Quarterly review – Changes to Prime Funds, Prime ETFs & Prime Portfolios

Prime Funds is our list of recommendations in equity, debt, and hybrid mutual funds that are worth investing in. Prime Funds narrows down your choices from the thousands of funds that there are into a concise list of funds that span different styles. Prime Funds are selected based on performance, portfolios, and investment strategies. 

In this review, we have made a few changes in equity Prime Funds and hybrid Prime Funds. Please go through the report in detail to know the changes and the rationale.

Equity

The past quarter was characterised by weekly swings in markets, driven by continued tariff overhangs, a demand boost through GST cuts, a tame earnings season, runaway gold prices, and a booming IPO market. The result was that over the past 3 months, the Nifty 50 has remained flat, with the Nifty Midcap 150 not much different. The smallcap market segment, though, has returned to being worse off than the rest of the market with a fall in the past quarter.

Our Prime Funds have held up well in the turbulent markets that we’ve seen so far this year. The focus on consistency and downside containment, and not just chart-busting returns, have served well. Therefore, we are not making any changes in the primary Moderate & Aggressive Prime Funds sets. We have only made changes in thematic funds. 

Equity – Moderate risk – Passive

In this Prime Funds set, we have not made any changes. But we’d like to highlight Nippon India Nifty 50 Value 20, which has seen a sharp drop in its relative performance compared to the Nifty 50. In the past few months, this index returns have dropped below the parent Nifty 50. 

The Nifty 50 Value 20 index is heavy on IT and banking. The sell-off in the IT stocks especially in the largecap basket following growth concerns in US markets and the impact of new H1B visa rules in the US hurt. The banking sector has also been flat in the past couple of months after a rally earlier in the year. The two sectors contribute about 60% of the index weight (with Infosys and TCS together accounting for close to 20%), which has therefore weighed on returns. 

However, we are still retaining the Nippon Nifty 50 Value 20 index fund in Prime Funds. One, the index also has higher weights than the Nifty 50 to sectors such as auto and FMCG, which can see an uptick following the boost in consumer spending post GST cuts. Two, we’re also positive on the finance sector which can also help drive returns. This apart, value as a strategy – even in active funds – has generally underperformed in the past few months. We will watch this index for performance improvement in the coming months and take a call if any action is required.

Equity – Strategy/thematic

We have made the following changes in this set.

The first is Invesco India PSU Equity which we have added to our thematic list. The BSE PSU index has corrected over the past year following a strong 2023-24 rally, creating opportunities in previously overvalued sub-segments like defence, power, and oil PSUs that still show earnings momentum.

While the earnings growth has narrowed in certain other segments, the theme broadly remains compelling with high RoE, attractive dividend yields, and government policy support through infrastructure and railway capex that should strengthen order books. Trading at attractive valuations relative to the Sensex, potential disinvestment could provide further upside.

Invesco India PSU Equity is well-positioned with its stock holdings showing good earnings momentum—its exposure to defence, energy, and select financials has helped it outperform peers over the past 6 months. With compelling portfolio valuations, this fund suits small tactical bets but cannot be a core holding given the segment’s inherent volatility and cyclicality. We may issue active profit-booking calls and revise our recommendation if performance deteriorates. Treat this as a tactical play, not a long-term allocation.

The second fund we are adding is HDFC Transportation & Logistics Fund, aligning with evolving opportunities in India’s auto and mobility ecosystem. After a powerful rally from 2022 to mid-2024, the Nifty Auto index has gone through a year of consolidation. This pause, however, masks significant structural shifts already underway. Consumers are increasingly opting for premium features, boosting the content per vehicle and opening new growth levers for the auto component industry. At the same time, electric vehicles have moved beyond the trial phase — the domestic scale and supply chain depth emerging in India are creating a potential cost advantage that can position Indian EV manufacturing as a global contender.

Near-term tailwinds include the prospect of GST rate cuts for certain vehicle categories, festive season demand, and a normal monsoon that should support rural sales of tractors and two-wheelers. Together, these drivers point to a healthy demand cycle across sub-segments.

HDFC Transportation & Logistics offers a balanced exposure — blending auto OEMs and auto component makers across market caps, alongside select consumer discretionary and cyclical plays that can complement each other across market phases. The fund is well-positioned to capture both the secular transformation in mobility and the cyclical upswings in vehicle sales. This is a high-risk fund and we will give a book profit or exit call at the appropriate time. It is suitable for those with risk appetite and looking to play sector upswings. 

