If you are an investor in equity market, the pandemic-induced market crash of March 2020 must have probably brought back the memories of the 2008 financial crisis. But unlike the 2008 market crash which lasted for over a year, this time the market was quick to recover.

The Central bank in India took proactive measures to infuse liquidity in the market while the government initiated steps to boost consumption and economic activities. Further, as most sectors unlocked after a few months of strict lockdown, it brought back hope that the economic impact may not be as damaging or long-lasting as the downturn of 2008.

This resulted in improved confidence among investors; and therefore, Foreign Institutional Investors (FII) and many first-time investors participated actively in the equity market. As a result, the equity markets scaled new highs in the past few months. Notably, the market rally was broad-based with smaller caps outperforming larger peers.

You will notice in the table given below that the returns on equity mutual funds across categories bounced back sharply in CY 2020 amid the market rally. The stellar returns during the year resulted in visible improvement in each funds’ long-term performance.

Table: Top performing funds of CY 2020 across categories

Scheme Name Absolute (%) CAGR (%)
CY 2020 2 Years 3 Years 5 Years 7 Years
Focused Fund
ICICI Pru Focused Equity Fund 26.00 17.26 9.42 15.14 14.03
IIFL Focused Equity Fund 25.52 29.54 16.65 20.72
Quant Focused Fund 25.38 17.33 8.24 14.57 19.50
Category Average: Focused Fund 17.21 17.44 8.60 16.06 16.79
Large & Mid Cap Fund
Quant Large & Mid Cap Fund 28.97 18.10 8.30 16.56 20.75
Canara Rob Emerg Equities Fund 26.00 19.98 9.78 19.29 25.09
Principal Emerging Bluechip Fund 23.67 18.44 7.26 18.75 22.50
Category Average: Large & Mid Cap Fund 17.47 16.30 7.17 15.57 17.12
Large Cap Fund
Canara Rob Bluechip Equity Fund 24.85 22.96 15.88 18.75 16.96
Axis Bluechip Fund 21.19 21.78 16.53 18.85 17.71
UTI Mastershare 19.80 17.95 10.96 15.52 15.54
Category Average: Large Cap Fund 15.16 16.10 9.39 15.07 15.11
Mid Cap Fund
PGIM India Midcap Opp Fund 51.13 30.49 13.21 17.24 17.45
Quant Mid Cap Fund 44.31 21.51 12.62 13.94 14.02
UTI Mid Cap Fund 33.88 20.15 6.61 15.06 20.68
Category Average: Mid Cap Fund 25.76 17.92 6.74 15.36 19.40
Multi Cap Fund
Quant Active Fund 44.93 26.28 15.60 19.08 22.07
PGIM India Diversified Equity Fund 38.54 27.71 14.44 18.27
Parag Parikh Flexi Cap Fund 33.55 25.23 15.57 18.77 19.42
Category Average: Multi Cap Fund 17.09 16.29 8.38 15.20 16.37
Small cap Fund
Quant Small Cap Fund 76.13 20.04 13.75 11.13 10.82
Kotak Small Cap Fund 36.14 24.55 8.43 18.22 21.93
SBI Small Cap Fund 35.17 23.38 6.28 20.69 28.54
Category Average: Small cap Fund 32.34 16.62 2.93 14.51 19.70
Value Fund
ICICI Pru Value Discovery Fund 23.55 15.80 7.74 13.23 18.31
UTI Value Opp Fund 19.80 18.49 10.44 15.13 13.94
Nippon India Value Fund 17.09 15.14 5.94 14.63 16.67
Category Average: Value Fund 16.19 12.67 3.78 13.80 16.73

Data as on January 21, 2021
Direct Plan – Growth option considered
Funds with a track record of at least 3 years considered
(Source: ACE MF) 

As seen in the table above, the top performing schemes in Large cap fund, Large & Mid cap fund, Focused fund, and Multi-cap fund categories generated remarkable returns ranging between 20-45% in CY 2020.

Despite the common assumption that smaller caps are worst affected in the event of an economic slowdown, Mid-cap and Small-cap funds generated significant gains in 2020, with the majority of schemes outpacing the index as well as other categories by a significant margin. Interestingly, the Value funds category which registered a sharp underperformance in the last couple of years, also performed well during the year.

Should you invest in top performing schemes of CY 2020?

Economic activities are expected to strengthen further in 2021. Therefore, the bulls may continue to rule the market. The following are the tailwinds that may work in favour of equity mutual funds:

  • Vaccination drive to curb the COVID-19 pandemic and reduction in active cases may bring back consumption growth
  • Most economic activities have reached the pre-COVID levels
  • Rebound in corporate earnings
  • Ample liquidity in the system
  • Low interest rate environment

However, do note that top performance in a particular year does not guarantee superior returns in the subsequent years. A fund’s performance may gyrate between good, average, and bad in a span of few years, depending on the market conditions and the strategies adopted by the fund manager.

Remember that short-term returns are not enough to determine the worthiness of a scheme. While most funds perform reasonably when the tides are in favour, a majority of it fails to contain the downside when the market sentiments turn sour.

What should investors do?

Market valuations have turned expensive, and if the economic recovery does not take place at the expected pace, some consolidation may be imminent. Going forward, it will be important to be cautious about potential headwinds that may hamper the growth such as the following:

  • – Rise in non-performing assets of Banks and NBFCs

  • – Falling urban income and rising unemployment rate

  • – Geopolitical risks

  • – Any other unforeseen event

To mitigate the impact of any potential risk and volatility on your equity mutual fund portfolio, diversify your investment across categories and investment styles based on your risk appetite, financial objectives, and investment horizon.

The ‘Core & Satellite’ approach to investing is a time-tested strategy that helps you to build a diversified portfolio of funds. The Core holdings will let you focus on the stable schemes with a long-term view; while the Satellite holdings enable you to capitalise on short-term opportunities.

Your ‘Core’ holding should comprise around 65%-70% of your equity mutual fund portfolio and consist of Large-cap FundMulti-cap Fund, and a Value Style Fund.

Whereas, the ‘Satellite’ holdings of the portfolio can be around 30%-35% comprising of a Mid-cap Fund, a Large-cap & Mid-cap Fund, and an Aggressive Hybrid Fund. If your risk appetite permits, you may also consider investing a small portion in Small-cap Funds and Sectoral/Thematic Funds.

Here are the benefits of following the ‘Core & Satellite’ approach to investment:

  1. Provides your portfolio with optimal diversification
  2. Reduces the need for constant churning of your entire portfolio
  3. Reduces the risk to your portfolio
  4. Helps you benefit from a variety of investment strategies
  5. Allows you to create wealth, cushioning the downside
  6. Holds the potential to outperform the market

The core and satellite investment strategy may work for you in 2021 and beyond.

When you invest in a diversified portfolio of equity funds, it will be beneficial if you stagger it over time, preferably through the SIP route. If the market conditions turn volatile going ahead, SIPs will help you to manage the risk and at the same time compound your wealth through its rupee-cost averaging feature.

Lastly remember that, whichever direction the market moves ahead, do not sway from your set asset allocation plan because it could invite undue risk. Ensure that you conduct a periodic review of your portfolio to weed out any consistent portfolio laggards.

This article first appeared on PersonalFN here

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