We are living in strange times. No, I am not talking of Covid-19. Your one-year returns of equity funds (across categories), at an average 31% between January to March 22, 2021, zoomed to an average 69% since March 23, 2021. In other words, 1-year returns suddenly doubled from March 23, 2021. If you recall, March 23 2020 was a market low. So, 1-year returns from March 23, 2021, have started looking abnormally high.
This has caused an aberration in the return charts of mutual funds. Funds that languished in the third and fourth quartile of performance charts are competing at the top now. Though this ‘high return effect’ is tapering off slowly, it can still send you wrong signals. You will have funds that tempt you to invest, with their sky-rocketing 1-year returns pushing even their 3-year returns.
More importantly, this phenomenon is also showing some of the otherwise steady performers in bad light, possibly pushing you to exit them. Decisions made at this juncture can therefore go wrong.
This does not mean you should not participate in the kind of rally that we are witnessing. The current rally is driving some of the bottom-rung stocks up. That means there are individual stocks that are moving up steeply, not necessarily buttressed by any sector trend. In such cases, it is best that you pick individual stocks to play such momentum. In other words, stick to MFs for the long term and use such stocks as you may ‘discover’ for any tactical plays, if you really wish to.
In debt, the period of low return continues to linger, frustrating many into high-risk products such as covered bonds or risky NCDs that we wrote about recently. We are trying to balance your need to have higher returns without excessive risks. More about it later. We just set the context for what to expect from us in this quarter’s review of our funds 😊 Needless to say, we are not going by the current fancied funds because they still fare poorly when we run our internal research methodology.
About Prime Funds
Prime Funds is our list of best mutual funds across equity, debt, and hybrid categories. We use Prime Ratings, our fund ratings, as a first filter and then use qualitative analysis to design our fund recommendations. Prime Funds is an enduring list of funds that you can use, and you will find a fund that meets any goal you’re looking to meet.
If you are new to PrimeInvestor, you need to know the following about Prime Funds:
Different categories: Prime Funds are separated into buckets, based on risk level in equity & hybrid funds, and timeframe in debt funds. Each of these draws from different SEBI-defined categories. We do not go only by Prime Ratings but look at other factors as well. Our reasoning for this is explained here.
Different styles: In Prime Funds, we’ve aimed at providing funds that follow different strategies for you to mix styles and diversify your portfolio with ease. The ‘Why this fund’ for each Prime Fund will brief its strategy, why we picked it, and how to use it in your portfolio.
Direct plans: We have specifically given the direct plans in Prime Funds. We have observed that even in top-quality funds, the regular plan’s expense ratio can be significantly higher than the direct plan. In such cases, the direct would be the better option to go for. Check our MF Review Tool (and not just our ratings page) to know if you can go for the regular plan as well. Our reasoning is explained here.
Review: Our aim in reviewing the Prime Funds list every quarter is to ensure that we don’t miss any good opportunities that are coming up and we are not holding on to funds that are slipping. When we remove funds from the Prime Funds list, we tell you exactly what to do if you have invested in these funds. Funds we remove do not immediately call for a sell – it is just that they have slipped in performance marginally or there are better alternatives now. Unless our review tool says such funds are a ‘sell’, you can hold them (refer to our article on when to sell funds.)
Using Prime Funds: You do not need to hold every Prime Fund nor add any new fund we introduce to the list. Unless it fits your overall portfolio/strategy, or there is something lacking, there is little need for you to go on adding funds. Our idea of covering them in detail through some of our weekly calls is to let you know the strategy, style, and suitability in different portfolios. It is not a specific call to buy right away, unless we mention it is.
Equity funds
As mentioned earlier, the current wild market upswing has not pushed us into making significant changes to our equity fund list. Yes, there has been underperformance in some of our recommended funds. But we prefer to watch, given the market conditions, and not act in haste. The reasons for the underperformance can broadly be classified as follows:
- A strategy/style is underperforming in the current market and impacting schemes across an AMC.
- The funds did not fall steeply in the market hit of March 2020 and therefore do not have a low base to show high returns now.
- Many of the mid and small-cap stocks that have zoomed in recent months are part of the mid or small cap index, but are little held by mid and small-cap funds. This has therefore caused significant underperformance in the funds.
Let us look at some of the Prime Funds that we are watching for underperformance and their reason for lagging their benchmarks.
Equity funds – divergence from index
Equity – Moderate: Kotak Flexicap’s performance has lagged the Nifty 500 TRI from about August last year. The fund has marginally underperformed the index before. This time, though, the gap between the fund and the index has been higher. This lag can be explained by the nature of the market movement in this rally as well as stock choices that the fund made. Top stocks in the fund’s portfolio, though quality names, have not been among those that soared high.
