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 funds’ strategies to be 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 in this review can continue to remain invested in them. They are not bad funds; it is just that their relative performance, based on several metrics such as consistency or volatility has slipped compared to the category leaders. We do not recommend that you sub-optimally churn your portfolio.

The Select Funds list comprises 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 may still be a good performer that continues to build long-term wealth.

This quarter, there have been some changes in both debt and equity funds. Here are the changes, category-wise.

Equity Funds

While the equity market has rebounded in the past three months after a rocky start to 2016, it is mid-cap and small-cap stocks that continue to outperform the large-caps. Funds that had a higher allocation here have therefore done well. The rally from March has seen beleaguered sectors such as mining and banking picking up. Given that macro-economic indicators point to good growth, a broad-based market recovery may take place.

In the equity funds, the Select Funds represent a range of investment styles – growth, value, or a mix; and large-cap, mid-cap, or a combination. Our aim is also to bring about a balance between volatility, risk, and returns since these funds are meant for the long term. Therefore, funds with too much of a small-cap holding, while showing good returns, will not make it to our list. We have also accorded funds that follow a value-based strategy more leeway in terms of short-term underperformance.

Equity Funds –  Moderate Risk

In this category, we have removed ICICI Prudential Dynamic Plan as it has underperformed the diversified equity category for several quarters now, despite an inclusion of mid-cap stocks. The fund, whose mandate allows it to tactically shift allocation into debt, was also bogged down by a sudden swift rise in government securities. We have replaced it with Invesco India Dynamic Equity, a fund that follows a similar strategy of shifting dynamically into cash during market volatility. It can put up to 30 per cent of its portfolio in cash. The equity portion is invested in large-cap stocks, though the fund has the leeway to invest across market capitalisations. The fund has beaten both the large-cap equity category average and the Nifty 100 index almost all the time in both the short-term and the long-term. It is also the least volatile of the large-cap funds, though it delivers one of the best risk-adjusted returns.

This fund had not made it to the Select Funds list thus far because its AUM was below our cut-off of Rs 100 crore. But with the faltering performance of ICICI Prudential Dynamic Plan, Invesco India Dynamic Equity is a good replacement as it follows the same tactical asset-allocation approach, and is suitable for conservative investors.

On watch: UTI Opportunities continues to remain on our watch list. The fund’s stock picks are all sound companies with good long-term prospects; a wider market recovery, as evidenced by the bounce in beleaguered sectors, can help the fund improve. In the previous review, we had Axis Equity on the watch list. The fund has made an improvement in consistency in beating its benchmark, and its volatility continues to remain on the lower side. We have therefore taken the fund off the watch list, and it remains a part of the Select Funds list.

Theme Funds

In this category, we have removed ICICI Prudential Exports and Other Services as its portfolio appears to be slowly reducing the ‘export’ theme. It has instead moved more towards a consumption theme. While consumption certainly is a promising theme, this fund’s mettle in playing the theme correctly is yet to be tested. Besides, with the current cloud over global growth and therefore exports (especially software), it is prudent to remain domestic-focused. Investors in this fund can continue to hold their investments.

Hybrid – Debt-oriented Funds

In this category, we have removed HDFC MIP-LTP and Reliance MIP. HDFC MIP LTP has been trailing the CRISIL MIP Blended index since August last year. It has also been underperforming its category average; rolling one-year returns daily for the past three years shows that the fund has beaten the category and the benchmark less than half the time. A premature call on gilts and a cyclical-heavy equity portfolio dragged down its returns. Reliance MIP has similarly lost out in the past six months, trailing both category and benchmark. Here too, a premature call on gilt besides a relatively lower equity exposure, tilted towards banks, hurt the funds’ returns.

Investors in these funds can remain invested. The funds can see an improvement in returns as and when rate cuts and better liquidity translate into a sustained rally in government securities. Fresh investments, however, can be made in the other hybrid funds. For those with lower risk profiles, Birla Sun Life Savings 5 and HDFC Multiple Yield 2005 are good fits. investors willing to take on higher risks can look at UTI MIS Advantage and ICICI Pru MIP 25.

Debt Funds

In the debt fund category, we kept the primary objective as reducing risk. All changes stem from this.

As the reason behind adding debt to your portfolio is to diversify and keep volatility low, we have been working on identifying funds with low volatility which still deliver returns higher than traditional debt options such as FDs. You may thus see us removing funds that seem to have higher returns (due to their higher risks), especially in the ultra short-term category. Where we have provided funds with higher risks, we have specifically categorised them as such.

Debt Funds – 6 Months to 1 Year

Our objective in this category is to ensure you have liquidity, get returns higher than short-term deposits, and have minimal credit risk. Towards this end, we are removing Franklin India Ultra Short Bond Fund. This fund has a higher exposure to AA and lower rated papers than warranted in this low-risk category. Those of you holding the fund may continue to hold it but should be aware of its high-risk profile.

We are replacing this with a lower risk fund – DHFL Pramerica Ultra Short Term Fund. This fund has consistently delivered returns higher than its category. Its 1-year return of 8.6 per cent is comfortably above the category average of 8.37 per cent.

Debt Funds – Short Term (Low Risk)

In this category, we decided to add one more fund – Axis Banking Debt. This fund invests mostly in bank certificates of deposits and some in PSU bonds. The fund follows an accrual strategy as it buys and holds bank CDs. The PSU bonds can be traded and therefore hold potential to pep up returns. Its low volatility makes the fund’s risk-adjusted returns look good as well.

The fund’s 3-year returns of 8.9 per cent make it a superior option to investing in fixed deposits. It is suitable for low-risk investors looking for marginally higher returns than fixed deposits, especially in this low return scenario. However, note that the fund cannot invest in other corporate bonds that its peers in the short-term debt category can to earn higher accrual. The fund’s risk profile and return potential are thus lower compared to the category.

Debt funds – Short Term (Moderate Risk)

We decided to remove Birla Sun Life Short Term Opportunities and, instead, add Reliance Medium Term.  Birla Sun Life Short Term Opportunities has a high exposure to gilt, and while we think this is a strategic move, we already have Birla Sun Life Treasury Optimizer in our list to play it. Hence, to reduce duplication, we have replaced Birla Sun Life Short Term Opportunities with Reliance Medium Term. This fund has a good dose of AAA-rated bonds and also has a low average maturity of about a year. Investors who hold Birla Sun Life Short Term Opportunities can continue to hold it. As mentioned, we have made this change to provide more diverse options.

Among the funds in the Debt – Long Term (High Risk) category, you may be aware that Franklin India Income Builder took a hit in its NAV as a result of selling a troubled instrument from the JSW group. As a result, its 1-year returns look lacklustre. However, with a high yield the maturity (of its current instruments), the fund will likely deliver high returns if its present instruments pose no credit risk.

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.