August 04 2017
The Investment Dilemma
Rising Markets are making headlines almost every day about reaching new peaks. Investors have made huge gains in equity mutual funds in last few years. However, with media frenzy doing rounds about how market is overheated and why a correction is imminent, the questions every investor is now asking are; Is it the right time to make fresh investments? Is it the right time to start a new SIP? Which are the best equity funds that can still deliver attractive returns in next 3-5 years? Or should I withdraw my existing funds and invest in new funds?
Our View on Indian Growth Story
Due to its demographic profile, India is a long term growth story which should continue for at least next 25-30 years. High population growth rate, young population, large number of people joining active work force in the coming years, rising per capita income, education led society, diversified economic output, migration from rural to urban, joint families transforming to nuclear families; All these factors are helping India in both consumption and investment of goods and services, which shall further accelerate as aspirations of people become bigger and richer.
In a fast growing country like India, equity investments present equal opportunity to individuals to participate in the growth of the economy and create wealth, just like various businesses make wealth for themselves.
Where to Invest Now ?
We have always believed that a diversified portfolio with correct asset allocation specifically suited to the investor needs and risk profile can always generate attractive returns with optimum level of risk over 3-5 year period.After arriving at asset allocation mix, it is equally important to select the right funds that have the potential to deliver category-beating returns on a consistent basis over the coming years. After all, it is not the past but future performance of the funds that will create wealth for you.
Selection of a fund for long term growth investment needs assessment of its future potential by analysing several factors like category of fund, fund management philosophy, AUM, track record of fund manager across market cycles, portfolio composition, past performance vis a vis other funds in the same category, consistency of returns, current net inflows and many more.
After analysing more than 400 growth funds on the above parameters, we present here a list of Top 10 equity mutual funds that we believe can still deliver attractive returns over next 3-5 year period, especially through SIP/STP route.
Top 10 Funds to Invest
1. HDFC Balanced Fund
A balanced fund that invests in equity and debt, normally in 70:30 ratio. The equity allocation has midcap bias with exposure to large and small caps as well. Debt investments take lower duration calls, which provide stability to the returns. Regular profit booking in midcap stocks to maintain debt:equity allocation keeps the volatility of the fund lower without compromising on the returns.
2. L&T India Prudence Fund
A balanced fund that invests 65-75% in equity and rest in debt. The equity portion is multicap with a mid and small cap bias. The volatility in the fund is managed by investing in large number of stocks with limited exposure to a single stock. Debt is managed actively with investments in both corporate bonds and sovereign papers.
3. MotilalOswal Most Focused Multicap 35 Fund
A multicap fund as the name suggests, is managed uniquely by having concentrated bets in limited number of stocks. The fund management philosophy is to pick high growth winners and make significant investment to gain from the stocks’ growth story. This style is particularly effective in bullish market, especially in large cap/multicap oriented funds.
4. Mirae Asset India Opportunities Fund
A multicap fund with large cap bias, it has been one of the best managed funds since 2008. The fund management style is to pick high growth stocks, but with a limited possibility of downside. The capital protectionism theme of the fund has played well for its performance across market cycles.
5. Kotak Select Focus Fund
Primarily a large and midcap oriented fund, this fund has been managed across market cycles with aplomb. The fund manager believes in bottom-up stock picking and has entered and exited stocks, mostly at right times, thus delivering superior performance without taking too much risk in the portfolio.
6. Mirae Asset Emerging Bluechip Fund
A midcap fund with a reasonable exposure to large cap stocks, this fund is unique, as it has beaten other funds across market capitalisations, across market cycles consistently. This fund invests in high growth companies with a EBITA of minimum 100 crores and avoids very small companies, which helps in managing volatility and liquidity risks.
7. Principal Emerging Bluechip Fund
A midcap fund with exposure to small cap stocks as well, it has proven itself in both up and down markets. The volatility of the managed through limiting exposure to a single stock. The lower fund size gives wider opportunity to the fund manager to invest in smaller stocks without worrying too much about liquidity risk.
