The year 2019 has proven to be another turbulent year for the Indian equity market. Various events such as, the general elections, fiscal and monetary policies, corporate earnings, loan defaults, macro indicators, global trade tensions, have had investors at the edge of their seat.

Despite the volatility, the Sensex scaled new highs and is currently trading above the 41,000 mark since the last seven sessions. However, as mid and small caps continued to trade lower, the valuation gap between the large cap and smaller caps widened.

Investors shunned mid and small caps due to the prolonged economic slowdown and moved to the safety of large caps, causing the frontline index to rally.

The impact of volatile market could be seen in the mutual fund inflows. The mutual fund industry added assets worth Rs 4 lakh crore in 2019, taking the asset base to an all-time high of Rs 27 lakh crore at the end of November. But this could be largely attributed to inflows in debt-oriented schemes. On the other hand, equity mutual funds witnessed inflows of Rs 70,000 crore, lower than Rs 1.3 lakh crore in the preceding year.

Inflows were the lowest in the month of November 2019. Since the market touched new highs during the month, investors looked to book profits, redeeming their investments.

Table: Mutual fund performance report card for 2019

Category 2019 YTD returns (%) Top 3 performers Bottom 3 performers
Largecap funds      
Best performing fund 20.52 Axis Bluechip Fund JM Large Cap Fund
Worst performing fund 6.07 BNP Paribas Large Cap Fund Franklin India Bluechip Fund
Catgeory average 13.10 Canara Rob Bluechip Equity Fund Nippon India Large Cap Fund
Nifty 50 – TRI 13.91    
Large & midcap funds    
Best performing fund 18.49 Axis Growth Opp Fund UTI Core Equity Fund
Worst performing fund 0.73 Tata Large & Mid Cap Fund Franklin India Equity Advantage Fund
Catgeory average 9.05 Mirae Asset Emerging Bluechip Quant Large & Mid Cap Fund
S&P BSE 200 – TRI 10.52    
Multi-cap funds    
Best performing fund 19.49 Axis Multicap Fund Sahara Wealth Plus Fund
Worst performing fund 1.24 JM Multicap Fund Nippon India Multi Cap Fund
Catgeory average 9.86 DSP Equity Fund Franklin India Equity Fund
S&P BSE 500 – TRI 8.92    
Midcap funds    
Best performing fund 11.86 Axis Midcap Fund Aditya Birla SL Midcap Fund
Worst performing fund -4.17 Motilal Oswal Midcap 30 Fund Quant Mid Cap Fund
Catgeory average 2.79 DSP Midcap Fund IDBI Midcap Fund
S&P BSE Mid-Cap – TRI -3.03    
Smallcap funds    
Best performing fund 19.05 Axis Small Cap Fund Quant Small Cap Fund
Worst performing fund -10.75 ICICI Pru Smallcap Fund Aditya Birla SL Small Cap Fund
Catgeory average -2.05 SBI Small Cap Fund HSBC Small Cap Equity Fund
S&P BSE Small-Cap – TRI -8.03    
Focused funds    
Best performing fund 28.38 IIFL Focused Equity Fund ICICI Pru Focused Equity Fund
Worst performing fund 0.81 Motilal Oswal Focused 25 Fund HDFC Focused 30 Fund
Catgeory average 12.66 DSP Focus Fund Quant Focused Fund
Nifty 50 – TRI 13.91    
Value/Contra funds    
Best performing fund 12.74 JM Value Fund Aditya Birla SL Pure Value Fund
Worst performing fund -10.75 Kotak India EQ Contra Fund IDFC Sterling Value Fund
Catgeory average 2.89 UTI Value Opp Fund SBI Contra Fund
S&P BSE 500 – TRI 8.92    

Returns are Absolute (%). YTD as on December 24, 2019
(Source: ACE MF, PersonalFN Research)

Performance Analysis

Out of the 163 diversified equity schemes analysed, only 85 schemes performed better than the benchmark index. Notably, there was a vast difference in the returns registered by the top performing schemes and the worst performing schemes in the respective categories.

Value/Contra style funds were the worst performers, with 82% of the schemes underperforming the benchmark during the year. As value funds invest in undervalued stocks, the current high valuation seen in many quality stocks makes it difficult for fund managers to discover value-buying opportunities.

Large cap funds and Large & midcap funds stood next on the list of underperformers. Even as the large cap index touched fresh peaks during the year, the gains did not reflect in the mutual fund returns. Only 38% of the large cap funds outperformed the benchmark. This could be because only a narrow set of large cap stocks drove the index. Large & midcap funds fared slightly better with the outperformance rate of 39%.

Focused funds which seek opportunities in certain high conviction bets saw 44% of the schemes outperforming. In case of Multicap funds, around 53% of the fund outpaced the index.

Interestingly, Mid cap funds and Small cap funds had the highest number of schemes outperforming the benchmark. Around 96% of the midcap schemes outpaced the benchmark, while in case of small cap funds, it was 72%. It must be noted that the category average was among the lowest in these two categories of funds.

The overall performance of mutual fund schemes during the year highlights that even during a volatile phase, a well-managed scheme focusing on careful stock-picking and risk-management can reward investors.

Some fund houses like Axis mutual fund stood out during the year delivering top performing schemes across multiple categories. Though some fund houses proved to be laggards with bottom performers in more than one category.

The outlook for 2020

India’s GDP growth plunged to a low of 4.5% in Q2 of FY 2020. Revival in economic growth and the consequent corporate earnings growth is crucial for investors to start looking at small and mid caps again.

Even though the government and RBI have taken steps to boost economic growth, it would not be wise to expect a sharp growth in the near term. The recent political events in the country further adds to the uncertainties about the ease of doing business in India. As a result, the equity markets could continue to be volatile in the short term.

Interestingly, FPIs, one of the largest contributors to Indian equities, pumped in Rs 43,781 crore during the October to December 2019 period, which shows their continued faith in India. Overseas investors invested heavily in large cap stocks during the year.

Thus FPI inflow in equity has neared Rs 1 lakh crore in CY 2019, the highest in six years. However, they may become wary of investing if the issues at hand are not resolved.

Investment strategy to be adopted

Past returns of funds (whether good or bad) are not indicative of future performance. Moreover, one year period is too short to judge the performance of equity schemes. One must analyse the performance of the scheme across market phases and cycles before investing in any scheme to determine if it is a consistent performer.

Going forward, the rally in large caps could be limited as many stocks are trading at high valuations. Besides, there is uncertainty over when the tides will turn in favour of small and midcaps.

Investors can use the uncertainties and volatility in the market to their advantage and grow wealth by strategically placing their mutual fund portfolio. The Core & Satellite approach is a diversification strategy that lets you focus on the stable schemes with a long-term view and at the same time capitalise on short-term opportunities. Its unique combination helps you generate superior returns without taking excessive risks.

The term `Core’ applies to the more stable, long-term holdings of the portfolio. It should form a major part of your portfolio consisting of large cap fund, multi cap fund, and value style fund.

Whereas, the `Satellite’ part, the strategic portion that augments the overall returns of the portfolio across market conditions, should include mid cap fund, large & midcap fund, and aggressive hybrid fund.

Weightage of each portfolio constituents in both ‘Core’ and ‘Satellite’ categories can make a huge difference in the end and you should, therefore, carefully assign weights to each category and the schemes for the portfolio.

If your portfolio is strategically placed, there will be no need to constantly churn it and you will be well placed to rise above the market highs and lows.

This article first appeared on PersonalFN here

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