Quarterly Review: Prime Portfolios performance review & quarter changes

Prime Portfolios are a set of 19 unique portfolios that meet over 30 different investor timeframes and needs. Prime Portfolios are listed under Ready-to-use-portfolios in the Recommendations dropdown. These portfolios primarily use mutual funds, but where there are better-suited products such as deposits or government schemes, the portfolios include those as well.

We review these portfolios every quarter and make changes to remove underperformers or to include any new investment opportunity or product that may come by. At the end of each year, we review the performance of key portfolios, in addition to discussing the changes we make.

If you are new to PrimeInvestor, do go through the boxed section below on how we construct Prime Portfolios and how you can use it. Else, use the Table of Contents to skip to the portfolio you are interested in.

Performance of Prime Portfolios

In this performance review, we cover the performance of five most popular portfolios with equity exposure. We are not reviewing the other portfolios as they represent goals such as emergency, income generation, capital protection or passive where benchmarked performance is not really applicable. These portfolios also contain products such as government schemes and fixed deposits, where there is no index really to benchmark.

For the portfolios in this performance review, please note the following:

• Returns are SIP returns (XIRR) since January 1, 2020 which is the inception of these portfolios. Your own returns will vary based on when you entered and your investment pattern. 
• The performance considers both current funds and funds in the earlier part of the portfolio where we have recommended stop in SIPs (and suggested a hold) in the quarterly reviews. It also considers exits and reinvestments where we have made such recommendations.
• The performance is weighted based on the proportion of allocation to each fund.
• The benchmark used is a blended benchmark. We use representative indices for each of the funds in the portfolio and use the same weights to arrive at the benchmark returns. 

The idea behind this year-end review is to provide you with a track record of performance of the portfolios. The table below summarizes the performance of different portfolios.

3-5 year portfolio performance

This is a portfolio with a 50% allocation each to equity and debt. This portfolio has delivered returns about 1 percentage point more than the blended index. But this performance is still a reasonable one: for one, debt indices are idealistic and largely theoretical, and debt funds can’t replicate these.

For another, part of the equity representation comes from a passive fund which doesn't seek to beat indices. In terms of returns overall, the portfolio has delivered. The funds individually also continue to beat their peers on a consistent basis.

5-7 year portfolio performance

This is a portfolio with a 65-35% allocation equity and debt. This is one portfolio where we have made the maximum changes as funds we picked for the portfolio faltered. The portfolio has lagged its blended benchmark by 3.2 percentage points. Our course-correction, however, is starting to bear fruit and the margin of underperformance over the past few quarters has been slowly but surely shrinking. The following have helped:

• Exit calls in the primary return drags of DSP Midcap and Invesco India Growth Opportunities, which helped curtail opportunity loss in staying with underperformers.
• Reinvestment calls on the above exits were in funds that have done well - Motilal Oswal Nifty Midcap 150 index fund and Kotak Emerging Equity. 
• The only current portfolio underperformer of Kotak Flexicap has significantly improved performance too as its value focus helped and which can continue to shore up recovery. We had stopped SIPs in the fund in the March 2022 quarter review, but asked for investments made to be held. Portfolios built after April 2022 will not have this fund.
• We replaced Kotak Flexicap with a Nifty 50 index fund; with the Nifty 50 outperforming other indices, it has helped overall portfolio returns. Also pairs well with the other value fund in the portfolio.

The current funds in the portfolio have been good performers, beating their benchmarks or category average consistently. Continued recovery by Kotak Flexicap and the waning effect of the underperformance of the other replaced funds can gradually push this portfolio ahead of benchmark.

Greater than 7 year portfolio performance

This portfolio’s performance has been steady and the absolute returns have comfortably delivered well above inflation with an IRR return of 17%. Still, the fund’s performance in relation to its risk profile could have been better but for 2 issues: one, in  debt underperformance from the long duration gilt impacted returns. Two, in equity, the top performer Parag Parikh Flexicap has delivered just on par with index, with performance slipping owing to US holdings. US markets took a severe hit last year. 

We are not worried about this. We are, however, keeping a close watch on Mirae Asset Largecap, a solid fund but which has also been under pressure (as most large caps are) to beat the  benchmark. Otherwise, we  remain sanguine about the portfolio’s ability to deliver over the long term.

High Growth portfolio performance

With close to 18% IRR, our high-growth portfolio managed to deliver, despite the severe hit it took from the US-based Nasdaq 100 fund (the US market was hit hard in 2022). But the contra fund and smallcap fund sufficiently made up for the underperformance in the US passive fund. The portfolio’s outperformance over the  blended index in fact expanded to 4.5 percentage points, from 3.5 percentage points in the September quarter.

NRI portfolio performance

This portfolio blends equity funds and uses NRE fixed deposits for the debt holding as they are better fits, in terms of taxation, than debt funds for NRIs. This portfolio marginally beats its blended benchmark. The margin of outperformance in this portfolio has slightly narrowed over the year before, owing to the drop in returns of Parag Parikh Flexicap – given the fund’s strategy and portfolio, we’re not concerned at this point. For the portfolio, Parag Parikh remains a benchmark beating performer. We are, however, making one fund change in this quarter’s review to introduce a higher-returning option. The same is given in the section below.

Changes in Prime Portfolios this quarter

In this quarter, we have made changes to 4 portfolios. These involve both fund changes and weight changes.

