to any of your financial goals

Model MF Portfolio
We have created a portfolio for investors with conservative, moderate and aggressive risk appetite. Therefore, it is recommended that before selecting your portfolio do assess your risk profile. Further, we have divided the portfolio between large-cap, mid-cap and small-cap funds. And to all these sub-asset classes we have allocated different weights. The allocated weight depends upon your risk profile. 

As you can see in the above graphs, irrespective of risk profile we have the portfolio tilted more towards large-cap funds. The rationale behind the same is that when the markets would start recovering it is large-cap that is likely to move up in the initial recovery phase. This will ensure that you encash the benefits from the rise in blue chips. Also, after one year you would need to re-balance your portfolio to restore the original asset allocation. This will help you to book profits from the large-cap funds and invest in mid-cap and small-cap funds. 

Choosing the Right Funds
Which are the funds you should invest in? This is one of the paramount questions for all mutual fund investors. Therefore, below is a list of equity mutual funds that you need to consider investing in. Along with it we have also given weightage with which you need to invest in these funds. These proportions would differ depending on your risk profile.

You will notice in the above table that we have skipped the Kotak Small-Cap Fund for investors with conservative risk profile. The reason is that when we analysed the combination of funds as a portfolio, we found that it fails to reduce the risk of the overall portfolio, which is important for a conservative investor. Moreover, compared to other funds in the list, it is not able to control the downside risk in an efficient way. The above proportions are applicable for both lump sum and SIP investments

In case of lump sum, it is recommended that you invest in a staggered manner. This means that don’t invest all at once. Start investing 20 per cent every month. And if you are a veteran, then invest 20 per cent on every correction. However, remember that any amount you plan to invest, invest in the same proportion. This will ensure that you get better end results. Other investors can simply put their lump sum in a liquid fund with systematic transfer to the required funds. Following is the Portfolio For Investors With Different Risk Profile 

* SIP and Lumpsum amounts considered are just for the purpose of illustration.

Rationale behind Fund Recommendation
Many a times, we blindly go ahead and buy MF schemes purely looking at their star rating or historic returns. These parameters, however, might not help you in selecting a long-term winning fund for your portfolio. To truly get the performance perspective of the fund you should check its performance during different market cycles. 

For example, even if a fund has performed better during the bull market but could not protect its gain during a falling market, it will fail to generate better returns for you in the long run. Therefore, it is important to look at the performance of the fund in every market condition. 

The fund should be such that it falls less during a bear phase of the market and at least gives market returns in the bull phase. To select the right kind of funds we have studied all the equitydedicated funds that have an inception date of before the year 2011. From these funds we filtered those that have performed better than the category and benchmark during both the bear and bull markets combined. The first cycle that we studied is from the start of 2011 till the end of 2012. In 2011 the direction of the market was negative. However, in 2012 it recovered. Similar was the condition between 2015 and 2017. The graph above(Performance of the funds in Bear and Bull Phase) shows the performance of the funds selected during the first cycle of our study between 2011 and 2012.

We have created a well-researched equity mutual fund portfolio for you. This will help you to take advantage of the current market situation and lead to creating wealth over a period of five years and more. Most of the asset prices show ‘mean reversion’. This means that returns from the stock investment reverts back to its mean. Many stocks are currently trading at their 52-week low and some are even trading at their five-year low. This is because of sharp correction that they have gone through now. Going forward, the return from these investments is expected to revert back to its mean. This will help you to make the most out of your investments. But first you need to assess your risk profile and choose a portfolio depending on the same.

You need to remember that the investments, whether lump sum or SIP, should be made in the exact proportion. Also, you have to re-balance your portfolio annually. Reviewing the fund at equal intervals is also equally important. This is because we have recommended the funds based on the current situation and this might change depending upon the actions from the fund’s end. Therefore, never forget to review funds annually. This will help you to book profit or restrict any further loss and get into a better fund in a timely manner. This is a portfolio that should be strictly used for wealth creation purpose. Do not allocate it to any of your financial goals, specifically those that are your needs. 

Canara Robeco Bluechip Equity Fund - Direct Plan Growth Option

Looking at merely how much a fund falls during bad times should not be a reason for it to be eliminated from your watch list. It is important to check how the fund has performed subsequently. In this aspect, Canara Robeco Bluechip Fund turns out to be one of the best funds in the large-cap space. It not only fell less compared to the category but was also able to rise considerably in the following years. In the year 2011 the category average returns were negative 23.32 and the fund gave negative 12.76 per cent. In the year 2012, the markets surged and so did the funds from this category. This fund gave 28.21 per cent returns in 2012 which is less than its category average which stood at 29.74 per cent.

