What are the essentials of a winning portfolio?
Does it pivot on scheme selection, star ratings of a fund, or accurate risk profiling?
In fact the human bias influences all your financial decisions. And this is precisely what hinders your portfolio from trumping the markets.
For e.g.: If you’re an investor who decides to invest in a fund because A) You’re impressed with the media interviews of a fund manager or the Chief Investment Officer (CIO) of a fund house;
or B) Excited by the returns a fund houses generated in the recent past;
or C) Ten d to rely only on a few mutual fund houses that are big, popular and park all your hard-earned money with just those few, you can expect the returns of your mutual fund portfolio to disappoint you.
As a seasoned investor yourself, you’re probably aware that the key to a winning portfolio is diversification.
The mistake most investors usually makes is investing in popular schemes offered by some of industry’s largest fund houses. When you are overexposed to a particular fund house, you are more likely to get negative surprises
Effective diversification isn’t always about having a certain number of schemes in a portfolio. But holding a portfolio that’s truly diversified in the nature of the schemes selected and asset class allocation.
Isn’t it time to keep your bias out of mutual fund investing and understand how to intelligently diversify?
To clarify the importance of diversification,
let’s take a look at the table below.
Table 1: Ten largest fund houses of Indian Mutual Fund Industry…
|AMC Name||Average AUM (Rs in crore)|
|HDFC Mutual Fund||342,524.7|
|ICICI Prudential Mutual Fund||321,281.2|
|SBI Mutual Fund||284,123.6|
|Aditya Birla Sun Life Mutual Fund||246,696.0|
|Reliance Nippon Life Mutual Fund||234,292.5|
|UTI Mutual Fund||159,694.2|
|Kotak Mahindra Mutual Fund||150,271.3|
|Franklin Templeton Mutual Fund||119,932.8|
|Axis Mutual Fund||89,767.7|
|DSP Mutual Fund||78,362.7|
Data as on May 06, 2019
(Source: ACE MF)
We evaluated the equity-diversified schemes offered by top-10 fund houses (based on AUM) for our analysis and ranked them on their yearly performance over the last five years. Clearly, no particular scheme has outperformed/underperformed consistently.
What’s the right approach?
Let’s find out.
Table 2: No clear winner…
|Scheme Name||Returns (Absolute %)|
|Franklin India Focused Equity Fund(G)-Direct Plan||8.8||-7.7||39.0||6.3||3.0||81.3|
|HDFC Top 100 Fund(G)-Direct Plan||7.5||0.9||32.9||9.3||-5.5||47.4|
|ICICI Pru Focused Equity Fund(G)-Direct Plan||6.0||-1.7||24.9||12.1||-4.1||40.7|
|Axis Multicap Fund(G)-Direct Plan||4.4||8.8||–||–||–||–|
|HDFC Growth Opp Fund(G)-Direct Plan||3.7||-3.7||29.5||4.1||-4.8||27.8|
|Aditya Birla SL Equity Fund(G)-Direct Plan||2.8||-3.0||35.1||16.2||3.9||58.0|
|DSP Small Cap Fund(G)-Direct Plan||2.2||-25.1||43.4||13.6||21.2||103.1|
|Reliance Multi Cap Fund(G)-Direct Plan||1.9||-1.5||42.0||-5.9||1.2||60.9|
|SBI Small Cap Fund(G)-Direct Plan||1.2||-18.6||80.4||2.6||22.3||112.8|
|UTI Mid Cap Fund(G)-Direct Plan||-4.1||-14.2||43.3||4.4||7.5||91.8|
|NIFTY 50 – TRI||7.1||4.6||30.3||4.4||-3.0||32.9|
|NIFTY 500 – TRI||4.2||-2.1||37.7||5.1||0.2||39.3|
Data as on May 06, 2019 for the calculation of YTD returns
Top performing schemes of respective years are in green while the bottom performers are in red.
Source: (ACE MF)
For example, HDFC Top 100 Fund(G) was the worst-performer in 2015 among schemes offered by 10-largest fund houses. But in 2019, it’s performed well so far.
On the other hand, SBI Small Cap Fund was performing exceedingly well between 2014 and 2017. However, the fund lost its track since 2018. Imagine those who betted heavily on this fund at the beginning of 2018 are most likely disappointed now.
Moreover what’s noteworthy is, the schemes ranked at the top or bottom of the ladder haven’t been from the same fund house consistently.
What goes true for individual schemes is also true for the overall performance of a fund house across market cycles. In the table below, we have highlighted the performance of the top 10 fund houses.
Table 3: Performance across market cycles…
|Scheme Name||Returns (Absolute %)||Returns (CAGR %)||Returns (CAGR %)|
|Bear Phase||Bull Phase||Corrective Phase|
|03/Mar/15 To 25/Feb/16||25/Feb/16 To 23/Jan/18||23/Jan/18 To 06/May/19|
|Axis Mutual Fund||-10.5||21.2||3.3|
|Kotak Mutual Fund||-16.4||35.5||-2.5|
|UTI Mutual Fund||-19.8||29.5||-3.2|
|HDFC Mutual Fund||-20.3||39.5||-4.4|
|ICICI Prudential Mutual Fund||-18.6||33.6||-5.2|
|Franklin Templeton Mutual Fund||-15.5||33.4||-5.7|
|SBI Mutual Fund||-11.6||35.0||-6.1|
|DSP Mutual Fund||-17.5||36.2||-6.1|
|Aditya Birla Sun Life Mutual Fund||-16.4||37.6||-7.0|
|Reliance Nippon Mutual Fund||-19.9||39.3||-7.1|
|NIFTY 50 – TRI||-21.7||29.2||5.0|
|NIFTY 500 – TRI||-20.1||33.6||-1.6|
Top performing mutual fund houses of respective years are in green while the bottom performers are in red.
(Source: ACE MF)
We considered the average returns generated by all diversified schemes of the same fund house during the last three market phases to arrive at the performance of a particular fund house.
Then we ranked them in a descending order. Inferences are shocking.
For instance, Axis Mutual Fund was the worst performing fund house during the last bull phase. But in the on-going corrective phase, it’s the top-performer. In contrast, Reliance Nippon Life Mutual Fund generating massive returns in the previous bull market. Nonetheless, in the current corrective phase, it’s losing ground abysmally.
Investors who had invested excessively in Reliance Nippon Life Mutual Fund at the beginning of 2018 could be repenting now. The same would be true for an investor who shunned Axis Mutual Fund, due to their bias and/or lack of foresight, during the same period.
Now the pertinent question is what caused the divergence in the returns various mutual fund schemes and fund houses generated?
Several factors that affect the returns includes:
- Investment philosophy of a fund house
- Risk management strategies
- Systems and processes followed by fund managers
- Experience of the team
- Appetite to grow AUM
The list above isn’t exhaustive.
In essence, there’s no alternative to diversification, not only across schemes but also across fund houses. In fact, you should look beyond popular fund houses. At times even smaller fund houses can offer you better returns across their product portfolio.
Diversification not only balances out your risk exposure, but it helps you optimise your returns without any extraordinary efforts. As would know, equity mutual funds are a great wealth maximisation tool and assume an important place in one’s financial plan. Ideally, you should diversify across mutual fund houses that follow different approaches to investing. Diversification across the right ones most suitable for your financial goals, risk appetite, and time horizon is the key to a winning portfolio.