Choosing a mutual fund is never an easy task. Past returns alone never a great indicator and you have to keep in mind things like your own goals and risk profile. Ratings agency Crisil has come up with mutual fund rankings and they have just released the latest report for the quarter gone by.
So who are the key winners and losers this time around, which fund houses have done well and how have the new rules that were released by Securities Exchange Board of India (Sebi) impacted the mutual funds that you invest in.
Jiju Vidyadharan, senior director, Crisil Research shared his outlook and perspective on the same.
Watch: Here's how you can choose the right mutual fund Edited Excerpts: Some interesting exercise that you guys do, I think every quarter these rankings are released.
That is right, we put out the rankings every quarter.
So always a great idea to have a barometer in mind for people to pick and choose their funds. I want to first start by understanding how do you rate funds? What are the important aspects and the criteria that you look at?
We rank funds in 24 categories now and this, of course, sort of coincides with the recent scheme re-categorisation that has come out from Sebi. So we rank funds across 24 categories, again spread between equity, hybrids and debt.
We look at an initial filter which is based on the minimum track record of funds under existence. So for instance, in case of equities we look at three-year time period. So funds that have at least three years of net asset value (NAV) history are ranked.
Likewise, we have a filter in case of assets under management (AUM). So funds that meet a minimum size in terms of assets managed under those funds again are ranked by Crisil.
If we talk about some of the other criteria, I think you do look at returns but it cannot be the only yardstick, right? That is like looking in the rear-view mirror. How do you gauge returns and how important are they when it comes to drawing up these rankings?
I think one of the most important points which is also relevant for investors are to look at risk adjusted returns which in simple terms is what is the return per unit of risk that you have taken.
We look at risk adjusted returns and we look at both alpha which is what has been the sort of performance that has been generated by a particular fund vis-à-vis its peer set.
So the average return that the peer group is throwing out is benchmarked against that?
Yes, that is right. Likewise the standard deviation of the fund. So how volatile has been the fund’s performance over a period of time. We look at a three-year time period as we spoke.
I think the financial services industry in India goes through so many ups and downs, so three years is a good enough time where a lot of changes happen. On understanding the rankings, I believe the nature of the funds portfolio also plays a role. You do look at things like concentration etc. would you explain that to us? What are the parameters?
Besides risk adjusted returns in the sense which is the measure on the basis of the NAV performance, we also look at portfolio attributes and in case of equity, for instance, we look at attributes such as liquidity, which gives you a sense of how soon can the fund manager get out of the stocks that he has a position in and clearly. The more liquid a portfolio, the better it is from the perspective of portfolio construct.
We look at concentration as well. It is again looked at from two perspectives, one is the stock concentration and second is the industry concentration.
There are a lot of parameters and I am sure that they will help investors to benchmark their funds and pick up the winners and, of course, the better performing ones, so without any further ado, I want to come to this quarter’s rankings. There are different categories if you talk about equity funds there are about 8-9 different categories that you look at because that is the Sebi structure now in the new scheme of things. So let us start off with the largecap funds and these are Crisil’s ranking for the quarter gone by? Number one on the equity list is Axis Bluechip Fund, the number one position has been tied, there are two funds on rank one, that is the HSBC Large Cap Equity and the Axis Bluechip. The second position has three different funds, ICICI Prudential Bluechip, there is Reliance Large Cap, UTI Mastershare and then no.3 is the Aditya Birla Sunlife Frontline Equity Fund. I just want to ask you bird’s eye view, any major changes in the largecap rankings for this quarter, any important trends?
Yes. This quarter, one of the key trends that we have seen is the index has done significantly higher than the funds. Axis Bluechip Fund is one fund which as entered in the top position. It was earlier ranked three. It is a big jump for the fund and one of the key trends that we have seen in terms of its recent performance is that the fund has managed to do better than the index.
So it has sort of reversed the trend that you would have seen with respect to all of the other funds put together.
One of the core reasons is clearly stock selection which is something relatively unknown in case of the largecap universe. So the fund manager has actually been able to invest in stocks which have done better than the index and all other funds together. So that is one key highlight that we have at least in terms of largecaps.
We have done the largecap category, let us move to the large and midcap. Here the top rankings funds that is ranked one has been shared among Canara Robeco and the Sundaram Large and Midcap Fund, the Invesco India Growth Opportunities Fund comes in at two, as the Mirae Asset Emerging Bluechip, the Principal Emerging Bluechip, the DSP Blackrock Equity Opportunities Fund that is at number three and the Franklin India Equity Arbitrage along with the IDFC Core Equity is also at three and there are couple of other funds, I see the Kotak Equity Opportunities, the L&T Large and Midcap, so a lot of funds stacked up at the third rank over there. Once again your key takeaways from this category this quarter?
