1. Large-cap Funds
LARGE-CAP mutual funds offer consistent returns with low risk. They invest at least 80% corpus in top 100 companies by market capitalisation. Today, large-cap is the second-largest equity MF category after flexi-cap — it accounts for 14% assets under management (AUM) of equity and growth-oriented schemes.
Canara Robeco Bluechip Equity is the best performing fund in the category followed by ICICI Prudential Bluechip-Growth and Kotak Bluechip at second and third ranks, respectively. It delivered three-year trailing returns of 16.77% and five-year trailing returns of 16.84%. Category returns were 16.99% and 13.66%, respectively. “Our investment strategy is a combination of compounding stories and alpha generators. Compounding stories, 65-70% of the portfolio, are businesses that grow in double digits and have competitive advantages due to brand, regulations or scale,” says Shridatta Bhandwaldar, who manages Canara Robeco Bluechip Equity Fund as head of equities, Canara Robeco Asset Management Company. “The rest 30% are alpha generators where we want to play cyclicity. These are not necessarily the best within the sector,” he adds. “We have seen multiple cycles and have done well even during volatile periods as we look at fundamentals as well as valuations,” he says. Large-cap funds work well for investors looking for stable returns who can stay invested for three-five years. “The longer the better,” says Bhandwaldar. The fund’s top three holdings are financials, information technology and consumer discretionary.
Anish Tawakley, deputy CIO, Equity & head of research, ICICI Prudential Mutual Fund, says his ICICI Pru Bluechip fund does not take big sector calls. “It has a barbell approach to investing. This means we will buy cheap value stocks where a lot has gone wrong with the company which, over time, will revert to mean.” The barbell strategy involves a balance between reward and risk by investing in two extremes of high-risk and no-risk assets. At the other extreme, the fund buys companies with growth and quality. “Such a company has to satisfy three conditions — have a track record of profitability, be a market leader and have compounding potential,” he adds. The fund is overweight on industrial and capital goods, auto, cement and insurance. “
We believe in growth at a reasonable price. We look for leaders that are established and have seen various cycles. So, this fund is less volatile than others,” says Kotak AMC’s CIO, Equity, Harsha Upadhyaya, who manages Kotak Bluechip fund.
2. Mid-Cap Funds
STABILITY OF FUND management team is the key to the success of any fund. This is especially true of mid-cap funds as they have high liquidity risk and suffer bigger losses than large-cap funds during periods of economic uncertainty. Mid-cap funds have to create 65% portfolio from companies ranked between 101 and 250 in market capitalisation.
SBI Magnum Midcap Fund-Regular Growth is best performing mid-cap fund in Fortune India study this year. Nippon India Growth Fund and Motilal Oswal Midcap Fund–Growth rank second and third, respectively. SBI Magnum Midcap Fund delivered 21.07% returns in five years till October 31, 2023. Nippon India Growth Fund and Motilal Oswal Midcap returned 21.68% and 23.16%, respectively. The equity mutual fund category delivered 19.50% in five years to November 17, 2023.
So, what is the success mantra of these funds? One is the bottom-up approach where they focus on a company and its fundamentals instead of industry and economy. “We are agnostic to sector exposure. We have a lot of leeway there. In mid-caps, when we do not know much about companies, we take smaller exposure and increase it as we gain confidence,” says Sohini Andani, fund manager at SBI Funds Management. The fund is interested in compounding stories that can be held for long. “We look for growth-oriented companies where opportunity size is very large, where the business can become 3X or 4X or even more. Longevity of growth and substantial size of the opportunity excite me,” she says. The fund’s top three sectors are consumer discretionary, industrials and financials.
“Our investment mantra is buying decent businesses at right valuations and holding on to them as they scale up. We also focus on managing risk at portfolio level,” says Rupesh Patel, who manages Nippon India Growth fund, the second best performer in the category. The fund believes diversification and backing of high-conviction ideas has helped it outperform its peers. “Our overweight stance on consumer discretionary players, select new-age tech companies and diversified basket of financials has worked well in last few years,” he says.
“Financial and consumer sectors, both services and products, continue to be among top-weighted sectors. We also have a significant allocation to the industrial segment which includes sub-segments like logistics, defence, power and industrial consumables,” says Patel.
Niket Shah, fund manager at Motilal Oswal Asset Management Company who manages Motilal Oswal Midcap Fund, says, “Vision to foresee, courage to buy and patience to hold are three pillars of the fund’s success. The fund has been ahead of the curve in identifying large themes from tech and digitisation that started post-Covid to capital goods, chemicals, start-ups and EVs.”
3. Small-cap Funds
NO RISK, NO REWARD! It’s an old saying. It’s corollary, ‘high risk, high reward’, aptly describes small-cap mutual funds, mandated to invest at least 65% assets in small-cap companies, which rank 250 or lower in market capitalisation. India had 25 small-cap funds with ₹2 lakh crore AUM at the end of October 2023, according to Association of Mutual Funds of India. The category accounts for 10.51% AUM of equity and growth-oriented schemes.