So, while Kotak Flexicap did benefit from the high returns clocked by the likes of State Bank of India, Infosys, or ICICI Bank, it was also weighed down by sedate returns of HDFC Bank, Hindustan Unilever, Petronet LNG, L&T, and TCS. The fund has begun to narrow the gap by which it trails the Nifty 500 TRI. We’re watching the fund for continued improvement in performance before taking a call on the same.
Funds from Axis AMC, such as Axis Bluechip (and other funds not in our list) have seen slower performance as their growth-focused strategy has underperformed. A similar story panned out in Mirae Asset Large Cap as well. At this juncture, we are not too worried about these downswings.
Equity – Aggressive: In the mid and small cap space, there is a significant divergence between funds and their indices, with the former undershooting indices by a mile. Such underperformance is in the range of 10-25 percentage points (on the 1-year return) since March end. Funds such as DSP Midcap, Axis Small Cap and even the top returning SBI Small cap have underperformed. This kind of divergence (underperformance) from the index is best ignored at this stage as the nature of stocks that have rallied in the mid and small cap space are not the ones that would enter the filters of mid and small-cap funds, either due to liquidity, quality, or governance issues.
Equity funds – additions
We have made minimal additions to our recommended funds list, for the reasons mentioned above. The funds we’ve introduced are as follows.
Equity – Passive funds
We have not added new funds in the moderate or aggressive space. We have instead added one index fund – HDFC Index Fund – Sensex Plan to our ‘Equity – Passive funds’ list. This is more an effort to complete the passive large-cap space. Some of you have asked us why Sensex funds are not available and whether Nifty outperforms Sensex or vice versa. We’ve included the index now.
As far as the second question goes, the truth is this – past data shows that it does not matter one way or the other if your holding is five years or more. The Nifty has beaten the Sensex by an average 0.15 percentage points if you take 5-year rolling returns for the past 15 years. However, if you take the last 8 years, the same 5-year returns of Nifty underperformed the Sensex by 0.3%.
Hence, to keep it simple, we had stuck to one index, the Nifty 50. However, for those who like the compact portfolio (30 instead of 50) and therefore higher weight to individual stocks in the Sensex, we are providing an option that has low tracking error and reasonable expense ratio. We are neutral to whichever index you opt for. You can go for either.
Strategy/thematic funds
We note that our addition of a commodities fund worked well. Now, we are adding one more cyclical sector – infrastructure – through Invesco India Infrastructure. Currently, IDFC Infrastructure is an outperformer in this space. However, we have chosen Invesco India Infrastructure for two reasons.
One, while the IDFC fund has outperformed due to its overweight position in construction and allied activities, we prefer the diversified exposure in Invesco as its portfolio is more spread out over construction as well as engineering and capital goods. It does not hold banking & finance. We prefer this diversification at this stage to capitalize on capex stories outside infra and prefer an infra fund without banking, given that it is available in all other fund categories.
Two, the Invesco fund has been a highly consistent performer beating the infrastructure category average 85% of the times when 1-year returns were rolled daily for the past 3 years. This is significantly higher than the just 14% outperformance proportion of peers by IDFC Infrastructure. If you decide to go with the Invesco fund, keep exposure limited to under 5%. You can invest in lumpsum and use market dips to accumulate. Otherwise use short SIPs of 6-9 months.
Debt funds
In the debt funds space, neither have funds managed great accrual returns nor has any duration played out constructively. Even as the rising inflation has put pressure on yields, RBI operations to keep rates under check have resulted in a lesser-than-expected pace in yield rise. To this extent, your ultra-short or short or corporate bond funds have not seen a sharp climb in their yield to maturity (YTM) resulting in returns languishing.
Debt funds - additions
We have introduced a couple of funds to improve your return prospects. We have not removed any fund.
Debt – Medium term 3-5 years
We introduce ICICI Pru Corporate Bond fund – a consistent fund at par in performance with ABSL Corporate Bond and Kotak Corporate Bond. This fund too can go between 1-4 years in average maturity and will hold top quality bonds as required by SEBI for this category. While we already have 3 funds in this space, we introduced this one primarily because its average maturity is marginally higher than the other 2 mentioned above and closer to HDFC Corporate Bond fund but with less volatility.
With this addition, we would have corporate bond funds across the maturity curve. If you were to hold more than 1 corporate bond fund, you could use a combination of ABSL Corporate Bond or Kotak Corporate Bond (for lower duration) along with HDFC Corporate Bond or ICICI Pru Corporate Bond.
