One golden rule of equity investing is to churn your portfolio at regular intervals. Once every 12 months or so, you must compare and contrast the recent performance of the various stocks and mutual funds units in your portfolio and weed out the chronic underperformers and book profits in the super performers. It will ensure that your portfolio remains relevant and does not fall too behind the changes in the broader market.
This is especially true for the 2022 New Year eve. The Indian equity market is changing direction after an unprecedented rally in the last one-and-a-half years. The recent decline in stock prices across sectors also means little or no potential loss if you choose to sell a part of your portfolio and move some of this money to other stocks or funds.
The recent fall in the broader market means that most stocks and equity mutual funds are much cheaper than they were just a few months ago.
And if you follow the age-old thumb-rule of investing, buying at a lower valuation maximises the long-term returns and vice-versa.
While we are not sure of the individual stocks, here are top diversified mutual funds that have the potential to shine in the New Year. These new mutual funds have been shortlisted based on a fund score on a host of parameters such as long-term and short-term performance, volatility of returns, the portfolio overall valuation, portfolio concentration and most importantly the fund’s expense ratio.
Their portfolio remains relatively inexpensive for new investors. And to top it all, all these funds have some of the lowest expense ratios or management fees in the industry, which means that investors capture most upside gains in their fund.
Most of these funds also have fairly large assets under management (AUM) that ensures consistency in performance and few negative shocks if one of the stocks in the portfolio had a meltdown.
The analysis is based on the latest monthly mutual fund data on all diversified and index equity funds from ICRA Analytics MutualFundIndia.com. Here are the mutual funds that topped our charts:
1. HDFC Index Fund – Sensex Plan – At the top is HDFC Mutual Fund Index Fund that tracks the BSE Sensex. The HDFC Sensex index fund has given annualised returns of 17.6 percent in the last five years and 17.8 percent returns in the last three years. This may seem like a laggard compared to 20 percent-plus returns delivered by top-performing actively managed diversified mutual funds, but a good chunk of additional returns by active funds are eaten away by their higher expense ratio. Net of expenses ratio, index funds could prove to be a winner over the longer term.
2. UTI Nifty Index Fund. The UTI mutual fund index fund based on the Nifty50 index is at the second spot with 5-year CAGR returns of 17.2 percent and one of the industry’s lowest expense ratios of 0.3 percent. One of the biggest benefits of index funds like the UTI Nifty plan is that you no longer have to bother about the quality and the competence of the fund manager and frees you from the burden of churning your portfolio churn every year.
3. Nippon India Small Cap Fund is ranked third with 5-year CAGR returns of 23.7 percent and 3-year CAGR returns of 29.1 percent. It also shines with an expense ratio of 1.8 percent, which is among the lowest of its peer group. Its valuation is also quite reasonable with a P/E multiple of 47.44X at the end of Nov-21.
4. DSP Small Cap Fund is fourth on our list with chart-topping CAGR returns of 28.4 percent in the last 3 years. Its portfolio is also amongst the cheapest in the industry with a P/E multiple of 33.6X.
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5. Parag Parikh Flexi Cap Fund comes fifth with a 5-year CAGR return of 23 percent and 3-year CAGR returns of nearly 30 percent. The fund also gets a high score on valuation with a P/E of just 34.7X and an expense ratio of 1.8 percent making it an all-rounder.
6. Mirae Asset Emerging Bluechip Fund is another consistent performer and comes sixth on the list of top funds. It has given a category-leading CAGR return of 22.3 percent and 25 percent returns in the last 5 and 3 years respectively. The fund also gets a high score for its relatively low expense ratio and high risk-adjusted returns (Sharpe ratio).
7. Kotak Emerging Equity Fund is seventh on our list with 5-year CAGR returns of 19.6 percent and 3-year CAGR returns of 25.4 percent. The fund also scores well on expense ratio and risk-adjusted returns.
8. SBI Small Cap Fund is in 8th place with 5-year CAGR returns of 24.1 percent and 3-year CAGR returns of 28 percent. The fund has one the best Sortino ratios in the industry which means a high degree of downside protection. It is precious in the current market environment. The fund also scores high on expense ratio but loses a bit on the valuation front with a P/E of nearly 59X.
9. SBI Focussed Equity Fund is ranked ninth on our list with 5-year CAGR returns of 20.4 percent and 3-year CAGR returns of 24.2 percent. The fund also gets a high score for the low volatility in its returns and relatively low expense ratio. However, it loses some points for having some of the most expensive portfolios in the industry with a P/E of 75.6X.
10. Axis Midcap Fund is tenth on our list with 5-year CAGR returns of 23.3 percent and 3-year CAGR returns of 25.9 percent respectively. It’s another all-rounder with a competitive expense ratio and one of the best Sharpe and Sortino ratios among the diversified mutual funds.
As usual, don’t stick to only the top-ranked funds but spread your money among 5-6 funds to get the benefits of diversification.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).