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The Mutual Fund Show: Crisil’s Latest Ranking May Help Investors Choose The Right Fund

Returns from mutual fund schemes remained subdued for the large part of 2018 due to concerns over liquidity crisis among non-bank lenders, escalating trade war fears and uncertainties ahead of the general election.

Based on the performance of the schemes, Crisil ranked 474 funds as of December. Of this, 211 are equity, 215 are debt and 48 are hybrid funds. Axis Mutual Fund and Kotak Mahindra Mutual Fund together secured the top spot with their 11 funds featuring in Crisil Mutual Fund Ranking. They were followed by HDFC Mutual Fund, ICICI Prudential Mutual Fund and IDFC Mutual Fund with nine funds each.

The rating agency also ranked 25 large-cap funds, 26 multi-cap schemes, 20 mid caps and 11 small-cap funds.

“Reliance Large Cap Fund claims the top position in the large-cap category,” said Bhushan Kedar, director (funds and fixed income) at Crisil. “Not only did the scheme managed to give higher returns of 7.23 percent compared with its peers’ average of 3.58 percent, but also improved on company and industry concentration mark.” It was followed by Edelweiss Large Cap Fund and IDFC Large cap Fund, he said at BloombergQuint’s weekly series The Mutual Fund Show.

Large caps outperformed small and mid caps in 2018. The Nifty Midcap 100 Index and Nifty Smallcap 100 Index plunged 17 percent and 30.5 percent, respectively, last year. That compares with a 3.2 percent gain in the NSE Nifty 50 Index.

Also read: Here’s Proof Of How Domestic Mutual Funds Are Upstaging Foreign Investors

Watch the full episode here to find out how the rating agency arrived at the rankings:

Also read: The Mutual Fund Show: Get Your Basics Right Before Investing In Debt Funds

Here are the edited excerpts of the conversation:

What made you confident about Reliance Large Cap Fund as the number one ranked fund in the large-cap mutual fund category?

Bhushan Kedar: Reliance has swapped in the last quarter. Its nine months and three-year performances have improved. It has also improved on company concentration as well as industry concentration parameter. The year 2018 was not great from stock markets standpoint. It was muted for generic indices. Some of the sectors like banking and information technology did well. Small and mid caps have taken a large hit. So, somebody’s ability to pick up right stocks from this have benefited, and we are talking about large cap category where you have only 100 stocks to choose from. What you choose, works for you. Bajaj Finance gave them the lever in terms of performance. ICICI Bank as the other one and Divi’s Laboratories contributed to their performance improvement.

Why did Edelweiss Large Cap Fund miss the number one rank?

Bhushan Kedar: It is just 10 percent which is there in rank one. It is only a 25-fund category. So, there are only two to three funds which you typically have in rank one category. Edelweiss’ performance relatively has dropped. If you look at their performance vis-à-vis their peers, for nine months, it is 200 basis points higher than the peers. On the three-year segment, they are 120 basis points higher the CAGR. It is a slip in performance which has caused them second rank. In industry concentration, their scores have improved. It is not that they have taken a toll on each and every parameter.

What did the UTI Equity Fund do right which lead them to number one spot in the multi-cap funds category?

Bhushan Kedar: In terms of returns and managing the volatility, it has helped them move up the rank. In nine-month performance, they have delivered more than 400 basis points alpha vis-à-vis their peers. Their three-year performance is 60 percent higher on a CAGR basis. It has helped them improve their ranking.

Reliance Multi Cap fund moves to rank two from four. Is it the same characteristics as large-cap fund?

Bhushan Kedar: The selection process is same. The multi-cap category is the largest category. You have large number of stocks to choose from. The selection skills does matter as they let you pick up stocks differently. The ranking on performance basis, it has gone up to 3 notches there. They were ranked fourth on mean return and one now. It is clearly a differentiator. The kind of stock they are able to pick up like Linde India which you will not see in too many portfolios. So that stock-picking helps to boost the performance. They had ICICI Bank and EIH in their top contributor list.

DSP Equity Fund has negative nine-months return. Why has it managed to move up the ladder?

Bhushan Kedar: It is relative ranking. If you are looking at returns and risk parameter like concentration and liquidity, a fund scoring both, and if there is a balance between the two, it tends to get a better rank because you are looking at the risk-adjusted performance.

If you compare their performances vis-à-vis rank 4 and 5 funds, they are definitely an outperformer though we are talking about negative performance. Their nine months is -0.12 compared to 1.82 of the 4th and 5th category funds. On other parameters like concentration, they hold the third rank. The other one has underperformed and slipped, and DSP has taken the place.

Axis Midcap Fund manages to maintain its position in the mid-cap fund space. They are doing something right.

Bhushan Kedar: On the equity side, they are ranked one and they continue to be there. If you compare in other categories, the size of fund is also moderate as compared to some of the other fund houses. So, replication of fund sometimes becomes more efficient for some of this. But also, not taking away the credit for managing the portfolio really well.

If you really look at the performance, the category is -4 percent, the nine-month return is 6.86 percent which is credible. Stock selection and concentrated bet have resulted in superior performance. It has helped them achieve the alpha. If you look at stocks like Bajaj Finance, City Union Bank, Divi’s Labs are some of the key contributors to performance of Axis Mid Cap Fund.

ICICI Prudential Mid Cap Fund has moved from number 3 to number 2. With number 2 and number 4, their nine months returns are not impressive. For Aditya Birla Sun Life Mid Cap Fund, the three-year returns are not top of the line. Why is it that this funds manage to stay in top four?

Bhushan Kedar: The mid- and small-cap category has delivered negative return for the entire year. Even the benchmark was in red. In fourth quarter of the calendar year, we saw some positive performance. But otherwise the indices have been negative. In Axis Fund, there is clearly a differential in stock picking and that has given a positive performance. If you look at peers, -4.7 percent for nine months, they have low negative return. Both ICICI Prudential and Aditya Birla Funds have marginally lesser negative return. So, in a relative sense, they are still featuring in. It is also to do with the category that you are part of. One is you are gaining from the upside and at the same time protecting the bottom is also important.