The Mutual Fund Show: How Key Large, Small And ELSS Funds Fared On Crisil’s Rankings
Research and rating firm Crisil Ltd. released rankings of mutual funds for the quarter ended June.
On The Mutual Fund Show, Piyush Gupta, director at Crisil, outlined some of the top performers and key schemes. Here are some of the key funds in the large-, small- and equity-linked categories and how they fared.
Assets under management of the large-cap schemes surged to Rs 1.83 lakh crore as of June, the highest among all categories. That was aided by 6.39% jump in the benchmark index and net inflows of Rs 1,810 crore.
The category, however, continues to underperform the benchmark indices in one- and three-year timeframes.
Seven of the 27 schemes ranked in the category outperformed Nifty 100 TRI over three years. Eight beat the benchmark in the one-year period, while 16 outpaced the index over three months.
IDBI India Top 100 Equity Fund ranked No. 1 with the highest return in the latest three months at 9.6% against the category’s 7.51%. The scheme’s allocation to large caps fell from 86.28% in October 2020 to 78.05% as of June. Share of mid caps rose from 10.69% to 15.32%, and from 0.81% to 2.74% for small caps, aiding its outperformance.
Axis Bluechip Fund, among the largest schemes in the category, climbed a spot to the second place. Its three-year returns stood at 15.57% compared to the category average of 13.31. Had 5% exposure to finance and 1% to software, both higher than the category average and aided the performance.
Small Cap Funds
Small-cap funds outperformed all other open-ended equity categories over three and six months, and one, two, five and seven years.
The surge in small-cap stocks and an inflow of Rs 1,970 crore increased the assets under management for the category. 12 of the 14 funds in the category outperformed the Nifty Smallcap 100 TRI over the three-year period. But one fund outpaced the benchmark over the one-year period and four over three months.
Nippon India Small Cap Fund, with the largest assets in the category, ranked at the top. Three-year returns stood at 20.25% compared to the category average of 16.96%, and returned 70.41% compared to the category’s 64.45% in the last nine months.
In the past one year, the fund has had 39 stocks in its portfolio that beat the category’s average return of 100.34%. The exposure of these stocks averaged 46.80%, heling it outperform.
Franklin India Smaller Companies Fund slipped two spots to rank fifth. The scheme’s three-year returns stood at 10.87%, second lowest in the category compared to average of 16.96%. It returned 62.67% gains in the recent nine months compared to average of 64.45% for the category. The fund has a lower exposure to small caps than the category.
Equity-Linked Savings Schemes
The ELSS category, which allows deductions under Section 80C of the Income Tax Act, witnessed a net outflow during the quarter ended but its assets under management rose Rs 1,218 crore on the back of equity rally. 10 of the 35 funds in the category outperformed the benchmark S&P BSE 200 TRI during the three-year period.
IDFC Tax Advantage climbed a spot to No. 1 in the latest rankings by Crisil. The scheme returned 15.22% gains over three years compared to the category average of 13.83%. It also outperformed with 59.84% in the recent nine months against 44.57%. Higher allocation to small-cap stocks (27% versus category average of 9%) aided in its performance.
Aditya Birla Sunlife Tax Relief 96, on the other hand, slipped on rankings. Three-year returns stood at 8.6% as of June compared to the category average of 13.8%. It also underperformed in the recent nine months with 26% gains, the second lowest in the category that returned average of 44.6%.
The fund’s exposure to top five sectors stood at 59.7% as of June. Pharmaceuticals (7% more exposure than the category), consumer non-durables (3% higher), industrial capital goods (7% more) underperformed the benchmark index, impacting the scheme’s performance.
Watch the full show here:
Here are the edited excerpts from the interview:
Before we get started with the individual funds, anything that stood out for you as you were putting out this research on a quarter-on-quarter basis?
PIYUSH GUPTA: If I were to look at equity as a category, I think there is a clear distinction as far as the performance of three major segments that we have in the equity mutual fund — large-cap, mid-cap and small-cap. We see a significant difference in terms of performance of small-cap funds vis-à-vis say mid-cap and large-cap.
Small caps have done really well. Their performance is better and highest among all the three categories, and to some extent that also drives the performance of some of the funds within each of the categories that we see.
So, in large-cap the allocation between the various market capitalisation has a bearing on the performance. Similarly, on a small-cap and mid-cap sides, it’s a similar trend that we observed.