Debt – Long term – above 5 years
For the first time since our platform launch, when the credit environment was not conducive, we are now cautiously approaching the credit space for those who seek additional returns. Here again, our aim is to keep risk at bay, even if this is a credit risk space.
Here, the contenders were ICICI Pru Credit Risk and HDFC Credit Risk. Between these two, we preferred ICICI Pru Credit Risk for 2 reasons: one, its YTM is higher without significantly higher credit exposure, providing better prospects. Two, its worst returns (over 1-year periods for the last 4 years) were 5.86% as opposed to 3.9% for the HDFC Fund suggesting better downside risk management. ICICI Credit’s risk-adjusted return is also superior, hinting at lower volatility.
Please note that this is not a fund for those who are looking for FD substitutes or for low-risk debt investments. This is a high-risk fund and any of the credit issues of 2018-20 can play out in this fund as well. Hence, having a very long-term horizon and ability to take hits is an absolute must. Use it only to buttress returns from the debt component of your portfolio, to tide over low-return times such as the case currently. Exposure should be curtailed to under 10% of your portfolio. Else, please stick to our corporate bond recommendations. (Kindly don’t read too much into the choice of 2 funds from the same fund house. It is merely coincidental 😊)
28 thoughts on “Quarterly review – changes in Prime Funds, our mutual fund recommendations”
Dear Vidya
Motilal Oswal Nifty Midcap 150 index fund is a prime recommended fund under passive strategy. The fund has underperformed its index by 5% for one year. Isn’t the underperformance significant for an index fund? The TER is reasonable at 0.2%.
Why does PI still retain it as a recommended fund? Is it for want of competition in index funds? Where and how did they attain the underperformance (impact cost?)?
The differential is not 5%. On a 1 year return basis, the maximum the differential has been against the Nifty Midcap 150 TRI is 3.2%. The differential has since narrowed and is now 2.3%. On a daily basis, there were a series of days earlier this year where the fund lagged the index by a margin of 0.06 to 0.13%, that could have led to the return lag. While we cannot pinpoint the exact reason, it is inevitable that in the mid-cap space where there will be liquidity issues, there may be an impact on performance sometimes. – thanks, Bhavana
Dear Bhavana, thanks for your inputs. As per VRO, the one year trailing return of the direct scheme is 59.34%. Whereas, the return from S&P BSE 150 Midcap TRI is 64.43%. That is a 5% underperformance.
An index fund’s performance can be compared only to the index it’s meant to track. The BSE Midcap 150 and Nifty Midcap 150 are not the same index. They are constructed differently. There’s no fund tracking the BSE Midcap index. This apart, it’s best not to be influenced only by current performance. The BSE Midcap 150 is a newer index, and data available starts from end-2017 only. There’s no way to know how good the index is as an investment option. – thanks, Bhavana
Thanks Bhavana, that explains. I could not get one year index returns from PrimeInvestor site under the Motilal Midcap 150 scheme particulars (shows as ‘N/A’). So I had to go to VRO which uses only S&P BSE index.
Hello Ms. Vidya \ Ms. Bhavana,
PGIM funds (mainly the flexicap, then the midcap) seem to be doing very well. Why are their AUM so small? Is it safe to add them to one’s portfolio?
Thanks,
Mohan
Hello Sir, Request you to please take a look at our Review tool of buy/hold/sell and the reasoning given there. https://primeinvestor.in/portfolio-review/ thanks Vidya
Hi,
Can you’ll also publish the risk metrics being using for fund reviews and selection? – Assuming you’ll are using sharpe, downside/upside capture etc? Will help in fund comparison.
A tool is in the works for this. thanks, Vidya
Just like you have mentioned on possible gain in infra funds , other theme that looks promising in future is EV space. Do we have fund that focuses in this theme. What is prime investors take on this theme and recommendation.
There isn’t fund, given the limited opportunities at this point. Best to play through stocks and we have. thanks, Vidya
Dear PI team
Some thing is confusing to me which needs clarification. Recently updated (July 21) gives me the list of several funds, I will take Large & Midcap for example, rated 4* and above which gave me 5 funds. When I want to invest in this category , the “prime rating” gives 4.5 for both Edelweiss and Invesco funds. However, when I went to fund review tool, they both are under HOLD, meaning fresh purchase is not recommended. Same goes for Kotak Opps & Tata as well which are 4* rated. So what is the use of best rating but if we the recommendation is HOLD? This is a point to be clarified and perhaps you might even consider adding a “current recommendation” column in the prime list which will save a lot of time.
