Prime Funds performance in 2024

As another year whizzes past, we find ourselves wondering where 2024 went! While most of us are still trying to find our missing New Year’s resolutions from January, our Prime Funds have been hard at work in what can only be described as a rollercoaster of a year.

In this report, we will take a look at how our recommendations in Prime Funds fared for the calendar 2024.

What we did in 2024

In Prime Funds, changes we make are usually from a long-term perspective. However, we try to add tactical funds to make the most of a particular opportunity whether its in thematic equity funds or in debt funds. these are more from a short-term perspective and are intended to add some diversification or return booster to your portfolio.

In 2024, we have not made many or big changes to any of our Prime Funds categories. Market conditions were getting trickier to navigate both in equity and in debt. Equity markets saw mixed signals between earnings growth, index levels, IPO offtake, yo-yoing mid and smallcap space, and global cues. Debt markets dealt with the RBI holding rates steady against rate cuts in the US, which lead to market rates trending lower even without a repo cut.

Our choices, therefore, were aimed at capturing these moves in debt markets, sector-specific movement in equity markets and in aggressive equity funds, to prioritise protecting risks along with returns rather than focusing on maximising returns alone.

One action in this direction was to introduce a new category within equity funds – the Equity High-Risk Turnarounds. This was to help add funds that were picking up in returns but hand not yet established a steady outperformance, in order to catch performers early. We have also, in line with what we had mentioned in 2023, further pruned underperformers where it was clear it was getting tougher for funds to recover. 

Let’s now move on to how our recommendations fared.

Equity funds

Our equity fund recommendations have demonstrated strong performance across all categories. Our selection strategy prioritizes consistent outperformers rather than temporary chart toppers. This approach focuses on sustainable, long-term results over short-term gains.

Therefore our decision to remove funds from our recommended list happens after much deliberation. Apart from performance metrics it is also based on careful analysis of several factors:

• Severity and duration of underperformance
• Recovery potential assessment
• Portfolio composition alignment with market conditions

When comparing our recommended funds’ performance against category averages, it’s important to note that category averages often include funds with unsustainable short-term spikes in performance. These temporary outperformers can artificially inflate category averages but typically don’t maintain their performance over time. Our Prime Funds selection process filters out such volatile performers to focus on funds with more reliable, consistent returns.

Equity – Moderate

The Nifty 50 spent the first half of the year in a flattish phase, until the general elections sparked a quick, sharp rally. Global cues, an FPI sell-off, and earnings disappointments then sent markets into an abrupt decline from October onwards. However, the broader sector pick up over the past several quarters has gradually helped large-cap based funds cement their outperformance over the Nifty 100 index. 

We had earlier been wary of adding multiple pure large-cap funds into Prime Funds given that outperformance was thin; we preferred flexi-cap funds. given the stable performance and the broader sector and economic recovery, we saw more potential in the large-cap category and therefore looked to include more such funds in Prime Funds. 

In the Equity – Moderate Prime Funds set, we draw from the large-cap and flexi-cap categories, as well as a couple from value/contra and focused if the fund is steadily large-cap oriented. The performance of this Prime Funds category is as follows:

This Prime Funds set has outperformed both the benchmark Nifty 100 TRI as well as the average for the categories from which we take funds. 

• Our method of picking large-cap based funds from categories outside just pure large-cap has helped identify strong performers such as ICICI Pru Focused Equity. Invesco India Contra has also done well – this fund’s performance is in fact a showcase of our approach to waiting out bouts of underperformance where the portfolio, strategy and long-term record are sound.
• We removed Mirae Asset Largecap in our December 2023 quarter review (done in January 2024); this was a fund we had mentioned in our 2023 Prime Funds round-up as one where performance was steadily worsening and on which we wanted to take a call on pruning.
• In the Passive section of Equity Moderate (returns are not included in the above table), our addition of the Nifty 50 Value 20 was a good one as it closed with a 23% YTD return against the Nifty 100’s 18.6%. The other passive funds in our recommendation list are Nifty 50 & Sensex index funds.

Equity – Aggressive

This Prime Funds category consists of all funds that lean towards mid and smallcap allocations. 

