Changes to FundsIndia’s Select Funds List

FundsIndia’s Select Funds is a list of investment worthy funds. Spread across categories, this list helps you narrow down your investment choices from the hundreds of funds that you would otherwise have to sift through before investing. We review this list on a quarterly basis. There are additions to ensure that good funds are not left out. There are also deletions if we find certain fund strategies are inappropriate for the prevailing market conditions.

Before we move on to the changes this quarter, remember this – none of the funds that we have removed from our list merit an exit unless we clearly state that. Those who hold funds we have removed from the list can continue to stay invested in them. Funds we remove from our list are not bad funds. Their performance, based on several metrics such as consistency or volatility, compared to the category leaders has slipped. Given that the Select Funds list represents the investment worthy funds today, we remove such funds from the list.

The Select Funds list comprises of funds that are good today and have an edge in the present environment. Our call, for this list, is based on whether a peer fund can do a better job when fresh exposure is taken today. A fund that we remove can still be a good performer and continue to build long-term wealth. We do not prefer that you sub-optimally churn your portfolio.

This quarter, there have been some changes in both debt and equity funds. Here are all the changes, category-wise. A detailed explanation of the changes follows.

Equity funds

Though the market hit a speed bump in September, it has still clocked handsome gains since the revival in March. Mid-cap and small-cap stocks have not taken a breather in their march upwards, with one-year returns of 19% of the Nifty Freefloat Midcap 100 index, beating the Nifty 50’s 6% return. Funds that had a higher allocation here have therefore done well. However, diversified funds have begun to move out of mid-caps into large-caps, which reflect in their recent returns. Market recovery is also becoming more broad-based, allowing funds that tended towards stressed sectors such as banking, power, capital goods etc. to pick up.

In the Select Funds list, we first look for consistency in beating the benchmark and peer average, while keeping a balance on volatility. We look at this consistency in both the short-term and the long-term. Where funds faltered in short-term consistency, we gave leeway to those with a value-based strategy to allow them to catch up. This is because their value orientation would have seen them move towards cyclical sectors. Most of these funds have gained well from the broad-based market rally since March. We have taken a re-look at funds that have not. Second, we do not prefer funds that take excessive risk as they don’t fit the portfolio of a long-term investor. Therefore, funds with excessive small-cap holding and excessive volatility not matched by consistent outperformance, will not make it to our list.

Equity – Moderate risk

In this category, we have removed two funds. The first is Axis Equity. We had Axis Equity on our watch list for some time, but owing to improved performance with respect to its peers, we moved it out of the watch list in our June review. The fund has again slipped in performance over the last few months, dropping below category averages and the Nifty 100 index despite a healthy dose of mid-cap stocks and some solid consumer stocks. Its overweight position in financials did not help either, as the fund held the few stocks that did not rally as much. This repeated fall and comeback with respect to its category and its recent drop below the benchmark we use for large-cap funds (Nifty 100) has meant that we have to set this fund aside from our list and watch for improvement and consistency.

The second fund we have removed is UTI Opportunities, for long on our watch list. We gave the fund time for its attempt to turn around and its new fund manager. However, it continues to trail its category and the Nifty 100 index. For this reason, and given that we have other better choices in our list, we have removed the fund from the Select list. Investors in this fund can continue to hold it. The AMC is also getting a new equity head early next year in Vetri Subramaniam, who is currently heading Invesco India’s equity funds division. Given his advent and the fund’s own efforts, the fund may well make a comeback. We have not replaced these two funds with any others.

Equity – High-risk

In this category, we have removed Reliance Equity Opportunities. The fund has been lagging behind the broad-market Nifty 500 index and its peers by an increasing margin over the past year. The fund’s nature is to be highly volatile and is wont to underperform from time to time; we had given the fund some room for this reason. But this extended period of underperformance despite a sizeable mid-cap allocation in an up-trending market does not provide comfort. The fund’s risk-adjusted return has also dropped below the category average even as it remains more volatile than average. We have not replaced this with any other fund.

Tax-saving- Moderate risk

In this category, we have moved IDFC Tax Advantage (ELSS) to the high-risk tax-saving category. Owing to a significant amount (up to 50%) of mid-cap and small-cap stocks in the portfolio, we felt that it was a better fit in the high-risk category. The fund tempers the risk by taking significant cash calls, going beyond 10% of the portfolio at times.