In the large-cap category, how did IDBI India Top 100 Equity Fund do? What did it do?
PIYUSH GUPTA: The IDBI Fund has in fact improved its ranking in the latest quarter. It is ranked one as far as the latest quarter rankings are concerned and one thing which is quite evident from the fund is that it has outperformed both the category as well as the benchmark across timeframes—be the recent period or the three-year period that we typically look at when we rank equity mutual funds. Now, for IDBI, what we also observed is their allocation to large cap has been lower. The category on an average has had 88% exposure to large-cap stocks, while the fund had 82% in the period that we’ve evaluated. Second, the fund is fairly well diversified. It has about 54 stocks on an average in its portfolio over a period of time, which means that the fund is ranked higher as far as the diversification is concerned. Also, one of the key drivers for the performance of the fund was some of the sectoral exposures like IT and finance, which is where the fund was having higher exposure compared to the benchmark indices—that helped it in its overall performance.
It's a mix of sector allocation calls, and allocation between large, mid and small caps that in a way helped it [IDBI Fund] improve its performance.
The other one being the Axis Blue Chip Fund. Again, if IDBI climbed the ranks and reached number one, Axis has climbed the ranks as well. Is it the consistency which helps it? Why is it that it's climbing the ranks?
PIYUSH GUPTA: Axis in the past has done well. So, in the latest quarter of course it's improved its ranking. When you look at the Axis portfolio over a period of time, what comes out very clearly is that they are consistent as far as the allocation to different market capitalisation is concerned. They typically have a higher weightage towards the large-cap stocks. So that is clearly visible when we look at the portfolio over a period of time. Second, the fund has actually benefited from its performance in the initial one-and-a-half-year period. When large caps were actually doing well, the fund had higher allocation to the large-cap stocks. Having said that, the fund maintains a slightly concentrated portfolio. On an average the fund has about 20 or 26 odd stocks in its portfolio. When you compare it with the category, the category on an average has about 40 stocks in each of the funds on an average. Even at the sector level, there is a slight skewness that we observed in the overall portfolio. In the past the fund also got benefited from its higher allocation to cash especially at a time markets saw a sharp correction last year. Again, from the sectoral perspective the fund got benefited from it’s higher exposure to sectors like finance and IT—which contributed to the overall performance of the fund.
Now the small-cap category. It must have been difficult to choose funds and make them go up the rankings when 12 of the 14 have outperformed the benchmark?
PIYUSH GUPTA: Unlike large cap, I think small cap is one category whereby most of the funds outperformed their market benchmarks. When you look at large cap, I think we still continue to see a large proportion of the funds underperforming their market benchmark and that this is a category which has seen a significant uptake in terms of performance, which also meant that there was inflow that was there in the last quarter about 2,000 crore of AUM or funds flew into this category. So, in a way this category has been doing really well especially in the last one-and-a-half year and also they have been able to beat the benchmark consistently over a period of time.
Therefore, it's interesting to note that the largest AUM fund in the category has climbed the ranks and is ranked number two this time around?
PIYUSH GUPTA: So, Nippon is in fact one of the largest funds, in fact it is the largest fund in the category. It has improved its ranking from three to two in the latest quarter. I think at a broader level allocation to small-cap stocks, which is higher than the category average has benefited it. It had exposure of about 75% to small-cap stocks compared to a category average of 72%. Further, I think some of the stock selections have been beneficial for this particular fund and again, for the small-cap category I think stock selection plays a major role when it comes to outperformance or generating returns for the investors. It's a very well diversified portfolio. In fact, it has more than on an average 100 stocks in its portfolio, that is what we have seen over a period of time. Category, on the other hand, has only 64 stocks on an average in each of the funds. So, in a way while it is a large fund in terms of AUM, it also has a very diversified portfolio at a company level.
But the interesting bit is that the fund, which, in your own words, consistently has underperformed the benchmark has now slipped multiple points and is ranked number five. Tell us a bit about the Franklin India Smaller Companies Fund.
PIYUSH GUPTA: In fact, this used to be one of the better-performing funds if you go back a few years. In the last one year, when we look at this fund’s ranking, it has either been ranked three or four or five, so the performance has slipped significantly in the last few years. The fund has not been able to beat the benchmark, as well as the category average. So, it's underperformed both the benchmark as well as the category.
From the performance generation perspective, the [Franklin India] fund has higher allocation to large-cap stocks compared to peers, which has meant that its performance has got adversely impacted. Second, even in stock selection, quite a few stocks have adversely impacted its overall performance.
