The phenomenal rise in equity markets since May 2020 has helped many equity funds recover much of their lost ground. Some of these schemes had waited for years with portfolios whose hopes hinged on a broader market recovery. Their positioning finally paid off, when equity markets rallied massively after suffering a heavy fall in March 2020. Here three such diversified equity schemes that have bounced back well.
IDFC Tax Advantage (ELSS) Fund
Before the markets started their upward climb in May 2020, IDFC Tax Advantage (ELSS) Fund (ITA) had not really set the charts on fire in the equity tax-saving category. Its five-year return is 17.9 percent, as against 15.5 percent for the category on an average. On a three-year basis, the fund has delivered 9.17 percent; the category average return is 10.16 percent. But, in the past one year the fund delivered a healthy 34.4 percent returns as against the category average of 26.28 percent.
One of the reasons for its resurgence has been its investments in mid and small-cap stocks. The scheme’s weighted average market capitalisation is Rs 41,040 crore – among the lowest in the ELSS category. As per Value Research, ITA holds around 24 percent of its corpus in small-sized companies, as opposed to just 8.62 percent that other tax-savings funds held.
“Valuations in small and mid-sized companies were depressed towards the end of CY2019. There was a compelling buying opportunity,” says Daylynn Pinto, Senior Fund Manager, IDFC Mutual Fund. “Improved balance sheets, better earnings growth prospects and an improved liquidity environment should result in good corporate profits,” he adds.
ITA cut its exposure to retail stocks going into the pandemic and instead raised exposure to shares of healthcare firms. Exposure to the automobile sector boosted its returns.
He manages ITA and co-manages IDFC Sterling Value with Anoop Bhaskar, Head-Equities, IDFC Mutual Fund. IDFC Sterling Value also sprang back to the top of the performance chart with 110 percent returns between March 23, 2020 and February 5, 2021.
SBI Contra Fund
Heavy allocation to small and mid-cap companies was the reason behind SBI Contra Fund’s below-par show for a long time. In 2018, value and contrarian funds recorded a decline of around 8 percent. SBI Contra Fund (SCF) recorded a 14 percent fall.
“We have seen a broad-based rally in 2020. Many small and mid-caps also rallied, improving the performance of schemes investing in them,” says Rupesh Bhansali, Head-Mutual Funds, GEPL Capital. Such schemes had languished in CY2018 and CY2019, when only a handful of stocks did well.
SCF too suffered in 2018 and 2019. “By the beginning of CY2020, some well-managed small companies started showing early signs of profit growth, which was missing in the slowing economy of the earlier years,” says Dinesh Balachandran, SCF’s fund manager.
As the economy started to re-open in a calibrated manner, experts expected a revival.
SCF had 51 percent of its corpus in in mid and small-cap stocks in its recent portfolio.
The scheme had accumulated healthcare stocks when they were out of favour in 2018 and 2019. It cut exposure to banking and public sector undertaking stocks in April and increased exposure to select names in automobile and commodities sectors at attractive prices. The change in stance paid off. With a corpus size of Rs 1,675 crore, the scheme is well-poised to invest substantially in small and mid-cap companies and still remain nimble-footed.
Nippon India Focused Equity Fund
Building a portfolio of stocks that were quoting at relatively inexpensive levels expecting a structural recovery in Indian economy did not work for Nippon India Focused Equity Fund (NIFE) in 2018 and 2019. Its NAV decreased by 12.67 percent in 2018 compared to 1.8 percent loss posted by the S&P BSE 500 index. But the one-year return is 38.9 percent as opposed to 29.53 percent for the benchmark index.
“In CY2018-CY2019, quality stocks were much favoured. But there were many other attractive pockets,” says Vinay Sharma, NIFE’s fund manager at Nippon India Mutual Fund. For instance, Sharma says that while retail banks were at high valuations back then, were now available at cheaper multiples. Infosys, ICICI Bank and State Bank of India are among the top five stocks it holds.
Similarly, cyclical stocks such as capital goods, automobiles and logistics were also available at cheaper valuations. Apart from increasing its exposure to telecom stocks going into the pandemic, sizeable exposure to financials – especially corporate lenders – along with some old economy stocks helped it as cyclicals became investors’ favourite.
Sharma also successfully identified themes such as contract manufacturing and internet-related companies early on, which helped. NIFE prefers to invest in companies across market capitalisation.
What should you do?
Experts say that mutual funds that focused on paying a reasonable price with good growth visibility did well in the recent market rally.
“In the initial phase of recovery, healthcare and information technology led the up-move,” observes Ravi Kumar TV, founder of Gaining Ground Investment Services.
There are a few risks though. Rising crude oil prices and the possibility of a quick rise in interest rates may act as dampeners for equities. Continue your systematic investment plans (SIPs), but keep your expectations in check. And do not just go by a scheme’s recent performance. “Investors must understand the risk-reward associated with an equity scheme before investing,” says Rushabh Desai, Mumbai-based mutual fund distributor. Having a five-year time horizon, at the least, is a must. And even if the recovery continues – as most market experts expect – it’s still better to stick with diversified funds, instead of thematic schemes.