Introduction:
Contents
The year 2017 has been great for the market, While Nifty has given a return of more than 25% to investors, there are many stocks that have outperformed the index by a wide margin. However if you are an investor who does not like to track stocks and keep an eye on the market, but still wants to take advantage of the bull run, then mutual funds are the best option for you.
There are many types of funds based on the size of companies they invest in. While some of these funds invest big companies, which provide relative safety and stability to return on investment, others focus on investing in small companies that have huge growth potential in the future.
Based on the above mentioned classifications of mutual funds, we have picked top 5 funds(one fund from each category) that in our opinion will be the best performers in the year 2018. The method we used in picking these funds is as follows:
Our Fund Selection Criteria:
The AUM (Asset Under Management) should be low compared to its peers (Historical data shows that funds with large AUM are usually poor asset allocators, resulting in below average performance)
The NAV (Net Asset Value) of the funds should not be too high(It not only makes it easier for the investor to buy more units for a limited amount of money, Funds with low NAV have better growth potential)
The fund should also have consistently outperformed compared to category average (For a period of 1 year or more).
Let us now look at the top 5 funds in each category that will outperform their benchmarks in 2018.
Invesco India Dynamic Equity Fund Direct Plan (G):
Category: Large Cap
Fund Highlights:
AUM: Rs. 12.2 crores (Sept 2017)
NAV: 31.12 ( on 22 Dec 2017)
Benchmark Index: BSE-100
Minimum Investment: Rs. 5,000
Entry Load: Nil
Exit Load: 1%
Past Performance:
The fund has consistently outperformed benchmark index (you can see the difference between fund returns and benchmark index returns in the image below highlighted in blue box) and has also given better than average return in its category (You can see the difference between the fund returns and category average returns in the image given below highlighted in red box).
Sector Allocation, Asset Allocation, and Top Holdings
L&T Emerging Business Fund Direct Plan (G)
Category: Mid and Smallcap
Fund Highlights:
AUM: Rs. 258.84 Crores (Sept 17)
NAV: 29.28 (22 Dec 2017)
Benchmark Index: BSE Smallcap
Minimum Investment: Rs. 5,000
Entry Load: Nil
Exit Load: 1%
Past Performance:
The fund is mainly focused on Small and Midcap companies. Funds of this category are also known as “Growth Funds” as the fund focuses on small and medium size companies that have strong fundamentals, great growth potential, but are trading at lower valuations because they are largely overlooked by the broader market. Such funds are great investments when the markets are trading at high valuations, presenting fewer opportunities to make money.
The fund has outperformed the benchmark index (highlighted in blue box) and has also performed better than average in its category of funds (highlighted in red box). A snapshot of funds performance if given below:
Sector Allocation, Asset Allocation, and Top Holdings:
Major part of fund’s assets are allocated in mid and smallcap manufacturing, engineering and chemical companies, with top 5 sectors (manufacturing, engineering, chemical, retail and banking) forming ore than 50% of asset allocation of the fund.? A snapshot of Top sector holdings of the fund is given below:
Being a midcap and smallcap fund, the investments made have a higher risk compared to the largecap funds which has a portfolio of stable, relatively safer largecap companies. Since safety of capital is one of the primary objective of any mutual fund,?L&T Emerging Businesses Fund has diversified its portfolio in large number of small cap and mid cap companies. A snapshot of top holdings of the fund is given below:
Motilal Oswal MOSt Focused Multicap 35 Fund - Direct Plan (G)
Category: Diversified Fund
Fund Highlights:
AUM: Rs. 3,269 Crores (Sept 17)
NAV: 28.24 (22 Dec 2017)
Benchmark Index: Nifty 500
Minimum Investment: Rs. 5,000
Entry Load: Nil
Exit Load: 1%
Past Performance:
Diversified fund means the fund can invest in company of any size by its market capitalization. Unlike large cap and small cap funds, which are restricted by their nature to invest in companies of a specific market cap, diversified funds are not restricted to invest in a certain types of company and can have wider range of options to invest in.
Motilal Oswal MOSt Focused Multicap 35 Fund is a diversified fund that spreads its asset allocation to different companies of varying size by market capitalization. Funds like these take advantage of the growth in the broader market and are preferred by investors that are risk averse.
The fund has outperformed its category averages for the past many years and has also performed better than benchmark index. A snapshot of funds performance compared to the category (red box) and benchmark index (blue box) is given below:
Sector Allocation, Asset Allocation and Top Holdings:
Since the fund is diversified, it has wider options to invest in equities as there is no restriction on the size of companies in which the fund can invest its money. Fund has allocated almost all its AUM in the equities market. A snapshot of? allocations in different asset classes by the fund is given below:
Reliance Regular Savings Fund - Balanced Option - Direct Plan (G)
Category: Balanced Fund
Fund Highlights:
AUM: Rs. 304.59 Crores (Sept 17)
NAV: 58.56 (22 Dec 2017)
Benchmark Index: CRISIL Balanced Fund
Minimum Investment: Rs. 500
Entry Load: Nil
Exit Load: 1%
Past Performance:
Funds that invest heavily in equities have a higher risk of loss if the market crashes, similarly, funds that invest a major part of their assets in fixed income instruments such as bonds, are relatively safe but usually pay the price by delivering mediocre returns. The purpose of balanced fund is to provide best of both worlds by balancing allocation of assets between equity markets and bonds.