A: In terms of this category, we see stock selection playing out. Canara is a fund which has moved from three to one as in case of the Axis Fund in case of the largecap category. This is a category which is a new category with the SEBI reclassification coming in, there were previously no real funds in this space. Typically, we had largecap funds and you had midcap funds or you had multicap funds. So this is a category where there have been funds from different categories which have sort of come together to form a new category.
Let us come to the next category and these are really interesting ones because everybody wants to know what is a good midcap fund to invest in these days with the midcap market still underperforming the largecap indices. So right on top is the Axis Midcap, that has done really well in the last couple of months, the L&T Midcap Fund has tied in with Axis. At number two spot, we have the Edelweiss Midcap, the HDFC Midcap and the Kotak Emerging Equity and a couple of funds on the third position or the third rank would be the likes of the DSP Blackrock Midcap, the Franklin India Prima and the ICICI Pru Midcap as well as the Reliance Growth Fund. So again, key movers and shakers, would it be Axis this time which has made the big quantum leap?
Yes, Axis has moved from three to one in this quarter. What has worked is again stock selection. So if you were to just look at some of the key stocks that did well for them so companies like Page Industries, Cholamandalam Investments and Finance Ltd, Endurance contributed significantly to their performance and clearly that is one trend that we see which is the Axis Fund moving from three to one.
It has been pretty consistent because the jump has happened not just in the largecap fund of this particular AMC but even in the midcap. Let me come to the smallcap side of the market if you have a little appetite for risk, you are looking at parking some money in smallcap funds, this is what the Crisil ranking say, number one is the HDFC Small Cap Fund, there is nobody else on rank one. In no.2 position, it is L&T Emerging Business Fund and the Reliance Small Cap Fund. In number three Aditya Birla Sunlife Small Cap Fund, Franklin India Smaller Companies Fund, Kotak Small Cap Fund and SBI Small Cap Fund. What thoughts on this category because this is where the risk is typically higher?
I think one of the central themes and it gets quoted as well quite often is a lot of money has flown into small caps and some funds have had a fair set of inflows that have come in. As the size increases, stock selection becomes difficult because then you have to deploy much or your ability to find multibaggers has to grow at the same pace at which your assets have grown.
Let us move to the next category which is multicap funds to talk about some of the winners. The Principal Multicap Growth Fund is ranked one, the UTI Equity Fund is ranked pretty high here, rank one. Canara Robeco Equity Diversified Fund, The Kotak Standard Multicap Fund, Mirae Asset India Equity Fund, and Motilal Oswal Multicap 35 Fund and the Aditya Birla Sunlife Equity Funds, so these are some of the top names. Any trends, anything that stood out here in the multicap category?
In terms of the multicap category, one of the key factors or key funds that we have seen which has moved by more than one notch is the UTI Equity Fund, which has moved from three to one. One of the key drivers has been their ability to get the stock selection right and that is what has worked for that particular fund.
How are UTI funds doing generally over the last couple of quarters of the rankings because these are not funds that we speak of too often or discuss too often, how have they faired on the ranking charts?
At an aggregate level, if you have to look at the UTI funds, we have seen the positive trend in terms of their performance. Fixed income for that matter has been key category where the UTI Funds have done well on the fixed income side.
Now, let us come to the ELSS category, these are funds that all of us need because these are the tax saving funds, so let us see what has done well this quarter. Invesco India Tax Plan Fund and Motilal Oswal Long-term Equity Fund share the no.1 spot. In the number two spot we have a couple of funds coming in, Aditya Birla Sunlife Tax Relief 96 Fund, Axis Long-Term Equity Fund, IDFC Tax Advantage Fund and L&T Tax Advantage Fund and in no.3 would some schemes, I am just naming some of them, there are a lot of funds in no.3 position, some of them would be the Canara Robeco Equity Tax Saver Fund, Franklin India Taxshield Fund, ICICI Pru Long-term Equity Fund, IDBI Equity Advantage Fund, Sundaram Diversified Equity Fund and Tata India Tax Saving Fund. These are some of the names that are on rank one, two and three. Any highfliers in the ELSS category this quarter?
