Equity markets have been volatile since early last year and debt markets have been going through some turmoil since mid-2018. Not surprisingly, category average returns may look poor regardless of which category you are looking at, even though not all funds may have done poorly. The rally in largecaps since the last year has been narrow, with only a select few stocks pulling up the returns at any time. Mid and smallcaps have continued to underperform their largecap peers. As a result, most funds have found it difficult to catch hold of good stocks at the right time.
Our changes to the Select Funds this time have been minimal. In the equity space, there are no changes. We have retained the existing list. With returns being volatile, we stuck to funds which have a proven track record and differentiated strategies. In the largecap space, the bucket of funds aims to beat benchmark either by taking tactical calls like Axis Bluechip or by containing downsides better like ICICI Prudential Bluechip. The funds aim to contain volatility and provide averaging opportunities in a falling market in the higher risk space with higher exposure to mid and smallcaps.
In the debt space, we have moved further away from credit risk, given the recent events. Quite a few funds were removed mid-cycle due to defaults, closure of inflows, and potential for downgrades.
The first quarter of this fiscal year was dominated by the anticipation of Lok Sabha election results. Markets remained volatile until there was clarity in the situation. Once the exit poll projections came out, the market rallied for a short while, going back into volatile mode soon after.
Global and domestic macroeconomic factors have not been looking great. While the market has been expecting a turnaround in the economy, demand has failed to pick up. However, with a stable government at the centre, and the Lok Sabha election behind us, we hope the focus will return to development issues and the government will utilise the mandate to push through some major economic reforms to prop up the economy.
Largecaps have continued to do well over the first quarter of FY20. During the 3 months ended June 30, the NSE Nifty 50 gave a return of 1.4% while the S&P BSE Sensex gave a return of 1.9%. While not very high, it is still much higher than their mid and smallcap peers. During the same period, the Nifty Midcap 100 and an index consisting of high liquidity midcap stocks listed on NSE, gave a return of -3.4% while the BSE Small Cap index gave a return of -5.3%.
Keeping in mind the above factors, we decided to continue with our list from the last quarter, choosing stability over speculation. Most of the funds in this category continue to do reasonably well, seen from the perspective of the current market turmoil, with a couple of exceptions.
Indian debt markets have been in turmoil since last year when infrastructure lending company, IL&FS, defaulted on some of its payments. The crisis created a liquidity crunch in the market which led to other NBFCs failing to raise funds. This led to further defaults. The biggest casualty being DHFL, a housing finance company which focuses on tier II and tier III cities.
These events have led to a crisis of confidence and a flight of capital from debt funds. People have been looking at banks and government debt as safe havens to invest their short-term money. SEBI recently stepped in with certain changes to improve transparency and make debt funds safer. The government also announced a slew of measures to improve the situation for NBFCs. You can read about the measures announced in the budget here.
On our part, we have started paying more attention to portfolio concentration. We are flagging any concentration in names which are not well-known and reliable. Of course, concentration in GOI bonds and large central government PSUs are not flagged as they are virtually risk-free.
Given the fact that we had already removed quite a few funds mid-cycle, we did not feel the need to make many changes in the debt space either. Our current list of funds is only one fund shorter than what already existed.
Our investors can find a more detailed report on the Select Funds changes in their email.
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