Now you might think that the fund performed poorly. However, if you had invested Rs100 at the end of 2010, your investment would have become Rs87.24 at the end of 2011 after accounting for negative return of 12.76 per cent. In 2012, it gained 28.21 per cent, which means your investment would have become Rs111.85. If we had applied the same logic to category average, every investment of Rs100 at the end of 2010 would have become Rs99.60 at the end of 2012. The same pattern was witnessed in the year 2018 and 2019. Even If we look at the last one month returns, the fund gave negative 23.62 per cent whereas the benchmark gave negative 25.81 per cent returns and the category gave negative 24.59 per cent.

These returns were generated despite the fund holding only 5.06 per cent in cash. This shows the consistency of the fund. The reason it is able to arrest the fall is because of its robust portfolio, which hold stocks like Abbot India, Divi’s Laboratories, Alkem Laboratories, Avenue Supermart, and others. Technology and FMCG sector are among the top three sectors of the fund, which is now outperforming other sectoral indices. This indicates that even during the current fall phase, the fund will be able to navigate it better. 

Axis Bluechip Fund - Direct Plan | Growth Option

Axis Bluechip Fund has gained a lot of praise from investors as well as financial advisers. This is purely due to the performance of the fund during the turbulent period of 2018 and also during the current crises. In the past one month it fell by 22.99 per cent, whereas the benchmark fell by 28.15 per cent and the category average stood at 26.89 per cent. This shows the ability of the fund to control the downside risk. The main ingredient that is contributing to its performance is the cash holding. Currently it is holding around 17.91 per cent in cash and cash equivalents. No fund in this category has been holding such a high percentage of cash. That said, sitting on cash is not a strategic decision but lack of opportunities due to higher valuation of equities.

However, in the current scenario one can find quality stocks at reasonable price. Therefore, there is a possibility that this fund will use its cash to get into stocks that are available at a great bargain. The top three sectors it has invested in contribute more than half of its portfolio. Technology and FMCG sectors form part of the top three sectors. As we know, these two sectors have performed better than the other sectors. With 23 stocks in the portfolio, it makes it a bit concentrated. However, being an active fund and with more than adequate amount in cash, it will certainly help to diversify in the future.

If we look at its five-year rolling returns from January 5, 2010 to April 1, 2020, then in each and every period this fund was able to beat its benchmark. The five-year average rolling returns of the fund is 13.74 per cent whereas that of benchmark is 10.19 per cent. Also, in the same period 91 per cent of the time the fund has generated returns from 10 to 20 per cent. This shows consistency in its performance. Therefore, this fund forms a part of our large-cap offerings.

Invesco India Mid Cap Fund - Direct Plan | Growth Option

Invesco India Mid-Cap Fund’s investment objective is to generate capital appreciation by investing predominantly in mid-cap companies. Indeed, it is adhering to its investment objective. This fund holds 67.69 per cent in mid-cap stocks, which is more than the category average that holds around 64 per cent. If we look at the returns that it generated in the past one month, it gave negative 28.44 per cent returns whereas the benchmark gave negative 30.92 per cent and the category average stood at negative 29.46 per cent returns. 

The fund house follows a robust investment process that helps it perform better. This fund filters down the possible investment universe to more attractive opportunities by the process that involves company analysis, industry analysis, economic analysis and technical analysis. The stock selection is done with a bottom-up approach. For asset allocation decisions they rely on economic and industry analysis. This helps them to take a contra call. Further, the top three sectors contribute around 40 per cent of its AUM. Among those, the top two sectors are currently out of favour viz. financials and automobile and ancillaries. Such contra calls will help them when the market starts recovering from the crises. 

Looking at its five-year rolling returns, in none of the five-year period from April 16, 2007 to March 30, 2020 did it underperform its benchmark. The average five-year rolling returns for the same period stood at 18.32 per cent and that of the benchmark was 12.26 per cent. Even looking at its return distribution, 55 per cent of the time it delivered returns between 20 per cent to 30 per cent and another 45 per cent of the time it gave returns from 0 to 20 per cent. However, in case of its benchmark, 87 per cent of the time it delivered returns from 0 to 20 per cent. This shows the performance consistency of the fund.

Franklin India Prima Fund - Direct Plan | Growth Option 

The first obvious thought that might come to your mind is why at all have we recommended this fund despite the fact that it has underperformed its category in almost all trailing periods? It is important to understand that trailing returns are point-to-point returns that get updated on a daily basis and even the star ratings are based on these returns. Therefore, relying simply on trailing returns might not help you to select MF schemes. As said earlier, it is important to understand how the fund performs not only in good or bad times but how it performs while shifting from bad time to good time. And in this aspect, Franklin India Prima Fund was successful in beating its category in two market cycles. 