We had shown disappointing performance of this Prime Funds category in 2023, owing to severe underperformance of two funds. The returns of the Prime Funds, then, had also been comparatively lower as we had fewer smallcap representation in a year of a runaway smallcap rally.

We had, at the time, and in our quarterly reviews stressed on two points – one, the rally in the mid and smallcap space was overheated and chasing returns alone without considering risks was avoidable. Two, the nature of the rally meant that funds with strategies rooted in stock fundamentals and quality lagged funds that were less choosy or more momentum-driven.

For these reasons, we refrained from changing much in this Prime Funds set in 2024. We simply removed the stark underperformers. We didn’t add unnecessary risk for the sake of returns and we retained funds which weren’t chart toppers but were still stable in their performance and which had strong portfolios. However, in order to introduce riskier return opportunities but still alert you to keep such risks contained in your portfolio, we introduced the High Risk – Turnaround set of Prime Funds. 

The performance of this entire Prime Funds set is as follows:

• In 2024, we removed two big underperformers PGIM Flexicap and SBI Smallcap as their relative performance showed no signs of improvement. We also took a firm stance on Quant AMC funds and remove Quant Active – and performance has since deteriorated after we pulled the fund from the list.
• Our focus on downside containment came into play in the sell-off in the past couple of months; barring a couple, all funds fell to a smaller extent than the Nifty 500 index (or their respective benchmarks). So, even though these funds weren’t the chart-toppers during the uptick eventual performance was still superior.
• Our balanced approach when it comes to underperformance of funds helped; Kotak Emerging Equity, which was lagging both peers and benchmark in 2023, recovered well by 2024. Similarly, HDFC Smallcap and Nippon Smallcap are other stable performers but which are no longer at the top of the charts.
• Our approach of using funds from different categories (other than midcap and smallcap) to add higher returns was a good move with picks such as Franklin India Opportunities and Kotak Multicap clocking handsome returns.

Equity – thematic

In this Prime Funds set, our calls on healthcare, IT and auto (logistics) played out well. Our two IT recommendations delivered a good 33-35% return, soundly trouncing the Nifty 500 TRI’s 21%. We had maintained our call on IT even during the phase where it was an underperformer, so that the full upside could be captured well.

For the same reason – of going against the tide in themes where conditions are lining up for better performance – we have continued to keep our banking recommendations even though they have undershot markets. 

We pulled out two cyclical themes in 2024 – auto and commodities – and advised you to book profits on them (when we removed them from Prime Funds) if you held them. Overall, the thematic Prime Funds recommendations returned 28.9% for 2024, a good outperformance over the Nifty 500 TRI.

Hybrid funds

Hybrid funds have come to the forefront after the change in debt taxation in 2023. Post that, we had been including more recommendations in Prime Funds. In hybrid funds, we look at the equity allocations, returns, volatility and downside containment to split it between the more conservative options (Hybrid Equity – Low Risk, suitable for short-term holdings and to partially replace debt in your portfolio) and the higher-returning funds (Hybrid Equity – Moderate Risk, suitable for longer-term holdings and a route to get more equity in a portfolio without as much risk). 

In 2024, we have not made much change in these recommendations; by and large, our fund choices have remained above average. The table below shows the performance of the Hybrid Equity – Moderate Risk performance in 2024. 

We removed Quant Absolute from this list, owing to the developments in the AMC. We also removed Canara Robeco Equity Hybrid as its performance compared to the other hybrid aggressive funds was dropping. Given the opportunity loss with continued investments, we replaced it with Kotak Equity Hybrid, which has been steadily improving performance. 

In the Hybrid Equity – Low Risk Prime Funds set, we have made no change at all in 2024; in fact, the last change we made here was to add UTI Equity Savings in June 2023. All our recommendations have steadily delivered above average.

Debt funds

Debt funds have had a much quieter year in 2024 over the year before – a changing rate cycle and tax structure both served to make 2023 a very eventful year for debt funds. However, 2024 saw a divergence between the actual action on repo rates and market interest rates; while repo rates have seen no cuts, bond yields already were moderating as we observed in our mid-year debt market review. Broadly, debt markets shaped up as we had explained in our 2024 debt market outlook, with continued concerns over inflation but with markets pre-empting RBI's rate cuts.