The fund has outperformed its category averages by a decent margins and has consistently performed well for the past many years. A snapshot of fund’s performance against its peers is given below:
Sector Allocation, Asset Allocation, and Top Holdings:
Among the top sectors in which the fund has allocated its assets is the banking and finance sector which forms 26% of the total assets of the fund, followed by automobile sector which forms almost 7.5% of the total asset allocation. A snapshot of the top sector allocations of the fund is given below:
Since it is a balanced fund, it has to create a balance between the risk of equity market and safety of bonds in such way so that the fund is able to generate above average returns without taking additional risk. The fund has allocated 71% of its assets in equities, and 25% in debt, with rest of the money in money market instruments and cash or cash equivalents. A screenshot of asset allocation of the fund is given below:
Tata India Tax Savings Fund - Regular Plan (G)
Category: ELSS
Fund Highlights:
AUM: Rs.29.06 Crores (Sept 17)
NAV: 18.50 (22 Dec 2017)
Benchmark Index: S&P BSE Sensex
Minimum Investment: Rs. 500
Entry Load: Nil
Exit Load: Nil
Past Performance:
The objective of an ELSS fund is to provide medium to long term capital gains along with income tax relief to its investors while emphasizing the importance of capital appreciation. ELSS are long term funds that come with tax benefit, and have a minimum lock-in period of at least 3 years and invest majority of their funds in equities.
The fund has outperformed its peer average as well as benchmark index. As snapshot of performance of the fund compared to peer average (red box) and benchmark index (blue box) is given below:
Sector Allocation, Asset Allocation, and Top Holdings:
Like most of the funds that keep safety of capital on top of their priority list,?Tata India Tax Savings Fund has invested a big chunk of its assets in banking sector which is believed to be a safer bet among mutual fund managers, for a simple reason that chance of a bank going bust is almost nil. Other than banks, fund has also invested in top pharmaceutical companies, and some cement stocks, Keeping in mind the India’s growing demand for quality infrastructure will push up demand for cement. A snapshot of top sectors in which fund has invested its bets is given below:
Among the top holdings of the fund, you will find big banking names such as HDFC Bank and ICICI Bank. Other than this the fund has also invested in some giant retailers such as Avenue Super marts (Company that owns D-Mart chain of discount stores) and Future Retail (Owner of Big Bazaar and many other retail outlets.). A snapshot of top holdings of the fund is given below:
Conclusion:
As mentioned earlier, these funds were on the basis of asset under management, past performance value of NAV and our projections about market future of the market. Since past performance is not a guarantee of future returns, before making any investment decision in the above mentioned or any other funds, you should consult your investment adviser.
Thanks for your recommendation.
Very informative and logical.
Thank You Radhakrishnan.
i want to start a SIP of 3000 rupees for my daughter. I would be grateful if you can suggest me a good fund for a horizon of 15-20 years.
Best Regards
Javed
7045603725
Hi Ankit,
Thank you for the blog. It is very informative. I have two questions.
1. Suppose, say a small cap fund ‘A’ buys 5 stocks and out of which 2 have performed well and have reached a market capitalization equivalent to a Mid-cap stock. Now, will the fund ‘A’ sell both of these stocks as it focuses only on the small caps?
2. Similarly, if a manager of a large- cap based fund finds a mid-cap stock to be undervalued and feels that its has the potential to become a multibagger as well as a large cap stock. Now, can this fund manager buy this stock ?
Hi Anush,
Thank you for the comment.
To answer your question, there is no specific rule that prevents funds from holding stocks in companies of specific capitalization. For example, when we say large cap funds, it means that majority of the fund’s investments are parked in large cap companies, and does not mean that it cannot hold any position in mid cap stocks. If the fund manager finds a good growth opportunity in a mid cap stock, it can chose to have a small portion of the entire portfolio in that stock.
In other words, a large cap fund must hold “majority” of its assets in large cap stocks (usually around 80% to 95%), once this criteria is fulfilled, it is for the fund manager to decide whether he wants to invest remaining portion of the fund in mid cap stock or hold it in cash.
Let me give you a real life example. If you look at the ABSL top 100 large cap fund, it has invested a small portion of its assets (0.9% of total assets) in a mid cap company PTC India which has a current market capitalization of just 3,000 crores. Not just that, the fund has also invested approx. 0.7% of its assets in derivative instruments (that is futures and options) and some other small amounts in Vedanta preference shares and debt instruments.
Clearly, there is no “pure large cap” fund with all its assets parked in only large companies, any fund whether large cap, mid cap or small cap has some freedom to park its funds elsewhere if the opportunity is attractive and in sync with the investment principles of the fund.
If there is a stock in which a mid cap fund has major holding, and it becomes a large cap stock, the fund may decide to sell a part of its holdings in case it violates the regulations of the fund guidelines. However, most of the fund’s assets are highly diversified, and a single stock hardly makes such as huge portion of the asset under management. So there is a very little chance of occurrence of such an incident .
Hope my answer was helpful
Ankit.
Thank you for the reply. The details that you had share were very informative.
Depth study I read. Thank you.