The general thumb rule of equity investing is that you must churn your portfolio at regular intervals. The rule not only applies to direct investment in equity markets but also to equity mutual funds. Once every 12 months or so you should review the performance of various mutual funds in your portfolio to weed out underperformers and book partial or full profit in the super performers. This will ensure that your portfolio remains relevant and doesn’t fall too behind the changes in the broader market.
Tweaking is especially important at the current market juncture. Indian equity is now trying to find a new direction post the end of the COVID-19 rally in June 2022.
The poor show in the broader market in the last six months also means that many stocks and mutual funds are now trading at a cheaper valuation compared to the pre-pandemic valuations.
Lower valuation in turn means lower downside risk for investors.
For example, the benchmark BSE Sensex is currently trading a trailing price-to-earnings multiple of around 23.6X, nearly 15 percent lower than its pre-pandemic average earnings multiple of 27.5X. And everything being the same, buying at a lower valuation maximises the long-term returns and vice-versa.
The New Year is also a great time for new investors to start taking a small dip in equities. Equity mutual funds are the best vehicle for individual investors to take exposure to equity markets. They are less risky than direct investing in individual stocks.
While equity mutual funds are now a big universe with hundreds of funds and schemes to suit all kinds of investment and risk profiles, we believe that investors should generally stick to diversified mutual funds. Here are ten diversified mutual funds that offer the best combination of superior long and short performance and reasonable valuation on price-to-earnings and price-to-book value ratios.
These funds have been selected from 360 diversified equity mutual funds across all investment categories such as large-cap funds, Flexi-cap funds, mid and small-cap funds, tax-saver funds, focused funds and thematic or sectoral funds. The analysis is based on the latest monthly mutual fund data on all diversified and index equity funds from the ICRA Analytics Mutual Fund database.
1. ICICI Prudential Infrastructure Fund is at the top of our charts with 29.12 percent returns in the last 12 months and 29 percent actual returns in the last six months. A large-cap-focused fund with big exposure to banking and finance, power and construction sectors, the fund could continue to outperform given its portfolio of stocks with a lower valuation. Its portfolio has a P/E of 21X and price to book value ratio of 3X, both at a discount to the Sensex valuation.
2. HDFC Flexi Cap Fund is next on our list with 17.5 percent returns in the last 12 months and 21.33 percent absolute returns in the last six months.
Another large-cap fund with assets under management of nearly Rs 33,000 crore, the fund's portfolio is reasonably priced with a P/E of 27X and P/B ratio of 4.6X.
The fund has big exposure in top banks, IT firms and power companies.
3. ICICI Prudential Value Discovery Fund is ranked third in our list with 15 percent returns in the last 12 months and 18.32 percent absolute returns in the last six months. It is also a large-cap fund with big exposure to banks, pharma, oil & gas and IT Services exporters. However, its portfolio is relatively expensive with a P/E of 38X and a P/B ratio of 4.5X.
4. SBI Contra Fund comes next with 12.13 percent and 19.6 percent returns in the last 12 and 6 months respectively. It’s a multi-cap and multi-asset fund that invests in both equity as well as debt instruments. This makes it a low-risk fund that shines in times of high market volatility. Its equity portfolio is currently valued at a P/E of 34.5X and P/B ratio of 4.9X.
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5. Quant Small Cap Fund is another top performer with 9.8 percent returns in the last 12 months and 29.3 percent returns in the last 12 months. Given that it’s a small-cap fund its portfolio is reasonably priced with a P/E of 32.2X and P/B ratio of 3.8X and provided adequate downside protection to investors.
6. HDFC Mid-Cap Opportunity Fund comes next on our list with 12.56 and 23.54 percent returns in the last 12 and 6 months respectively. One of the oldest and biggest mid-cap funds with an AUM of nearly Rs 33,000 crore, the fund has a diversified portfolio with top stocks from auto-ancillaries. healthcare, NBFCs, capital goods and hospitality sectors. Its portfolio remains reasonably valued with a P/E and P/B ratio of 35X and 5X respectively.
7. Quant Infrastructure Fund is ranked seventh in our list with 13.9 percent and 26.9 percent returns in the last 12 months and 6 months respectively. A large-cap-oriented thematic fund it has big exposure to top stocks in cement, oil & gas, construction & Infra, capital goods, banks and the power sector. Its portfolio is currently valued at a P/E and P/B ratio of 34.9X and 4.3X respectively.
8. Quant Tax Plan is next on our list with 11.9X and 23 percent returns in the last 12 months and 6 months respectively. A large-cap-oriented fund, it has big exposure in sectors such as cement, FMCG, banks and oil & gas. But its portfolio is richly valued with a P/E of 40.8X and a P/B ratio of 4.7x, which raises the downside risk for new investors.
9. ICICI Prudential Large & Mid-Cap Fund is another high performer in our list with 11.1 and 17.56 percent returns in the last 12 and 6 months respectively. A large-cap-oriented fund its biggest exposure is in banks, IT Services, pharma, telecom, automobile and Oil & gas sectors. The fund has the potential to continue its good run given the reasonably low valuation of its portfolio with P/E and P/B ratios of 31.7X and 4.5X respectively.
10. Templeton India Value Fund is last on our list with 14.5 and 21.6 percent returns in the last 12 and 6 months respectively. A large-cap-oriented fund, the top stocks in its portfolio are in sectors such as banks, oil & gas, IT Services, cement and capital goods. Its portfolio is among the cheapest in its peer group with a P/E and P/B ratio of 25.9X and 3.8x respectively. This means lower downside risk and high potential upside for investors.
(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).
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