Not sure what you mean by ‘current recommendation’…in the ratings page, if you’re logged in, you will see the call we have given on a fund in the last column called Buy/Sell/Hold. The scheme details page also has the recommendation. The reason behind the call will be available in the MF Review Tool.
As far as ratings goes – you should use it to see where your fund’s performance stands compared to its peers. You will know whether it has been performing well or whether it is delivering lower than it ideally should be for you. It’s also a starting point for picking funds to invest in, but it cannot be the sole metric. There are a number of aspects that ratings do not cover. We have explained it in This article: https://primeinvestor.in/mutual-fund-ratings-not-a-recommendation-to-buy/ Hope this clarifies. – thanks, Bhavana
Thanks for clarification.
I am taking about the PDF download page where only rating is available. If I had to only go with the ratings, I would straight away go to with the “top rated” funds. Th question I was referring to is: A fund top-rated in the PDF file named “Top-funds-July-21” is not a straight forward buy, but we have to go inside the tools page and check if it suits for investment as on date. Then it may not be 5* rated it could well be 3* rated in the rated funds list. Hope I made my query clear. “Current recommendation” is a suggestion to be added to downloadable funds list which is revised quarterly basis.
Understood the point, thank you. The Top Funds PDF was originally meant for trial users and we didn’t give the review call there because it is a premium feature. We’ll look at introducing a ratings Excel download feature instead of just the top ratings pdf for subscribers, so you can get comprehensive data. – regards, Bhavana
Thank you, I think thats a good idea will save a lot of time for subscribers like me.
Where can I find the complete list of prime recommend funds category wise and not as moderate and agressive equity type?
Regards.
We don’t split the recommendations based on each fund’s category because of overlaps in fund categories. We go by a fund’s suitability for a particular purpose. We therefore do not have Prime Funds recommended in every fund category, and do not build portfolios based on category. Our reasoning is explained in detail here: https://primeinvestor.in/prime-funds-our-philosophy/. If you want to know which category a Prime Fund belongs to, please click the fund name and check the scheme details page. – thanks, Bhavana.
Hi Team, Thanks for the article as always. An observation on Invesco India Infra fund..AUM is only 179 crores..Is this not very low ? Thanks
It is low, but it is not a concern. Sector/thematic funds generally tend to have lower AUMs, and Invesco is an AMC that tends to fly under the radar in most categories. – Bhavana
How do we know whether and when the Prime Funds list is updated? It just says ‘updated quarterly’ without mentioning date. Can you please add the date of review at the top?
HellO Sir, mentioning the date is not the issue but let me try and understand why it is needed. Our Prime funds is a list of funds one can ‘buy’ today. We have stated that. If there is any change, it is alerted. And even if you missed the alert, our review tool will always let you know whether a particular fund is a buy/hold or sell. Unlike stocks, funds’ entry or exit point is not relevant imho. In stocks, for eg, we clearly give the date of call and price. On the other hand, in my experience, when we mention the date, many investors tend to ask whether the all is valid now since it was given 3 months ago. Should that matter? Just trying to understand. thanks, Vidya
Hi Vidya, For e.g., today I don’t know whether what I see on your site is still last quarter update or whether I am seeing your June quarter latest update. Same situation tomorrow and day after and next week. Isn’t it? Most of the times the change is not obvious since very few recommendations change. Credit goes to S/V/B/A for maintaining consistency!
We don’t check the list only when we have to buy a fund. Every quarter, after your update, I check them against my holding and decide how my fund managers are performing 😀. So, I want to know when can I trigger that quarterly check. Keep up with the good work.
Hello Sir, got it. We will work to make it clear. Thanks again for taking time to explain. Vidya
Excellent quarterly review, the follow up of the existing recommendation is something which really adds value to the services. Really appreciate all your efforts. I was wondering if it is a bit too late in the day to invest in Invesco India Infrastructure fund??
Yes, the theme has run up a good bit. But we’ve added it because if economic growth has take root, it will show up in the infra theme. The government has also earmarked good spending on infra, and as a theme it can cover several segments. So it is a cyclical, but still somewhat longer-term play. – thanks, Bhavana
Hi, Are you recommending investing in the invesco fund at current markets as a tactical call ? Investment horizon will be ?
Missed the Tata digital fund.. is it a good time to add this fund now ?
No, it is not a very tactical call. It can have a relatively longer run if the growth and government spending story is to play out, and if markets continue to pay attention to cyclical, lower-valued plays. Please see the Why this fund on the Prime Funds page to know more. Tata Digital – yes, you can, it remains part of our recommended list. – thanks, Bhavana
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