The reason why we thought that we would request you to talk on ELSS is because at times it's good to remind people that ELSS schemes are not just meant for January, February and March and you can do it throughout the year. So that's why we picked up ELSS and it's interesting to note how IDFC Tax Advantage has climbed up the rankings. Can you tell us a bit about this fund and why is it that you rated it so highly?
PIYUSH GUPTA: Before coming to IDFC Fund, the category again like you mentioned, it's not meant for January, February and March but if you look at latest quarter the category witnessed an outflow which meant that the SIPs are not as consistent in this particular category as compared to the other categories. Also coming to the fund, IDFC Tax Advantage Fund, it has improved its ranking in the latest quarter. The performance has improved over the last one year—it has been able to beat the benchmark as well as the category over the last one-year period. It's a very well diversified portfolio, it has about 68 stocks in its portfolio compared to the category average of 48 stocks. So, along with the performance, the portfolio is also well diversified.
The category on an average, if you see has 66% allocation to large-cap stocks but this particular fund has an odd 50% in large-cap stocks and remaining going into small- and mid-cap stocks. So that has in a way benefited in its performance and largely driven by performance in the last one-and-a- half years when small and mid-caps have rallied quite significantly.
Next, the Aditya Birla Sunlife Fund. I was looking at the returns average that you guys have given to me. It's been a very fairly shorty if you will and which is why it's come off the rankings, I reckon?
PIYUSH GUPTA: If you look at the three-year performance, the fund has delivered an odd 8.5% returns, and the benchmark has given a return of 15% and the category average is also 13%. So, that extent the fund has underperformed the benchmark quite significantly, and also the category average. I think for this fund unlike other funds that we discussed earlier, where allocation to small and mid-cap stocks were beneficial for some of the funds that we discussed but in this particular fund we have seen that, even though the fund had higher allocation to small and mid-cap stocks, its performance has not been so good.
Some of the stock selection calls have actually gone wrong for this fund [Aditya Birla Sunlife], which has meant that its performance has been weaker compared to the category even though it got it’s allocation call right in terms of market capitalisation.
Tell us about some of the highly ranked credit risk funds, and why is it that they enjoy that because the jury out here is really split? I'm not asking you to recommend if the credit risk funds are good or bad. Do you guys have any thoughts on the cycle and thereby the appropriateness of credit risk funds at the current juncture? If you don't have one, it’s okay.
PIYUSH GUPTA: I think at least when you look at the category, the category is supposed to generate returns by investing into lower rated instruments. By definition, 65% of the portfolio has to go into lower rated papers. Now, in the current situation where there is some apprehension as far as the credit cycle is concerned and again, it also is a function of the risk profile of the individual investor who is investing into these funds. They need to be aware of the fact that there is that higher credit risk element which is there in this particular category and once you are aware of the fact, then you can take an appropriate call in terms of whether you want to invest into these funds. If you look at the performance of these funds, I think some of the funds have given returns in excess of 10% in this category, largely because of the fact that we have not seen major events as far as credit is concerned and which has meant that some of the funds have been able to generate returns in excess of 10% but one needs to be aware of the fact that these are the funds which will typically have higher allocation to lower rated instruments.
I don’t normally see HDFC funds these days come as a top preference on the equity or the debt side and therefore, I was interested in knowing what has HDFC done to be the number one ranked fund this quarter on the credit risk fund side?
PIYUSH GUPTA: I think for HDFC what has worked is primarily the performance. It’s performance has been significantly higher than the category. The fund has delivered about 10.5% return over the last one year. At the same time when you look at the peer average it's odd 7%. So, a significant outperformance when you look at the peer set as far as this category is concerned. The fund while there is no duration play I would say in this particular category, generally you would find funds having a duration in the range of about point five to say maybe two, but within this category I think this particular fund has had the highest duration, compared to the peer set. The other factor which I would look at, is the fund credit profile has been fairly in line with the category average. It’s rating profile is on par with the overall category that we see. The fund, of course, has some exposure to weaker sectors in its portfolio. As per the latest portfolio, I think there are about 10% exposure to the sectors which we classify as sensitive sectors plus the duration being higher for this particular fund. So, to that extent the interest rate risk in this particular fund is relatively higher compared to the peer set but the performance has been really high or significantly higher than the peer set which has put this fund in the top-ranked category in the latest quarter rankings.
