MF QueryBoard

MF QueryBoard

With the markets having crashed due to the virus pandemic, I would like to invest in a mutual fund. But since I am new to this aspect of investing, could you provide me information about a few MF schemes that are growth-oriented? -K Chinmaya 

Indeed, this is the right time to start your investment in mutual funds and specifically in equity mutual funds. It appears that your main aim of investing is to earn growth and dividend. In this aspect, we recommend you to kindly avoid the dividend option and stick to the growth option. The reason for the same is that dividend is paid from your investments only, and that too is taxable in your hands. Not just that, but paying dividend is at the discretion of the mutual fund house. Therefore, the dividend option should be avoided. Rather, a systematic withdrawal plan (SWP) is much better.

However, this is only recommended for those who are in their retirement phase. Since we don’t know what your risk appetite is, we are assuming a moderate risk appetite and providing you with a suitable portfolio. But you need to assess your risk appetite before investing. If your risk appetite is conservative or aggressive, then don’t opt for the given portfolio. You can assess your risk profile online. Various asset management companies’ websites assess risk profile free of cost.

Thus, as you can see, we have divided this portfolio into largecap, mid-cap and small-cap sub-asset classes. You might notice that we have stressed more on large-cap. The reason is that when the markets recover, large-caps are the ones that would start finding their feet first followed by mid-caps and smallcaps. However, you need to remember that this portfolio is for five years and needs to be re-balanced annually. For further details do refer to our cover story from the previous issue. It will give you a lot more details and an idea of how you should go about investing in equity mutual funds at this point in time and the schemes you should consider parking your funds in. Also, if you are new to mutual funds and lack the experience of investing in equities, then it would better if you opt for a short-term debt fund and gold exchange traded fund (ETF) or mutual fund instead of small-cap funds.

Is it the right time to invest in small-cap-dedicated mutual funds? Also, I am considering investing via SIP in Kotak SmallCap Fund. Is this a good fund?  
- Sharmila Shukla

Yes, you can go ahead with investing in small-cap funds and doing so via a systematic investment plan (SIP) is preferable. You may also consider investing lump sum, but it needs to be invested in a staggered manner. The small-cap space has seen a lot of correction since 2018 and may further correct due to the current global financial turmoil. However, this also provides an opportunity to accumulate gems that would prove to be worth the investment when the markets start recovering

As far as Kotak Small-Cap Fund is concerned, it is a preferable choice from a long-term perspective. However, in the short-term it may give you shocks. Kotak Small-Cap Fund basically follows the philosophy of growth at a reasonable price. The fund manager mainly focuses on investing in quality businesses run by good management, generating high return on capital and offering sustainable growth with high market potential while being available at reasonable valuations. The fund essentially follows a bottom-up stock-picking approach with wide sectoral diversification to manage risks. This is reflected in its portfolio. It has low concentration risk, being well-diversified by investing across 61 stocks where no stock is weighted more than 4 per cent while the top 10 stocks are collectively weighted at 29.90 per cent. If we look at its 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 the average fiveyear 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. Based on rolling returns we can say that Kotak Small-Cap Fund is consistent in delivering superior returns than its benchmark. In 2011, during the bear phase, the fund gave negative 26.90 per cent returns as against the category average returns of negative 27.01. In the bull phase of 2012, when the markets jumped, the fund delivered 49.90 per cent whereas the category average stood at 39.59 per cent. Accounting for the losses in 2011, the fund gained 23 per cent which is almost double the gain as compared to the category average of 12.58 per cent. Similar behaviour was evident even in 2018 and 2019. However, if you have a low risk appetite, avoid investing in this fund since it is strictly for aggressive investors and that too for the purpose of wealth creation. Don’t allocate this fund to your financial goals. 

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