Changes to FundsIndia’s Select Funds List

October 7, 2015 . Vidya Bala

For those of you who are new to our platform, FundsIndia’s ‘Select Funds’ is a list of investment worthy funds. Spread across various categories, this list helps you narrow down your investment choices from the hundreds of funds that you would otherwise have to 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 certain funds’ strategies to be inappropriate for the prevailing market conditions.

Before we move on to the changes we have made this quarter, here’s an important message – none of the funds we’ve removed from our list warrant an exit unless we explicitly state that. We do not prefer that you sub-optimally churn your portfolio. Our endeavour, through the Select Funds list, is to choose funds that are good and appear to have an edge in the present environment. A fund that is removed may still be a good performer, and may help build long-term wealth. However, our call (for the purpose of this list) would have been based on whether a peer fund can do a better job when fresh exposure is taken today.

This quarter, our Select Funds list, has a few changes – additions as well as exits. Read on to know what they are.

Equity Funds – Moderate Risk

Many of you may be disappointed to see the 1-year returns of some of the funds in this category dwindling to low single-digit returns, or even negative returns. We would urge you not to be too concerned about it. Funds in this category are overweight on large-cap stocks, a market segment that has seen the maximum fall year-to-date. It is therefore natural that these funds sport lower 1-year returns compared with even mid-cap funds. This basically suggests that funds in the moderate risk category have more opportunities today to buy into large and nascent large-cap stocks that have fallen quite a bit.

Changes: We decided to put ICICI Pru Top 100 in our hold list after watching the fund for a couple of quarters. That means the fund is not a part of our Select list anymore. While we give leeway when a fund underperforms its peer, ICICI Pru Top 100 has, since the beginning of this year, underperformed its benchmark index, Nifty, falling 2.5 percentage points more than the index. Its 3-year rolling returns (in a 5-year period) have been slipping too.

While the fund has a slightly contrarian portfolio with many stocks whose valuations are reasonable, its overweight exposure to sectors such as energy and financial services, and additions to sectors such as metals (cheap, but in a downturn) has not helped it much in the past 2-3 quarters. However, we still think its portfolio holds stocks with low-to-average valuations, and that may provide scope for stocks to move in a rally.

This call is a relative one based on the fact that there are other large and diversified funds that have delivered better for similar risk assumed.

We instead chose to add Franklin India Prima Plus, a diversified fund with an average market cap marginally higher than that of ICICI Pru Top 100. Franklin India Prima Plus has contained the volatility in the past 9 months quite well and is suited for a long term portfolio. Do not expect it to be a chart topper. It seldom has been; however; its long-term returns speak of what it can deliver if you are patient. Please read our recent review on this fund by clicking here.

Equity Funds – High Risk

This category, predominantly consisting of mid-cap funds, or those with a mid-cap tilt, remains the same save for one addition – JP Morgan India Mid and Small Cap Fund. This fund has been in our watch list for several quarters now, and has been making progress in terms of delivering superior risk-adjusted returns.

The fund’s standard deviation, though, is higher than funds such as BNP Paribas Midcap, Franklin India Prima or Religare Invesco Mid N Small Cap. However, given that it has delivered for the risk assumed (volatility), the fund finds a place in our list. The fund’s average market cap, at less than Rs. 10,000 crore now, suggests that it invests in relatively smaller companies as well. To this extent, it may carry relatively higher risks, and may be viewed closer to funds such as UTI Midcap in terms of the portfolio market cap. For now, JP Morgan India Mid and Small Cap Fund may be considered for portfolio diversification, and not as a part of one’s core portfolio.

Tax-saving Funds – Moderate Risk

In this category, we’ve decided to replace Canara Robeco Tax Saver with BNP Paribas Long Term Equity. The former, has been consistently beating its benchmark on a rolling return basis, but as is its characteristic, it has been underperforming peers during the rally in 2014. The fund is known to lack zing in rallies, but contains declines well (2008 and 2011). We had decided to give it more time this year, given the volatility.

However, an underweight position on financial services, and an overweight position on energy (especially holdings such as Reliance Industries) did not quite help the fund in the current year. It is to be noted that Canara Robeco Tax Saver is low on standard deviation, and a good fund to hold for those who do not prefer swings in their fund performance. We will continue to watch its performance.

BNP Paribas Long Term Equity’s performance has been noteworthy for a good while now, and its risk-adjusted returns ensured that it entered our list this time around. As is the case with some of the other funds in the BNP Paribas stable, this tax-saving fund too sports a differentiated portfolio, playing sectors such as communications as a proxy for e-commerce, and at the same time, insulating performance from volatility with sufficient exposure to defensives such as pharma and IT. Fresh investments can be considered in the fund.

In the ‘Tax-saving Funds – High Risk’ category, it is noteworthy that ICICI Pru Tax Plan has undergone a name change – ICICI Pru Long Term Equity. It continues in our list.

Hybrid Equity-oriented Funds – Moderate Risk

In this category, we’ve decided to remove Canara Robeco Balance from our list. Please note that this fund’s performance, when looked on a point-to-point basis, and also on a risk-adjusted basis, still looks good. However, the fund’s ability to beat its category average when 3-year returns are rolled daily over the past five years, has become less impressive, outperforming peer average less than 70 per cent of the times. We’ve decided to keep this fund on our watch list, while choosing to not add more funds to this category for now.

Hybrid Debt-oriented Funds

We’ve decided to remove Franklin India Life Stage Fund of Funds 40s Plan from this category. Its higher exposure to equity, compared with other funds in the category, does not appear to be delivering commensurate returns. We, instead, replace it with a regular Monthly Income Plan (MIP) fund – ICICI Pru MIP 25. This fund has been a steady player. With a portfolio maturity of less than 9 years, and adequate exposure to gilts (besides limited exposure to AAA and AA bonds), the fund is well placed to gain optimally from a debt rally without too much risk. Its equity portfolio is reasonably compact, and has sectors such as automobile to provide a push to the portfolio in an equity rally.

While those are the only changes, we have decided to watch HDFC MIP LTP for its performance. Currently, the fund is not underperforming its category average, but has slipped lower than some of its consistent peers. We believe this is on account of the fund having a relatively lower exposure (compared with peers) to gilts. As the gilt rally has been strong in the past year, the fund’s performance did not keep pace with peers. We will continue to have this fund in our list for now.

Debt Funds – 6 Months to 1 Year Holding

In this category, we have decided to drop one fund – Franklin India Low Duration – one of the highest returning funds in the ultra short-term fund category. While the fund has done exceedingly well, its average maturity has increased to 1.2 years (from less than 1 year as of June 2015). Besides, it has high exposure to instruments with A-rating (although short term tenure). The fund’s Yield To Maturity (YTM) has remained high, even as other ultra short-term funds have seen a dip in their YTM in the past quarter. We feel these factors up the fund’s risk, although it is a well managed one. We continue to have another fund (Franklin India Ultra Short Bond) from the same fund house.

Debt Funds – 1 to 2 Years – Low Risk

In this category, we had removed JP Morgan India Short Term Income a while ago post the troubles with some its portfolio of holding. We have now added IDFC Super Saver Income Fund – Short Term Plan. While this fund may be low on fund rating if you check some of the rating websites, it is a low volatile fund and has delivered consistent (though not chart topping) returns. Its portfolio is a conservative one, sporting AAA- bonds, commercial papers and certificates of deposits. Its portfolio maturity of 2 years also fits the ideal time frame required for this category.

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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