In which case, let me ask you about the number two ranked fund. Since you mentioned that HDFC is at a higher risk and if Aditya Birla Sunlife Credit Risk Fund’s returns are very close to HDFC’s, is the risk element also as high as HDFC or lower than that and why is it that Aditya Birla Sunlife is able to do what it has done because I think, in a manner of speaking, they've seen a change at the helm of affairs when it comes to the debt side investing with Maneesh Dangi moving out?
PIYUSH GUPTA: I think even for Aditya Birla, the key factor for higher rank is the performance. I think this is the second-highest performing fund in the category when we look at the last one year of performance. The portfolio parameters are where we do see some risk. For instance, exposure to weaker sectors or sensitive sectors is high in this particular fund. So, even from the concentration perspective, the fund has a diversification, which I would say is line with the category but the exposure to sensitive sectors is slightly on a higher side. Even asset quality I would say is on par with the category. Liquidity is where I would say the portfolio has a fairly high liquidity compared to the peer set and that's where it ranks higher in the overall ranking.
So, liquidity is high, the returns are pretty strong, it seems to be all hunky dory so far so good for this fund?
PIYUSH GUPTA: Yes, barring I would say sectoral risk, which is there in this portfolio. The other parameters are either on par with the category or slightly better than the category.
The last category, which is corporate bond funds. Just a quick introduction for people who might be not completely aware of what would a corporate bond fund typically do, what are the kinds of returns that should be expected?
PIYUSH GUPTA: Corporate bond category is in contrast to the credit risk category that we just discussed.
In contrary to the credit risk funds where the 65% portfolio has to be invested into lower-rated instruments, here you have a category whereby 80% of the portfolio is invested into top-rated instruments which AAA and AA+.
So, from the credit risk perspective, it is significantly safer compared to the credit risk funds. Having said that, there is no duration cap on this particular category, so you do find quite a bit of variation as far as the duration of the funds are concerned in this category and the duration can range from say, one to more than five for some of the funds in this category. To that extent the performance of these funds also vary quite significantly depending on the interest rate cycle that we observe over a period of time. So, largely the returns are driven by the duration of the funds over a period of time and the interest rate cycle that the funds go through during the period. To some extent, the returns from the credit are relatively lower in this particular category.
Therefore, the two performers and both of the funds that you’ve chosen have actually climbed the rankings. Let's talk about the Nippon India Corporate Bond Fund, first. Any thoughts here?
PIYUSH GUPTA: Nippon India Corporate Bond Fund improved its ranking in the latest quarter largely driven I’d would say by the performance in the recent six-month period. I think when we look at this particular fund over a period of time, what we will observe is the fund has in general maintained a lower duration it is about 1.5 to 2, there or thereabouts. You will find the duration of the portfolio over a period of time and what we also had in the last six months is especially in the quarter between January and March, we saw hardening in the interest rate which meant that the performance of this particular fund was less adversely impacted as far as the interest rates were concerned. Having said that, contrary to a corporate bond category or maybe when you look at some of the other fund, this particular fund has relatively higher exposure to papers rated AA and below. So, the fund has about 5-6% exposure to these rating categories compared to a category average which is less than 0.5%. So, to that extent the returns in this particular fund are largely driven by accrual from relatively lower-rated instruments which are a part of the portfolio.
Is there an inherent risk to that or no not quite, or manageable?
PIYUSH GUPTA: Yes, on a relative basis, I think what will determine the overall performance is if the interest rate risk is fairly controlled. So, the fund has duration about two, so there is no interest rate risk. On a relative scale I think the credit profile is slightly weaker compared to the peer set that we look at. So, for instance exposure to sensitive sectors are there. While it has improved in terms of exposure to those sectors, it has reduced its exposure there. The credit profile is slightly weaker compared to the peer set I would say.
What about L&T’s Triple Ace Bond Fund has climbed the rankings?
PIYUSH GUPTA: L&T, if you look at this particular fund, it is quite an opposite from the other, the Nippon fund that we discussed. Here, the fund maintains a fairly strong portfolio in terms of credit profile. In fact if the fund doesn't have any exposure below AAA rated papers in its portfolio. It's largely AAA and above where you see the exposures. Even from the diversification perspective, it is fairly diversified, it doesn't have any exposure to weaker sectors in its portfolio. So, the returns are primarily generated by the duration that it has maintained over a period of time which is generally higher than five, I would say that we have observed.