In the year 2011 the fund generated negative 22.06 per cent returns while the category average was negative 25.34 per cent. In the year 2012 when the market surged it gave 44.13 per cent returns as against category average returns of 40.76 per cent. With this shift, the fund delivered 22.07 per cent returns accounting for the loss in 2011 and the category average stood at 15.42 per cent. In the years 2018 and 2019 a similar pattern was witnessed. Hence, relying on trailing returns might lead you to disastrous results. So, use trailing returns just to have an overall performance view of the fund. However, while investing it is better to dive deeper. Rolling returns give you a much better picture than trailing returns

Therefore, looking at the five-year rolling returns from January 2, 2020 to March 30, 2020, there was a bit of underperformance from April 2005 to April 2012. However, from there onwards the fund has outperformed the benchmark with good margins. The average five-year rolling returns of the fund stood at 23.56 per cent and that of the benchmark was 18.82 per cent. Franklin India Prima Fund delivered more than 20 per cent returns for 54 per cent of the times. However, the benchmark was only able to deliver it 34 per cent of the times. This clearly shows the ability of the fund to beat its benchmark despite some underperformance.

Kotak Small Cap Fund - Direct Plan | Growth Option

Kotak Small-Cap Fund follows the philosophy of growth at a reasonable price. The fund manager’s focus is on investing in quality businesses run by good management, generating high return on capital and offering sustainable growth with high market potential and available at reasonable valuations. Also, they look for companies which are strategically well-positioned to gain market-share from the competition without diluting profitability and return on capital. They essentially follow a bottom-up stock-picking approach with wide sectoral diversification to manage risks.

This is reflected in their portfolio. They have low concentration risk as they are well-diversified by investing in 61 stocks with the highest weighted stock not more than 4 per cent while the top 10 stocks are collectively weighted at 29.90 per cent. If we look at the five-year rolling returns for the period January 2, 2012 to April 1, 2020, not a single time has Kotak Small-Cap Fund underperformed its benchmark. The fund generated 19.27 per cent of average five-year rolling returns as against its benchmark that gave 13.32 per cent. Even if we look at the return distribution during this period, 82 per cent of the times the fund fetched return of more than 20 per cent in the same period. Whereas, in case of the benchmark it gave more than 20 per cent returns 74 per cent of the times. Therefore, we can say that Kotak Small-Cap Fund is consistent in delivering superior returns than its benchmark based on rolling returns. In 2011 the fund gave negative 26.90 per cent returns as against the category average returns of negative 27.01. In 2012 when the markets jumped, the fund delivered 49.90 per cent whereas the category average stood at 39.59 per cent. If we account for the loss in 2011, the fund gained 23 per cent which is almost double the gain of the category average of 12.58 per cent. Similar behaviour was evident even in 2018 and 2019. However, investors with lower risk appetite should avoid investing in this fund since it is strictly for aggressive investors and that too for the purpose of wealth creation.

ICICI Prudential Small Cap Fund - Direct Plan | Growth Option

ICICI Prudential Small-Cap Fund’s objective is to seek wealth appreciation by predominantly investing in small-cap companies. This fund is adequately diversified which has spread its investment across various stocks and sectors with no stock weighing more than 4 per cent. The top ten stocks form only 26 per cent of the portfolio. This helps it to contain the concentration risk. Not just that, this fund is holding almost 8 per cent in cash which is helping them to tide over the current market scenario.

If we look at its performance in the past one month, then the fund delivered negative 33.75 per cent of returns whereas its benchmark and category gave negative 34.18 per cent and negative 30.31 per cent returns. To gain more insights about its performance, let us check its rolling returns. For the period January 2, 2012 to April 1, 2020 the fund was able to generate average five-year rolling return of 13.93 per cent and its benchmark gave 13.22 per cent. This shows the fund’s slight outperformance over its benchmark. In terms of risk, this fund has done well compared to its benchmark and category. The Sortino ratio of the fund stands at negative 0.45 and that of benchmark and category stands at negative 0.68 and negative 0.51 respectively.

In 2011 when the market tanked, this fund delivered negative 15.05 per cent return, which was lowest in the category. The category average in the same year stood at negative 27.01 per cent. When the markets jumped in 2012, this fund delivered 10.80 per cent return return, accounting for losses in the year 2011, it managed to match the performance of the category in year 2011 and 2012 combined. When we look at its performance in 2018, it gave negative 22.24 per cent returns and the category gave negative 20 per cent returns. However, when the markets somewhat surged in 2019, the fund gave negative 12.21 per cent returns as against the category average of negative 22.65 per cent. This outperformance is with a huge margin.