In your view, how should a retail investor with a 3-5 years timeframe, allocate funds to different categories of equity mutual funds?

Investors need to have a clear focus towards their risk return objectives and investment time horizon. Typically for an investor with a 3-5-year horizon, we wouldn’t recommend greater than a 25-30 per cent equity exposure, which should be purely taken through large cap funds. The fixed income allocation of the portfolio can largely be allocated towards corporate bond and short duration funds with some funds invested in ultra short duration funds for liquidity needs.

Please suggest the top five large cap funds in terms of two parameters, reliability and returns, over the past three years? They could be same or different ones.

Aditya Birla Sun Life Frontline Equity
The fund stands out for its consistent performance. The fund led by Mahesh Patil, has a growth bias, which is apparent as he focuses on factors such as Return on Capital Employed (ROCE), Return on Equity (ROE) and earnings growth potential, while paying attention to valuations.

HDFC Top 100 Fund
The fund’s investment strategy driven by manager Prashant Jain involves plying a research-driven approach with a focus on investing in reasonably priced, quality businesses. Its valuation-conscious approach and its willingness to be patient with even underperforming holdings have resulted in a fairly unique process with the potential to deliver superior performance over a market cycle.

ICICI Prudential Bluechip Fund
The fund, which is jointly managed by Anish Tawakley and Rajat Chandak, has a quality bias when choosing stocks: They favour companies with robust business models, strong entry barriers, and the ability to scale up without eroding profit margins. They follow a barbell strategy by also buying a portion of the portfolio with a value bias.

Mirae Asset Largecap
The investment philosophy of the fund with Gaurav Misra as Lead Manager  is built on three core principles: quality businesses with stable earnings, strong management, and attractive valuation. It has a record of consistently delivering better risk-adjusted returns than its benchmark and most peers.

SBI Bluechip Fund
This fund’s focus on long-term investing in quality names is evident in the portfolio. The fund, led by Sohini Andani, has an orientation towards growth stocks focussing on long-term (three- to five-year) visibility.

Please do the same for the purpose of both mid cap and small cap funds

Mid Cap Funds:

DSP Midcap Fund
This fund scouts for growth-oriented companies that have sustainable competitive advantages over their peers and are leaders in their industries. The fund’s strategy allows it to play its strengths. Fund manager Vinit Sambre has executed the strategy with a good degree of success over the years.

Franklin India Prima Fund
The focus of this fund led by R.Janakiraman is high-quality mid caps that have sustainable economic moats, predictable businesses, consistent earnings growth, reasonably high returns on equity with low balance-sheet risk.

Kotak Emerging Equity
The focus here is growth businesses with strong entry barriers and sustainable competitive advantages. The fund led by Pankaj Tibrewal aims at protecting downside risks which is reflected in its market
capture ratios.

Small Cap Funds:

HDFC Smallcap Fund
There is a perceptible quality bias in its investment style in this fund led by Chirag Setalvad who favours companies with strong management teams and robust business models.

SBI Small Cap
This fund managed by R. Srinivasan seeks companies capable of delivering high growth on a sustained basis. The strategy draws almost entirely from the bottom-up approach.

What is the extent of participation by retail and institutional investors in equity funds?

Retail investors make up the bulk of the equity investments. As per latest industry data 88 per cent of the Equity AUM is from individual investors. Equity investments typically form a bulk of the individual investor portfolios with 68 per cent invested in Equity funds. Institutional investors are more focused on short-term investments lower volatility fixed income funds and thus only 10 per cent of the overall investments from institutional investors are in equity funds, with an additional 14 per cent in ETFs which is largely due to EPFO investments in ETFs.

We have seen a major shift of investments from equity to debt funds in recent months. Do you expect trend of preferring debt funds to continue in the coming months?

Equity funds flow have remained muted for the last few months primarily due to the sharp bounce back in the markets post the steep correction in March. Since then markets have made a significant recovery and prompted investors to book some profits, resulting in flat to negative flows from equity funds in the last couple of months. Overall SIP flows, albeit trending marginally lower in recent months will remain the bedrock of the inflows into equity funds.

Fixed income funds have gone through their own set of challenges post the winding up schemes by Franklin Templeton in April. Investors redeemed significantly from credit risk funds as well as any other fund that was perceived as holding higher credit risk in its portfolio. There has been a flight to safety with investors moving to categories like banking and PSU, corporate bond and short duration funds. We expect the preference for these categories will continue for some time, at least till the pandemic related effects on the economy don’t start easing out.

Do you think there may be more incidents of collapse of debt funds in near future? Is there a need to review the process of assessing both debt and equity funds by regulators and the industry?

We think the likelihood of similar incident happening is limited. The outflows from the affected category of funds havenormalised over the past few months while managers too have created additional liquidity buffers in their portfolios. The regulator has been quite proactive with their regulations and will look to further strengthen the fund norms to address some of these issues. The industry participants should continue to work on investor education to ensure the various risks are well understood by investors.

saibal@outlookindia.com