Nippon India Small Cap Fund–Growth has topped the category followed by Axis Small Cap Fund–Regular Growth and Kotak Small Cap Fund at second and third ranks, respectively. The study took into account not just one-year and three-year rolling returns but also standard deviation, risk-adjusted returns, down-capture ratio and assets under management. The down-capture ratio measures performance in falling markets.
Samir Rachh, fund manager, equity, Nippon India Mutual Fund, who manages Nippon India Small Cap Fund, says diversified investment strategy has played a key role in its success. “We follow one of the most diversified strategies between investment styles. We believe diversification gives a much better risk-adjusted return.” Nippon India Small Cap Fund’s three-year and five-year rolling returns stood at 41.69% and 26.57%, respectively, on November 21, 2023. “Diversification allows you to hold on to the winners for a longer period. It also ensures that you don’t go out of the game even if some of your calls go wrong,” he says. “Our philosophy of investing in stocks with good promoters having quality businesses and then holding them over a long period has worked well. The bull market in small-cap space also helped the portfolio,” says Rachh, who has been managing the Nippon India Small Cap Fund since January 2017. “Our overweight stance on capital goods sector also helped,” he adds. The top three sectors in the portfolio are industrials, financials and consumer products.
Pankaj Tibrewal, senior vice president and fund manager at Kotak Mahindra Mutual Fund, who has been managing Kotak Small Cap Fund since 2010, says small caps have high mortality rate. “Only 13% small-caps have become mid-caps or large-caps in last 20 years. So, while excitement and opportunity are large, we need to be extra careful to ensure that we avoid mistakes by following our principles and investment philosophy closely.” He lists parameters that have been instrumental in identifying multi-baggers. “The first is management and their skin in the game. How honest and reliable management is, and how they have handled crises over a period, are important factors. More than 15-16% return on capital and profit and sales growth of more than 20-25% are also important,” says Tibrewal. Top three sectors in the fund’s portfolio are capital goods and industrials, auto and auto ancillary, and chemicals.
The two fund managers agree that short-term investors should not invest in small-cap funds. “People should come with a medium to long-term view,” says Tibrewal.
4. Flexi-cap Funds
IN NOVEMBER 2020, SEBI reclassified schemes to ensure that the funds adhered to their stated investment mandate and investors make an informed choice. The reclassification gave rise to a new mutual fund category, flexi-cap funds, which can invest in stocks across market capitalisations — large, mid as well as small caps. India had 37 flexi-cap funds with AUM of ₹2.92 lakh crore at the end of September 2023, as per data from AMFI. The category accounts for 15.3% AUM under equity and growth-oriented schemes. The top fund in the category is Parag Parikh Flexi Cap (PPFC) Fund with AUM of ₹44,038 crore at the end of October 2023. It was a multi-cap fund before re-categorisation. Rajeev Thakkar, chief investment officer and director of PPFAS Asset Management, has been with the scheme since its launch in May 2013. PPFC invests across market caps, sectors and also in overseas companies. “Being a multi-cap fund, we can afford to be contra-cyclical. So, if things are down and out and small and mid-caps are available cheaply, we can increase weightage, and when we feel large-caps are offering better value, we can shift towards that space. We can, unlike some thematic funds, invest in sectors that we feel are most promising at any point in time,” he says. Top three sectors in the fund’s portfolio are banks, US IT companies and Indian IT companies. In 2018, 2019 and 2020, the fund was a big investor in small and mid-cap IT companies. After that, there was a sharp run-up in these stocks.
“We then sold mid-cap IT names and shifted to larger companies,” he says. “Our investments are more weighted towards spaces where valuation provides comfort and things look attractive over three to five years.” The fund’s top three sectors are banks, capital markets and information technology. It does not invest in every sector in the listed space. “We don’t invest in very capital-intensive sectors where return on capital employed is low. Sometimes, some of these sectors are in the limelight because of policy changes or prospects of volume growth, but unless the return ratios are good, we don’t invest,” he says. Aviation and infrastructure are the two sectors from which the fund has stayed away because of their capital-intensive nature. What also sets PPFC apart is the limited number of schemes on offer. “We run a limited number of strategies. So, in equities, we have only two schemes. It is a largely single equity strategy,” says Thakkar. PPFC is suited for those who can remain invested for a minimum of five years. “It is meant for people who prefer simple investment solutions,” he says. In the last five years, it has delivered 22.58% returns. The category average was 16%, as per data from Value Research. “We are not driven by popular opinion. For example, ESG was a big theme a couple of years back but there was no clear path for moving away from fossil fuels in a short span of time. We went by valuations and ground realities rather than labels,” says Thakkar. Banks and some capital market-related stocks top the portfolio. “We have US IT companies and Indian IT services companies; the rest is a mix of diversified companies,” he says.