It’s been a quarter since we last reviewed our ‘Select Funds’ list and it’s time for another check. For those of you new to our Select list, FundsIndia’s ‘Select Funds’ is a list of investment worthy funds across various categories that helps you narrow your investment choice from the hundreds of funds that you have to otherwise sift through before investing.
This list is reviewed on a quarterly basis. There are additions to ensure that good choices are not left out. There are also deletions if we find some funds’ strategy not too appropriate for prevailing market conditions.
This quarter, the changes made to the list are minimal. We will discuss this but more importantly, we will also highlight how certain categories of funds have been performing and what should be your strategy towards them.
In this category, we have added Kotak Select Focus under our ‘Equity – Moderate Risk’ category. This fund has a large-cap bias but invests in mid and small-cap stocks as well. As you may have noticed, we are trying to increase the funds in this category from being mere large-cap stock holders, to funds that invest in stocks in the top 100 or 200 by market cap.
This way, while we try to keep a healthy mix of pure large-cap and diversified funds, we seek to generate slightly higher returns than pure large-cap funds through the top 100 or 200-focusing funds. You may wish to read our review on Kotak Select Focus by clicking here. The risk profile of this fund will be higher than large-cap funds.
In this category, we have, for now, removed Tata Dividend Yield Fund, the only dividend yield fund our list sported. While we are sanguine about this fund’s ability to perform, the current market, unfortunately, does not offer too many dividend yield opportunities, given the broad market run up.
This has led to most dividend yield funds underperforming diversified peers. We still have a ‘hold’ view on the fund. This means that if you already hold the fund with a 5-year view, you should continue to hold it. Any market dips will provide opportunities for such funds to pick dividend yield stocks.
In the ‘Equity – High Risk’ category, we have added one more mid-cap fund – Canara Robeco Emerging Equities. With two-thirds of its assets in mid-cap stocks and a fourth in small caps, this fund has delivered optimal risk-adjusted returns in the category. The fund is less volatile compared with quite a few peers.
We have also added one more theme fund – HDFC Infrastructure Fund. While Canara Robeco Infrastructure Fund too was a competitor, the latter’s small asset size acted as a constraint in our choice. This fund has a well-diversified portfolio of engineering, energy, finance, construction and automobile stocks. Having had a closed-end structure until 2011, this fund was able to manage redemption pressures well and could therefore, adopt a hold strategy that paid off well beginning 2013.
Overall, in the equity fund category, you will see that there is an increasing divergence, especially in the one-year performance between large-cap/diversified funds and mid-cap funds. But this return chart should not tempt you to load up on mid-cap funds in place of large or diversified funds. Remember, over the long term, the divergence would narrow down simply because during market falls, mid-cap funds will take a harder knock than their diversified counterparts.
Also, the midcap rally comes after years of underperformance by mid-sized companies. Hence the first leg of rally tends to be sharp and swift.
To build your expectations on mid-caps based on the recent performance would not be a prudent strategy. A 20-30% allocation to mid-cap funds, in our opinion should suffice to provide adequate upside to an equity portfolio.
In the debt fund category, we have retained our selection in the short-term category. In the long-term income fund category, we have added the Tata Dynamic Bond Fund for those who wish to have some long-term gilt exposure at this stage. While we do not advocate gilt funds for a retail portfolio given the interest rate risk, a fund such as Tata Dynamic Bond – with a combination of gilts and corporate bonds – may be well placed to ride a rally in case of a rate fall.
We had added UTI Dynamic Bond Fund last quarter for a similar reason. However, we now see that the fund has gone easy on gilts and loaded on shorter-term instruments. Hence, while we watch over its strategy, we have in the mean time added Tata Dynamic Bond Fund as a proxy-gilt fund.
Overall, in the debt category, you will see that income funds that were underperformers until last year, are mostly sporting double-digit one-year returns now. This despite no rate cuts. Improved credit scenario and re-rating enjoyed by some instruments, together with easing of yields in some maturity buckets have led to this performance. A rate cut could only accentuate this performance. Hence, for those holding income funds, we would urge you to hold this as against diverting money into any regular traditional income product at this juncture.
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.
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