1-3 year portfolio

This is a predominantly debt portfolio with some allocation to low-risk hybrid funds for tax efficiency. In this review, we are making the following change:

• Remove DSP Dynamic Asset Allocation Fund
• Add Kotak Equity Savings Fund

Reasoning: While the DSP fund holds strong to its conservative strategy, returns have now dropped on par with arbitrage funds. To improve this portfolio’s return potential, we are replacing the fund with an equity savings fund that is more aggressive.

Action required: Hold all investments made so far in DSP Dynamic Asset Allocation and do not exit. If you have any SIPs, you can stop and start the same in Kotak Equity Savings. If, however, your goal is less than a few months away, you can continue SIP with the DSP fund as the time is not enough to drive a significant increase in return.

Income & Growth portfolio

This portfolio uses a mix of deposits, debt funds, and large-cap funds to provide an income stream along with some capital appreciation. In this review, we are making a fund change and a weight change. This marks the first change in the portfolio since June 2020. The changes are as follows:

• Remove Mirae Asset Large Cap fund
• Increase weight in UTI Nifty 50 Index fund from 10% to 30% to absorb the removal of the Mirae fund
• Increased the number of FD options you can go for

Reasoning: Large-cap funds in general are slipping in consistency of outperformance over the Nifty 100 index. While Mirae Asset Large Cap is a stable performer, this fund too has been showing some struggle and the margin of outperformance has narrowed significantly. The primary purpose of this portfolio is to generate income and it calls for overall lower risk as well. Given this, a constant watch on this active fund and the possible risk of underperformance in the already limited equity allocation, is not necessary in our view. 

Therefore, we are simply sticking to the Nifty 50 index fund that is already part of the portfolio. We have reallocated the weight of Mirae Asset Large Cap to UTI Nifty 50 Index fund. 

In the deposit recommendations, our recommendation was that you go for 12-24 month deposits from Prime Funds as interest rates were set to rise. With rates across deposits now up, you can go for longer-term 3-year deposits too, if you have any surplus to invest. Please do not break your existing FDs – this is just if you have any additional money to invest.

Action required: Hold all investments made so far in Mirae Asset Large Cap and do not exit. If you have any SIPs, stop and start the same in UTI Nifty 50 Index fund. You don’t need to make any weight adjustments in investments already done.

NRI active portfolio

This portfolio uses NRE deposits and a mix of diversified and some passive funds meant for the long term. We are making a fund change to this portfolio. 

• Removing UTI Nifty Next 50 fund 
• Replacing the fund above with a more broad based index fund Motilal Oswal Nifty 500. 

Reasoning: The Next 50 index fund was meant to provide some aggression to the portfolio. However, this index has been struggling to beat the broad market as it is underweight financial services compared with broad market indices. With banks continuing to hold prospects to outperform, we wanted to participate in the banking and also more broad based mid and small cap recovery (these 2 segments took a beating in 2022) with the Nifty 500 index. This addition may cause the portfolio risk to marginally go up but this should be normalised in the long run.

Action required: Continue to hold investments made in the UTI Nifty Next 50 index fund. Stop SIPs, if any. Start fresh SIPs in the Motilal Oswal Nifty 500. For those of you not running SIPs, simply continue to hold. You can add the Nifty 500 index fund when any fresh exposure is considered.

Passive funds - ETFs

This portfolio is a fully passive one and seeks to provide a diversified portfolio across market caps using only passive ETFs. It is meant for long-term holding. We had made some weight tweaks last quarter. In this review, we are exiting an ETF and adjusting weights in other ETFs, as follows: 

• Removed ICICI Prudential Nifty 100 Low Volatility 30 ETF 
• Reduced weight in the Nifty Next 50 ETF given its underperformance over the large-cap space
• Increased weight to the Nifty Midcap 150 and the Nifty 50

Reasoning: We initially added the Nifty Low Vol index to both deliver long-term returns and protect downsides with its low-vol strategy. The Nifty 100 Low Vol 30 has served the purpose of containing downsides; its monthly downside capture ratio holds up well. However, the index has been returning far lower than the Nifty 100 (a limitation in factor-based indices is that historical levels that are calculated and provided prior to the index’s actual launch are often theoretical to fit the factors chosen. Real-time performance can differ). 

On a rolling 1-year basis, the return differential between the Nifty 100 and the Nifty Low Vol 30 has gone up to even 10 percentage points at times in the past 2 years. The stark differential has impacted the longer-term returns as well, with the two indices very similar in returns. In the absence of healthy returns, there is limited purpose that the Low Vol index may serve. As these passive fund strategies are new to our market, we are also gaining experience about its performance only with time. 

As far as the Next 50 index fund goes, it was meant to provide some aggression to the portfolio. However, this index has been struggling to beat the broad market as it was underweight financials. We also wanted to participate in the more broad based mid and small cap recovery (these 2 segments took a beating in 2022). Therefore, we upped the weight to both the Nifty Midcap 150 index and the Nifty 50 index to play a broad-market recovery, maintain the large-cap weight, and improve performance.

Action required: Continue to hold investments made so far in the ICICI Pru Nifty 100 Low Vol 30 ETF. It can retain its purpose of protecting downsides. Stop SIPs, if any. Continue to hold all investments made in the Nippon India Nifty Next 50 Junior BeES. However, reduce allocation if you are running SIPs to match the new weight. 

Similarly, adjust SIP weights in the other ETFs as well, to match the new weights. Do not adjust investments already made in any of the ETFs or redeem. You only need to change SIP amounts. For lumpsum investments too, use the new portfolio weights. This is summarised in the table below.