Fund of Fortnight

This is our mutual fund recommendation. Every fortnight , we recommend one open-ended equity diversified fund that has the best potential of returns for the next one year considering its constituents remain the same

Reason for recommendation
The alarming rate at which the corona virus cases are rising in India, it may spoil the equity party that investors had been enjoying in the last few quarters. A well-diversified portfolio may help you to limit your fall; however, the quality of diversifi-cation will play a vital role in limiting such a fall. Most investors are well-diversified towards different market capitalisations but you need to have diversification towards different strategies also. These strategies are also known as smart-beta indices and use defined metrics to select and weigh stocks unlike market capitalisation-based indices, which use free-float market capitalisation as the deciding factor. Metrics could be designed to capture value stocks, growth firms, and so on. One such strategy you can look at now is ‘quality’, which has performed better in volatile times and especially when the overall market has been trading at lifetime high. SBI – ETF Quality is one such exchange traded fund. This scheme invests a minimum of 95 per cent in companies under NIFTY 200 Quality 30 ranked by the ‘quality scores’ while the residual 5 per cent is invested into money market instruments. The NIFTY 200 Quality 30 index includes top 30 companies from its parent NIFTY 200 index, selected on the basis of their ‘quality’ scores.

The quality score for each company is determined based on return on equity (ROE), financial leverage (debt and equity ratio) and earning (EPS) growth variability analysed during the previous five years. The latest portfolio shows that the ETF has large-cap bias with 92 per cent holding in large-cap and the rest in mid-cap stocks. In terms of sectors, ETF is overweight on FMCG and technology while underweight on financials. Although in the last one year it has underperformed the Sensex and Nifty, it can cover that lag or underperformance going ahead if the market corrects. Therefore, you can invest up to 5 per cent of the portfolio in such a fund. Remember that buying such an ETF will require a dematerialisation account.