Articles

Year 2014 has been a year of revival India’s equity mutual fund investors. Most of them are back in the black after witnessing wealth erosion for nearly three years. A typical mutual fund (equity) investor has seen 61 per cent (median) rise in the value of her investment in last one year, higher than any other asset class. And the momentum continues with net assets values (NAVs) up 12 per cent in the last three months. It has boosted funds’ long-term performance.

As many as 173 out of 202 schemes in our universe have given 15 per cent annualized returns in the last three-years. The analysis is based on all open-ended equity schemes with a five-year performance record. Data was sourced from Value Research Online. The secular trend in the industry is positive but there is a great variation in performance across various market capitalization categories. The biggest gains went to investors who stuck to "riskier" mid- and small-cap funds. They have nearly doubled their capital (92 per cent) in the last 12-months, nearly twice the returns bagged by investors in large-cap funds (50.2 per cent). Other classes of diversified equity schemes are in the middle. Trends in the last three months suggest that the momentum favor mid and small-cap funds. It shows in Business Standard listing of India’s top 20 equity mutual funds. Four out of the top 10 schemes exclusively invest in mid- and small-cap stocks. It includes the top rated Franklin India Smaller Companies Fund.

The only exception to this has been pharma, technology funds and those with high exposure to auto stocks. Two pharma funds feature in our top 20 list and many diversified mid-cap funds also gained from exposure to mid-cap pharma stocks. The one-way movement in mid- and small-cap stocks is now prompting many fund managers to raise allocation to large-cap stocks (stocks that are either part of Nifty or Sensex).

"Many mid-caps are now more expensive than their large-cap peers. It has tilted the reward ratio in favor of the latter at least in the short to medium term," says Anoop Bhaskar, Head, Equities at UTI Mutual Fund. Two of his funds are among the top 15 including UTI Transportation, among top performer in the last one year. The fund house has increased its large cap allocation to 80 per cent from 60 per cent planned initially in the newly launched UTI Focused Equity Fund Series-1, a close ended equity scheme. It’s time retail investors do the same given the favorable risk-reward ratio in favor of large-caps and market volatility.

METHODOLOGY

The funds were selected in a three-stage process. We started with two-thirds of all open-ended equity schemes by size. This means dropping all schemes with AUMs of Rs 50 crore or less at the end of August 31, 2014. Then we eliminated funds whose performance record was not available for the last five years. This gave a universe of 202 equity schemes. In the first stage, all schemes were ranked according to their performance in the last three months, one year, three years and five years. Then we calculated the best performing scheme giving highest weightage (40 per cent) to their 5-year performance and 20 per cent weightage each to their short term performance. In the second stage, we picked funds that offer the best risk reward ratio by ranking them on stats ratio – Sharpe ratio (30 per cent weightage), Sortino Ratio (40 per cent) and 15 per cent each to beta and alpha. Finally the funds were ranked by assigning 30 per cent weightage each to their churn ratio and performance and 40 per cent to their rank on risk-reward parameter