We have added DSP BlackRock Tax Saver to the moderate risk category. The fund has been improving in performance over the year, both against its benchmark the Nifty 500 and its peers. The extent to which it is able to do better than the category has also been increasing. It’s also among the low-volatile funds, on par with established top-notch funds like Franklin India Tax Shield. Predominantly, the fund has a large-cap orientation, with some allocation to mid-cap stocks.

Tax Saving – High risk

Apart from IDFC Tax Advantage (ELSS) shifted here, the other change in this category is the removal of Reliance Tax Saver. Like the other Reliance fund in the Select list, this one is highly volatile and similarly, we had accorded it some leeway. The fund also tends to take contrarian calls. But in a market that is trending up, the fund has failed to match despite leaning heavily towards mid-cap stocks. The extent to which the fund has fallen short of its category average steadily widened over the past year. Rolling one-year return against the category average over the past three years shows that the fund has outperformed the average less than half the time. Its risk-adjusted returns have also gone below the average.

Hybrid debt-oriented

In this category, we have removed HDFC Multiple Yield 2005. We have replaced it with Franklin India MIP. Both funds take similar equity exposures, at a maximum of 14-15% of their portfolio. Franklin India MIP has been improving in performance over the past few quarters and is now a better fund than HDFC Multiple Yield 2005. Rolling one-year returns over the past three years, Franklin India MIP has delivered higher returns than HDFC Multiple Yield 2005 well over half the time; its average return is also higher. It is able to beat the CRISIL MIP Blended Index much more consistently as well. While HDFC Multiple Yield has a higher portfolio yield-to-maturity, Franklin India MIP has some exposure to medium and long-term government securities that can prop returns over the next year. Franklin India MIP also has a better risk-adjusted return while matching HDFC Multiple Yield 2005’s volatility. We have made the replacement for this reason.

Debt funds

Debt funds, especially in the medium to long-term category, have had a good rally in the past 6 months, mostly owing to the easing of yields, prompted by rate cuts as well as expectations of rate cuts. The double-digit returns that long-term debt funds such as dynamic bond funds sported in the last 1 year saw more investors substituting them for their low yielding FDs. Going forward, as we near the end of a rate cut rally, we may see funds reducing their duration and focussing more on medium-term maturity and accrual. While most of the funds in our list are positioned to make this transition well, we have also added a fund to bring in more accrual opportunities.

Debt 6 months –1 year

We added Tata Floater, which has been a steady performer and been coming in our filters. It’s mix of commercial papers, certificate of deposits and some quality AA papers. With an average maturity of around 300 days this fund promises to deliver, although very short-term papers such as CDs will see a dip in their coupon.

Investors, though, need to note that the past 1 year’s performance in this category may see a marginal dip.

Debt funds 1-2 years – moderate risk

We removed Invesco Medium Term Bond Fund from our fund category as it was falling short in terms of relative performance against peers in the short-term debt fund category. While the fund’s high yield to maturity suggests that its future returns might be promising, holding of high yielding commercial papers and AA-rated papers has upped this fund’s risk score within this category. We will continue to watch the fund for its performance and may derive comfort if its present strategy yields well with lower risks and also see how the fund performs if its comparable universe of funds also gets into similar accrual strategy for returns. Investors holding the fund may continue to hold it.

Debt funds – Long term – Moderate risk

We removed BNP Paribas Medium Term Income from this category. The fund remains a consistent, low risk fund. We removed this fund for two reasons: one, we made an exception in bringing this fund despite it not passing our 3-year track record filter as there were not too many funds with its low risk profile and consistent returns. However, more funds, especially from the banking and PSU space, with a less than 3-year record are now sporting a similar low risk profile and promising performance. We did not want to extend the exception and decided to watch whether this fund can compete with that new class of funds. Second, we also felt the need to focus more on slightly more aggressive accrual opportunities at this point, as AAA-instruments will deliver less henceforth with the spread narrowing significantly. It is for this reason, we did not even replace this fund with another and added a new fund in the aggressive category (see below). Investors with low risk appetite can continue to hold this consistent performer.

Debt funds – long term – high risk

With an objective of increasing exposure to accrual opportunities, we added UTI Income Opportunities. With a yield to maturity of 9.6% (August 2016) but with maturity of just over 2 years, this fund will technically be called a credit opportunity fund for the quantum of AA-rated funds it holds. Yet, its risk profile is lower than many other credit opportunity funds and comes next to SBI Corporate Bond in our internal rating. But since it has a lower credit profile and lower maturity but higher yield to maturity than the SBI fund, we preferred this. It may be noted that this fund is suitable only for those with higher risk appetite and willing to hold for not less than 3 years.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis of investment decisions. To know how to read our weekly fund reviews, please click here.