In the last couple of years, a lot has been said and done with respect to categorization of mutual funds. The regulator has attempted to put some structure in place for fund houses and managers through the categorization guidelines, in order to help investors make informed choices. Recently, a change has also been proposed by the regulator in multi-cap funds, which has set both the industry as well as the investor community worried.
That said, it can still be quite confusing for the lay investor to understand these categories. After all, what does “Value” or “Multi-cap” or “Thematic” actually mean for an investor in terms of risk and performance?
Thankfully, there is something else that is universally understood. Cricket! Everyone, young or old, is a self-appointed expert in cricket. And, the IPL (Indian Premier League) is something that is religiously followed for nine weeks every year. Fans know every team’s strengths and weaknesses while having their favourite teams to root for. So, if equity mutual fund categories were IPL 2020 teams, which teams would they correspond to or resemble?
Large-cap – Mumbai Indians
It’s a team with a galaxy of stars, and almost every player is a match-winner in himself. The team has enough bench strength to even have a second team in the IPL, with a good chance of winning it. Mumbai Indians has a street-smart leader who manages talent well and guides players skilfully through the season and a franchisee with deep pockets that can afford the best of coaches to help devise the strategy required to support a winning team, year after year. Not surprisingly, the team has won the IPL title the most number of times and has always been among the favourites to go with all the way. So, when in doubt, the team to pick!
Midcap/Small-cap – Kings XI Punjab
What this team cannot afford in terms of size and deep pockets, it substitutes with confidence and swag. Right from giving a chance to unconventional and young leaders; the team is filled with confident, yet relatively unknown players, who on a given day can win them the tournament. But sadly, the ride is volatile and when the going gets tough, they usually end up short of breath. You need to be a bit of a romantic to bet on them, but they can surprise you. That said, makes sense to hedge your bets.
Large & Midcap – Sunrisers Hyderabad
Arguably, the most silent and gentle team in the tournament. It doesn’t lack solidity. But while it has the best of experienced players as its leader to give them both direction and thrust, it is also filled with high-quality young talent. A team that gives you a feel of great balance, yet, can sometimes come up short on firepower when needed. Has been a title winner once and keeps getting into the playoffs regularly; a relatively safe choice that also gives you a bit of excitement.
Multi-cap – Kolkata Knight Riders
Another team that comes with a lot of pedigree in terms of both team members as well as performances. Had a great mix as well as depth to choose from in the past, and has been the top team a couple of times, so this is a team with a lot of past experience to fall back on. Yet, the team also gives us a “new” uncertain feel, with some confusion reigning in terms of composition, and with not many big-tickets to give it the stability it earlier had, it may be too dependent on its relatively young brood to take it past the winning line. It will experience more volatility in the future. So if you bet on it, do so carefully.
Index – Delhi Capitals
This is among the most paradoxical of teams. On paper, it has always had high-quality talent in its teams as well as the best of support staff. But curiously, this is a team that has always delivered ordinarily. It has a mix of both experienced players and newbies, but somehow they just don’t get together to deliver outstanding performances, at least on a continuous basis. Somehow, this is a team that one doesn’t mind punting on, but ends up managing average volatility, middling performance.
Sectoral/Thematic – Royal Challengers Bangalore
Again, another team that doesn’t fail to confound. Quite a few stars in the team, but extremely volatile, and their performances are usually super inconsistent. It is almost like these few great talents, rather than bring the team together, end up ensuring that the others are shadowed under their intensity. It also doesn’t help that their team’s balance is usually off, putting too much responsibility on the shoulders of the stars to pull them out of trouble. This means some great individual memorable performances, but in the end, the volatility is too much to take and the team ends up by the wayside.
Focused – Rajasthan Royals
This the thriftiest team in the tournament and, year after year, has punched above its weight, given the relatively sparse resources it has. What it lacks in terms of bench strength, it makes up through well-thought-through picks, and the higher expectations that are set from each of these players. It has a good mix between experienced veterans and young talent, with the focus being primarily on quality, along with the keen eyes to pick future winners at a lower price and punting on them. That said, its over-dependence on a small set of players makes the ride volatile, and costs it dearly in crunch situations.
Value – Chennai Super Kings
Last but not the least, this team has a fanatical following, and generates extreme reactions. The team is packed with over-the-hill semi-retired veterans (PSUs?), but still these come together in crunch moments like ‘The Expendables’ to deliver and take them past the finishing line. Nearly every time. On the other hand, its infuriating focus on taking the matches deep, leads to higher volatility and causes heart-attacks to even the most loyal of followers. That said, the zen-like calm that this team exudes, draws grudging respect from competition and gives confidence to even the wavering fan that it will reach the finishing line. It has reached the final nearly every time it has played, so rule them out at your peril.
You can never say which team will win. But you can take informed guesses on which teams will make it to the knock-out stage in the end, and which don’t have it in them to go all the way. And even then, there will be a surprise or two thrown in, to knock your breath away. In the same way, mutual fund categories have a few stable favourites that should form the core of your portfolio while you can sample a bit of the rest, while making sure they don’t form a significant part. After all, just like in the IPL, the idea is to remain in good shape, and successfully cross the finish line, right?
Disclosure: The writer remains a loyal CSK fan, still.
Disclaimer: These are the writer’s personal views and do not constitute recommendations or advice in any way. This is a light-hearted attempt at explaining mutual fund categories to the general investing public and not intended to offend anyone.
(The writer is an NISM-certified investment solutions practitioner and co-founder of Finwise Personal Finance Solutions