Therefore, our changes in debt funds for 2024 hinged on making the most of the remaining window of opportunity in bond price appreciation driven by yield moderation. We did this by adding funds that used a part of their portfolio to play such duration opportunities, across our Prime Funds categories. We also recommended following a barbell strategy of holding funds of different maturities to bring in accrual opportunities as yields were attractive while simultaneously gaining from bond price appreciation.

Debt – Very Short Term

Apart from removing Nippon Low Duration and adding Kotak Money Market in this Prime Funds set, we have made no changes. Even this fund change was primarily due to the very short-term holding period of these funds, where the Kotak fund offered marginally higher portfolio yields. Our performance in this Prime Funds set continues to remain healthy.

Debt – Short Term

This is one category where we tried to introduce tactical opportunities to capitalise on bond price appreciation. We added ICICI Pru Banking & PSU Debt Fund, initially, which used its gilt exposure effectively to play the yield decline. Owing to it increasing its maturity profile, we later moved it to the Debt – Medium Term category. In its place, we moved ICICI Pru Short Term from Debt – Medium Term into the Short Term category as its maturity profile was more suitable and which still had a similar strategy of duration calls.

• The Debt Short Term Prime Funds set also includes funds from the floating rate funds category. This debt category is a mix of funds with varying maturity profiles and accrual/duration strategies and therefore we have avoid the very aggressive ones. Our two floater funds in this Prime Funds set – HDFC Floating Rate and Nippon India Floating Rate have both delivered on par with the category average in 2024; the average is influenced by high returns from some funds. if we remove these outliers, the category average in the table above drops to 8%.
• Outside the floating rate funds, the other Prime Funds from the short duration and banking & PSU categories are all above average.

Debt – Medium Term & Debt – Long Term

In these Prime Funds sets, we pull from different categories where the average portfolio maturity is longer than 2-3 years or the strategy requires a longer holding period. 

The Debt – Long Term Prime Funds set is the second set where we added funds to capitalise on duration and the opportunity in gilts. In addition to SBI Constant Maturity that we already had in the set, we added two more pure gilt funds. We had retained the constant maturity fund through the low-return period of 2022 and much of 2023; gilts and these funds have come back sharply as gilt yields dropped, clocking returns in excess of 9% in 2024.

The other move we made in these Prime Funds sets is to go slow on credit risk funds. We observed that both yields and returns in credit risk funds were not significantly different from corporate bond or medium duration funds. Therefore, we removed HDFC Credit Risk and retained only ICICI Pru Credit Risk as the credit risk representation.

Overall, our performance in this Prime Funds set is as follows:

• The marginal underperformance over the category average is primarily due to the high gilt return that skews the average; the average return of the both corporate bond fund and credit risk fund categories, for example, is 8.2%.
• Our performance average is also slightly influenced by the lower return of ICICI Pru Corporate Bond fund, compared to the other corporate bond funds. If we remove this fund, the average moves up to 8.8%. ICICI Pru Corporate Bond is a consistent above-average performer with higher portfolio yields and we’re not worried by this shorter-term relative performance dip.
• Given our outlook on rate direction, we had additionally given tactical calls in 2023 (as well as earlier in 2022) to gain from the downward rate movement. These calls are paying off; our latest such call was on constant maturity funds in October 2023, with returns on SBI Constant Maturity and ICICI Pru Constant Maturity delivering 11.6% and 10.4% (absolute) respectively.

Overall, all our Prime Funds recommendations have by and large beaten their respective benchmarks/categories. While some may perceive our portfolio adjustments as frequent, we've only made changes when compelling evidence suggested that continuing with some of them may significantly impact returns and also result in opportunity loss.

Looking ahead, we'll maintain our disciplined approach to fund selection, adapting our strategy as market dynamics and fund performance patterns evolve. Our quarterly review process remains a cornerstone of our methodology, enabling timely identification of both opportunities and challenges.

Here's to a prosperous 2025 filled with continued success in your investment journey!