8. CanaraRobeco Emerging Equities Fund
A small and midcap fund that invests in high growth companies which have potential to outperform the market due to their competitive advantage, special situations arising through merger and acquisitions, under researched and due to being part of out of favour industries. Limits its exposure to single stock to manage the volatility and liquidity risk in the portfolio.
9. BSL Small & Midcap Fund
A small and midcap fund that has shown superlative performance in last three years under its current fund manager. The fund’s philosophy is to constantly book profits once a stock moves up and starts forming a significant holding in the portfolio. This reduces downside and liquidity risk in the portfolio. A smaller fund size is also an advantage for outperformance.
10. L&T Emerging Business Fund
This small & midcap fund has shown remarkable performance in recent times and outperformed the category by a wide margin. With low average market capitalisation of its holdings, the fund is focused on high growth small caps. Currently it holds 69 stocks with top 10 stocks forming only 20% of the portfolio.
|Fund Name||Category||AUM (Crs.)||1 Yr||3 Yr||5 Yr||Beta||Alpha|
|L&T India Prudence Fund||Equity: Balanced||5168||18.69||17.26||20.09||0.86||7.93|
|HDFC Balanced Fund||Equity: Balanced||12483||21.83||16.61||19.68||0.87||7.33|
|Mirae Asset India Opportunities Fund||Equity: Multicap||4030||24.78||18.94||22.73||0.98||8.45|
|Kotak Select Focus Fund||Equity: Multicap||11590||24.00||20.83||22.9||0.99||10.13|
|Motilal Oswal Most Focused Multicap 35 Fund||Equity: Multicap||7096||30.66||28.04||N.A.||0.89||16.62|
|Principal Emerging Bluechip Fund||Equity: Midcap||1098||29.40||25.79||29.34||1.05||14.06|
|Mirae Asset Emerging Bluechip Fund||Equity: Midcap||4005||34.55||29.62||32.6||0.86||17.98|
|Canara Robeco Emerging Equities Fund||Equity: Midcap||2176||32.29||26.37||30.28||1.08||14.71|
|BSL Small & Midcap Fund||Equity: Small Cap||917||28.27||26.52||27.14||0.97||15.33|
|L&T Emerging Business Fund||Equity: Small Cap||1238||43.00||28.06||N.A.||1.00||16.47|
* Compounded Annual Growth Rate
Beta is a measure of volatility of a security or a portfolio in comparison to the market as a whole. The beta of the benchmark against which a fund is compared is 1. A beta lower than 1 means the fund shall fall lesser than the market. More than 1 beta implies the fund shall rise more than the market in upcycle.
The excess returns of a fund relative to the return of a benchmark index is the fund's alpha.
Higher the alpha, better is the fund performance.
Investors may note that this is only an indicative list of potentially high growth funds. The funds for investment should be chosen on the basis of available time horizon and your risk and return expectations, preferably after consulting a financial advisor.
Should You Change Your Existing Funds
It may be a both Yes and No depending upon your goals and risk-return profile.
If your goal is still to remain invested for more than 5 years, and if your current funds from the same category are underperforming the benchmark and the category for last 2 years or more, we shall suggest you to review them and replace, if need be.
If your current investments are giving similar returns or have not done well only for a recent short period, then any change in the fund is not recommended.
For any change in your portfolio, we shall suggest you to consult a financial advisor.
Regular investment in high performing funds can deliver exceptional value to the investors. Individuals can create enormous wealth by remaining invested for long periods of time in equity funds. Opportunities do exist in all market conditions and both high markets and low markets provide different set of opportunities.
Especially through SIP/STP route in equity mutual funds, investors are able to ride the volatility of the market and generate better returns over other traditional investments.
We reiterate that key to creating wealth is making the right investments, on a regular basis and remaining in touch with a financial advisor. We hope you share our view.
As always, your views and feedback on the above are welcome.
Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at firstname.lastname@example.org .