Entry: For both Invesco PSU Equity and HDFC Transportation & Logistics, you can invest through lumpsums in a phased manner. Keep exposure limited and await any alert for action on the funds if the theme has played out.

We have also removed two funds from this set. The first one we are removing is HDFC Technology. This is simply to stick to one fund in our list – Franklin India Technology. Our detailed coverage on the sector is given here. 

Action to take: If you already hold HDFC Technology and are willing to navigate the near to medium term in the sector you can continue to hold it. Else, you can switch to either of the above new themes added. Franklin India Technology has some exposure to US tech as well thus offering more diversity. It continues in our buy list despite the near-term uncertainty in the sector. 

Next, we are removing Nippon India Consumption from the Prime Funds list. This is not because we do not see potential in consumption as a theme. The theme still holds strong from a long-term perspective. However, with consumer themed funds, consistency in performance has been dwindling over the past several quarters. Consumption as a theme covers a very wide range of sectors and stocks, and not all of them do well together. Therefore, depending on where funds invest, different funds come up above average at each point.

This variation in performance has been getting much more pronounced now than earlier, rendering it difficult to pinpoint the fund that is best suited to play the consumption theme. This also means that the theme is not being effectively captured. Nippon Consumption, earlier, was among the most consistent in delivering above average returns; this has now dwindled to about 65% of the time on a rolling 1-year basis. The average consistency for thematic consumption funds is less than 50%. Consumer thematic funds are also not able to definitively beat the Nifty India Consumption index. 

Therefore, we think the better route to play the consumption theme is to invest in individual stocks. Prime Stocks has several recommendations from the consumption theme that will help you take more focused bets on consumption.

Action to take: if you are a moderate risk taking investor, HOLD all investments made so far in the fund, since Nippon Consumption remains among the better performers within the consumer theme basket. If you invest in stocks, then you can consider exiting (if you have held the fund for over a year) and look for consumption theme in Prime Stocks. 

Hybrid Equity – Moderate risk

We are adding Nippon India Multi Asset Allocation Fund to our recommendations given the current market volatility. This consistent category performer delivers returns through a diversified portfolio of domestic equities, international World ETFs, and measured commodity exposure—avoiding the aggressive commodity allocations seen in some peer funds.

The fund has outperformed peers through tactical higher equity positioning and employs derivatives and commodity futures for arbitrage opportunities. Its performance compares favourably even against the hybrid aggressive category. The fund is suitable for moderate to high-risk investors with a minimum 3-year investment horizon seeking hybrid exposure. The other fund in our list from ICICI Pru typically has higher exposure to commodities than the Nippon fund. 

Multi-asset funds are not designed as an all-in-one asset allocation solution. Instead, they work best as a medium-term allocation to cushion downside risk while delivering equity-like returns with favourable tax treatment.

Debt

We have not made any changes to our debt funds. However, we have been having many queries on how to position your debt portfolio at this point. We have detailed in our report titled: Why Central Bank Rate Cuts Aren’t Boosting Markets Anymore on what to expect and where to invest in. 

We would particularly like to highlight this paragraph: “The global bond scare is causing bond yields to turn more volatile. This makes bets on long duration (5 year plus gilts and bonds) riskier than before. Only investors with a 5-year plus horizon can own long duration bonds today. If you own long-dated bonds or funds which play on them but have a shorter horizon, you need to exit. Switch to high-quality bonds with shorter duration or funds which hold them. You can check Prime Funds for our recommendations”. 

This DOES NOT mean you need to switch from gilt. We also continue to have gilts as part of Prime Funds. We merely wish to sensitise you to the fact that gilts will be volatile and generate little to no returns in the medium term. Any long term allocation to them can continue. 

Prime ETFs

We have not made any changes to Prime ETF recommendations in this quarter’s review.

Prime Portfolios

We have not made any changes to any Prime Portfolio in this quarter’s review. You can continue investing through SIPs/lumpsum as you were before and there is no action that you will need to take.

You can view the full list of Prime Funds here

You can view the full list of Prime ETFs here

You can view the full list of Prime Portfolios here

Disclosures & Disclaimers