ELSS has largely been sort of a consistent category. We don’t see too much of a churn except for the Invesco Fund which has moved from two to one in terms of the rankings. I think it is also a category, which has seen the least disruption after the Sebi recategorisation because ELSS was always a separate category.
I think Aditya Birla Sunlife is the only fund house where they had two different tax schemes and they had to merge them in one?
Yes, that is right. But otherwise you typically have and that was again a legacy factor because – the company that they had acquired had an ELSS fund and therefore you had to continue with the two.
In terms of portfolio construct also, because you don’t see too much of the likelihood of investor redemption happening, you would expect portfolio managers to take more longer-term calls in this category and that is something which we have seen in terms of historic portfolios, historic performance trends. It is a fairly stable category in terms of performance.
We are now down to a value or contra funds, this is something that has now been defined very clearly by Sebi. How do you look at this fund category and overall what is the kind of performance track record and which are the schemes that come out on top?
Value as a category, I mean value and contra technically are categories where you would really invest with a long-term sort of perspective. As a category we have a few funds which have stayed.
It is a theme which has quite a lot of takers globally as well. In terms of the performance the Invesco Fund is the one which has come out on top in the recent rankings.
We also see some part of this which can possibly be attributed to fund manager change and so on. Taher Badshah is heading this fund so there is that attribute as well that comes in.
We really need to see how this category evolves, because as of date it is just a reorganisation of funds which have been historically being positioned as value fund. We really would like to see how many more funds come in.
As of now what are the average performance numbers, return numbers that these funds are throwing up?
As of now, it would be relatively lower than the growth funds in terms of performance. But you will see periods when these funds do well. Like dividend yields is very classic category of value, which typically does well at given points of time. It is a fund category which is slightly different, we really need to see how this will evolve in India.
Sebi also came out and clarified another category in their norms last year which is the Focused fund category. These are the funds where the scheme will decide whether it is group of 25 stocks or whether it is 35 stocks. How do these funds work and on top I am seeing the Axis Focus do well, the IDFC Focus, the Sundaram Select Focus, again because it is a new category then how should be gauge their performance?
The challenge really in case of focused category for both investors as well as for ranking agencies is the fact that the focus can be – it is not quite defined in terms of where you are going to focus. So, it could be the largecap, the top 20 stocks. It could be midcap stocks, it could be various such themes which could be covered within that.
Therefore, looking at all of them together is going to be a challenge. What we have consciously done is we have sort of ranked all of the focused funds together because clearly the theme that is running is concentration.
You are expecting the fund manager to take concentrated bets and outperform. So, using that as a theme we have sort of pooled all of them together into one consolidated category.
As of now, we see the Axis Focused 25 topping in terms of the rankings. So, it has moved up from 2 to 1 in terms of the recent ranking and performance is what is contributing that.
That is one thing that really stood out this quarter Axis Fund house has been a key consistent player throughout different categories. Any other AMC that stood out for you in this quarters rankings?
Kotak and L&T are the other two fund houses which clearly came out as good performers on the equity categories.
I will come down to the last category that is the thematic fund category the infrastructure funds. It is a sector that has really not picked up so I don’t know how the performance would have been but L&T Infra, Franklin Build India Fund, IDFC Infra, Kotak Infrastructure Fund, DSP Blackrock India T.I.G.E.R Fund. infrastructure is a category is still I think waiting for the light of day. Your view on thematic funds?
From an investors perspective again it is concentration which is the theme so whether it be that 25 stocks that we spoke about in the previous focus category or for that matter a particular theme or sector that you would really want to bet on. The risk is, of course, if the sector doesn’t perform, you actually run a significant risk of losing more than what you would have done in diversified category.
The challenge in infrastructure again is the sheer categorisation of infrastructure. Historically, we have seen people looking at even financials services, banking sectors, so there are those challenges which are there.
As you rightly mentioned this a category which has really gone through very difficult times because of the simple reason that the sector itself was sort of going through a bad time. As of now, of course, the L&T Fund is doing well in this category.
Coming down to final thoughts. One question I have in mind is that what does analysis show as far as the high rankers are concerned? So, the Crisil high rankers do these funds tend to maintain, if you have done any studies do they tend to maintain their rankings, maintain their returns in the future as well?
We have actually done some analysis to really see what is the sort of consistency, persistency in terms of rankings and we see very little churn that happens between one and three.Meaning that you will have funds which move from one to two and then from two to one. But the likelihood of funds slipping down really fast which is what you don’t really like in a ranking is significantly low and that is sort of validated by back-testing as well.