Investors must refrain from buying into the top performers in this rally to perk up portfolio returns. Though the funds outperformed in this brief period, not all of them have a long-term track record that bears close scrutiny.
After falling many paces behind the bellwether index in the initial part of this stunning stock market rise, equity mutual funds have begun to catch up in recent weeks. Diversified equity funds (as a category) now sport a three-month average return of 52 per cent, while the Sensex has risen 57 per cent. Which funds recorded the highest participation in this rally? An analysis.
Only about one in four equity funds outpaced the Sensex’s 70 per cent gain from its March low. In the diversified category, the list of outperformers is topped by funds such as DBS Chola Opportunities, Canrobeco Emerging Equities, Magnum Global, ING Contra and Fidelity Special Situations Fund. Funds playing on mid-cap stocks – Magnum Midcap, Principal Junior Cap, JM Small and Midcap and Principal Emerging Bluechip also did impressively- rising 95 to 105 per cent from their March low. Among theme funds, those riding on banking (Reliance Banking, Banking BEES) and infrastructure, led by Taurus Infrastructure, JM Basic, Sundaram Capex Opportunities also outpaced markets.Midcaps aid performance
What helped the top performers in the diversified category win through? A sizeable allocation to mid-cap stocks, sector weights in favour of banking and capital goods and a relatively small size were the features shared by the top performers in this period.
With mid-caps catching up with large-caps quite rapidly in this rally, the BSE-500 index (up 75 per cent) has moved ahead of the Sensex in this rally. Many of multi-baggers of this period have also come from the mid-cap and small-cap space.
That has contributed to strong participation from funds such as Magnum Emerging Businesses, Principal Junior Cap, Magnum Midcap, JM Emerging Leaders and Small and Midcap Fund and Sundaram Select Midcap in this surge.
In terms of sector preferences, overweight positions in banks or capital goods helped the top performers make the best of the post-election re-rating in these sectors. A majority of the funds with market-topping returns were small ones, with assets under management of less than Rs 500 crore.
About six out of every 10 funds that beat the market also had a starting NAV that was below Rs 10, a sign that the rally was led by beaten-down themes and sectors. In fact, JM Small and Midcap and JM Emerging Leaders sported a NAV of less than Rs 3 per unit during the market low of March 9.
Should investors buy into the top performers in this rally to perk up their portfolio returns? No, they should refrain. Of the funds have outperformed in this particular period, not all have a long-term track record that bears close scrutiny. What to buy
While it is true that one leg of this rally was triggered by a re-rating of Indian stocks from distress valuations to ‘fair’ levels, there has also been a substantial “momentum” component to the gains, especially over the last two weeks. A good number of small and mid-cap stocks without much of a claim to fundamentals have delivered stunning gains. There also remains considerable doubt about whether sectors such as realty and commodities, which have led from the front, will see a quick recovery in earnings. Going by the tenet that what rises the most must fall the most, it is the top gainers of this rally that will be most at risk in a sharp correction. All this suggests caution towards the stocks, themes (and equity funds) which have been the frontrunners from the March lows.
It may be best for fund investors to stick to funds with good three- and five-year records, which have also delivered good participation in the recent rise. Going by this yardstick, HDFC Equity Fund, HDFC Top 200 Fund, Templeton India Growth and DBS Chola Opportunities are a few funds that fit the bill.
Only about one in four equity funds outpaced the Sensex’s 70 per cent gain from its March low. In the diversified category, the list of outperformers is topped by funds such as DBS Chola Opportunities, Canrobeco Emerging Equities, Magnum Global, ING Contra and Fidelity Special Situations Fund. Funds playing on mid-cap stocks – Magnum Midcap, Principal Junior Cap, JM Small and Midcap and Principal Emerging Bluechip also did impressively- rising 95 to 105 per cent from their March low. Among theme funds, those riding on banking (Reliance Banking, Banking BEES) and infrastructure, led by Taurus Infrastructure, JM Basic, Sundaram Capex Opportunities also outpaced markets.Midcaps aid performance
What helped the top performers in the diversified category win through? A sizeable allocation to mid-cap stocks, sector weights in favour of banking and capital goods and a relatively small size were the features shared by the top performers in this period.
With mid-caps catching up with large-caps quite rapidly in this rally, the BSE-500 index (up 75 per cent) has moved ahead of the Sensex in this rally. Many of multi-baggers of this period have also come from the mid-cap and small-cap space.
That has contributed to strong participation from funds such as Magnum Emerging Businesses, Principal Junior Cap, Magnum Midcap, JM Emerging Leaders and Small and Midcap Fund and Sundaram Select Midcap in this surge.
In terms of sector preferences, overweight positions in banks or capital goods helped the top performers make the best of the post-election re-rating in these sectors. A majority of the funds with market-topping returns were small ones, with assets under management of less than Rs 500 crore.
About six out of every 10 funds that beat the market also had a starting NAV that was below Rs 10, a sign that the rally was led by beaten-down themes and sectors. In fact, JM Small and Midcap and JM Emerging Leaders sported a NAV of less than Rs 3 per unit during the market low of March 9.
Should investors buy into the top performers in this rally to perk up their portfolio returns? No, they should refrain. Of the funds have outperformed in this particular period, not all have a long-term track record that bears close scrutiny. What to buy
While it is true that one leg of this rally was triggered by a re-rating of Indian stocks from distress valuations to ‘fair’ levels, there has also been a substantial “momentum” component to the gains, especially over the last two weeks. A good number of small and mid-cap stocks without much of a claim to fundamentals have delivered stunning gains. There also remains considerable doubt about whether sectors such as realty and commodities, which have led from the front, will see a quick recovery in earnings. Going by the tenet that what rises the most must fall the most, it is the top gainers of this rally that will be most at risk in a sharp correction. All this suggests caution towards the stocks, themes (and equity funds) which have been the frontrunners from the March lows.
It may be best for fund investors to stick to funds with good three- and five-year records, which have also delivered good participation in the recent rise. Going by this yardstick, HDFC Equity Fund, HDFC Top 200 Fund, Templeton India Growth and DBS Chola Opportunities are a few funds that fit the bill.
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