Reviewing Your MF Portfolio

The markets have declined quite a bit from their all-time highs made in October 2021. This decline calls for a review and re-balancing of your mutual fund investments. The fall can prove to be a great opportunity to accumulate units of equity mutual funds. In this article, Henil Shah discusses the performance of the markets and mutual funds in H1 CY 2022 and also lists top performing mutual funds.

Investors around the world are experiencing the fact that the party which started during the pandemic is now coming to an end. All those who have been investing and those who are tracking markets know that from the past six to nine months the markets have been in a mode of deep correction. In the last six months alone Nifty 50 has corrected over 11 per cent. In fact, broader markets felt a lot more heat where Nifty

As can be seen in the table and graph above, the markets have been declining from the past six months and mutual funds have followed suit. Even though

From the above table and graph, we observe that the FIIs have been net sellers for the past nine months in a row. Moreover, despite domestic institutional investors (DIIs) being net buyers in the same period, the markets could not cope with the amount of selling done by the FIIs. The selling from FIIs intensified as rising inflation took centre-stage while the geopolitical tensions among Russia and Ukraine remain rigid. Moreover, US stared at 40-year high inflation, leading the Federal Reserve to turn hawkish and aggressively increase the interest rates which were at zero. This was not the only reason: even the valuation of India in relation with other emerging economies is higher and that actually became the reason for sell-offs by FIIs in October 2021 on account of profit-booking and re-balancing.

Even the Reserve Bank of India (RBI) has hiked the repo rate and in the recent bi-monthly meet, gave up its accommodative stance. This rise in interest rates has not just hurt the stock markets, but also the bond markets. With every rise in interest rates, bond yield on the longer duration papers would also increase, leading to underperformance of long-term papers. As a result, in the present market scenario, both equity as well as debt funds would feel the pressure. Hence, having a proper asset allocation in place would make more sense. There are various ways that would help you understand your optimal asset allocation. However, for this you first need to understand your risk appetite.

Moreover, you should divide your investments between core and satellite portfolio. Your core portfolio should be dedicated towards your financial goals and your satellite portfolio would be for wealth creation. Furthermore, you can manage the portfolio tactically as well, as against strategic. Tactical asset allocation, though risky in nature, produces better results than strategic asset allocation.

Top Performing Mutual Funds in H1 CY 2022

While you consider investing in any mutual fund, it is important to understand that you need to review your investments periodically. In our opinion, reviewing your mutual fund investments quarterly is prudent. In order to do so, you can compare the performance of your mutual funds against the benchmark index and category average. If for the consecutive four quarters the fund is underperforming its benchmark as well as category average, this calls for a deep review. In case of debt funds, we have specifically listed categories such as low duration funds, short duration funds, corporate bond funds and floater funds, because in the present bond market scenario these funds would be more suitable. However, we would recommend reviewing investments in them in one year from today.

Equity Mutual Funds

The above table depicts that despite being the best performing fund on YTD basis, HDFC Top 100 Fund took higher risk for higher returns. This is quite evident with its higher standard deviation and lower Sharpe ratio as against benchmark and category median. Therefore, taking all the factors into consideration, Baroda BNP Paribas Large-Cap Fund looks good as its Sharpe ratio is better and has also outperformed both benchmark and category median in almost each time period.

The Quant Mid-Cap Fund has performed quite well in all respects. In terms of returns, it was on the higher end when compared with the benchmark and category median. Moreover, it also took lesser risk and stood out in terms of Sharpe ratio. On the flip side, if we look at SBI Magnum Mid-Cap Fund, although the returns were better than category median and benchmark, it too took relatively higher risk.

Canara Robeco Small-Cap Fund did exceptionally well not just in the short term but also in the long term. Its Sharpe ratio is one of the best, showcasing its ability to generate better risk-adjusted returns. Moreover, in terms of standard deviation as well it scored over the benchmark and category median. On the other hand, despite taking near about same risk, IDBI Small-Cap Fund generated lower returns. This can also be noticed from its lower Sharpe ratio.

Although, HDFC Flexi-Cap Fund has done exceptionally well on an YTD basis, this comes with higher risk as measured by standard deviation. Moreover, the risk taken is not justified by the returns generated as depicted by the lower Sharpe ratio. In this pack, JM Flexi-Cap Fund looks better as the risk-adjusted returns generated by them look good. In this case, even Quant Flexi-Cap Fund looks good, but the volatility is higher for every return generated.

Debt Mutual Funds

When it comes to investing in debt funds, risk weighs over return as higher return are due to higher credit and duration risk. This is quite evident among funds like JM Low Duration Fund, Sundaram Low Duration Fund and PGIM India Low Duration Fund. Interestingly, they have lower modified duration. In that sense, Nippon India Low Duration Fund is better as it generates similar returns by taking lower risk. Moreover, its modified duration too is in line with the category median.

In terms of returns, all funds gave somewhat similar returns, but in terms of risk, Aditya Birla Sun Life Short-Term Fund took higher risk as measured by standard deviation. Also, its modified duration stood over its category median. Therefore, in this pack, SBI Short-Term Fund looks more sensible with standard deviation and modified duration being lower than its category median, while returns being higher than the benchmark and category median.

In this category, Axis Corporate Bond Fund takes the higher risk with standard deviation above the category median while its returns don’t support the amount of risk it takes. However, its modified duration is below the category median, which is sort of a relief. Moreover, PGIM India Corporate Bond Fund justifies its position as it generates returns higher than the benchmark and category median while its standard deviation and modified duration hovers below its category median.

This category would be helpful during a rising interest rate scenario as we are witnessing right now. However, this should be used for tactical calls as holding it for the long term might drag your portfolio returns. Tata Floating Rate Fund is likely holding longer duration papers as is evident from its modified duration which in fact is above the category median. In this category, Aditya Birla Sun Life Floating Rate Fund makes more sense as its modified duration is below the category average and generating returns that beats the benchmark and category median.

Hybrid Mutual Funds

In a falling market, it seems that ICICI Prudential Equity and Debt Fund falls less when compared to the benchmark as well as category median. Moreover, during optimistic times as well it performs better. However, the risk is on the higher end, but is justifiable for the returns that it generates. Even though Tata Hybrid Equity Fund takes lower risk, it still is not able to justify the returns generated as is evident from its Sharpe ratio.