The basic principle of investing is making money and for this, selecting the right asset class is vital. What is also important is selecting the right instrument within a particular asset class. The selection of the right instrument becomes all the more critical when the universe is very large—and that is exactly the case with mutual funds.
ALSO READ: OLM 50
With more than 1,500 schemes available across categories, it’s no mean task to pick just six to seven funds to build your portfolio. That’s where Outlook Money’s list of 50 handpicked funds, OLM 50, comes in. The funds included in the list are put through stringent filters (read ‘Methodology’) and the selection is based on various parameters and not just returns.
The idea is to choose a consistent performer. Some of the funds in OLM 50 may not be the best performers but have been chosen because of their ability to do better in the long run.
In the new edition of OLM 50, which is being revived after a gap of around seven years, we have included funds from three broad investing categories—equity, hybrid and debt.
In the last two years, the Indian equity market has been exuberant, except for a small blip when the pandemic-induced restrictions hit India in 2020. Fund managers are, therefore, optimistic and expect equities to rule the decade as the pandemic recedes and businesses get back to normal. Retail participation in the market is at an all-time high, show the inflow numbers into systematic investment plans (SIPs) of mutual funds. The asset base of the industry grew for six straight quarters with 29 per cent quarterly growth rate. As on March 31, 2022, the average assets under management was Rs 37.70 lakh crore, according to the Association of Mutual Funds of India.
Given this backdrop, we have included 30 equity schemes in the list. Five of them are from the large-cap space and five others are from the large-and-mid-cap and flexi-cap categories. To keep the list simple and handy to use by individual investors, we have merged the flexi-cap and large-and-mid-cap categories under ‘Equity (Others)’. Funds from the mid-cap, small-cap and equity-linked savings schemes (ELSS) categories are listed separately.
There are eight passively managed funds—index funds and exchange-traded funds (ETFs)— in the list for those who see potential there. To give your portfolio an international diversification, we have included Motilal Oswal Nasdaq 100 ETF as well.
Large-Cap Funds: It has been a matter of debate for some time that large-cap funds underperform their benchmark. But that’s true only to an extent. When we ran a test to verify this claim of underperformance by large-cap funds, among 25 schemes that have been in existence for more than 10 years, six have outperformed their respective benchmarks over a period of 10 years as on March 31, 2022. Over a period of five years, 26 schemes outperformed their benchmarks.
We believe that large-cap schemes should be part of an investor’s portfolio as they invest in the top 100 companies by market capitalisation. Generally, these funds are well-diversified among the top 30, 50 or 100 stocks and stick to those with high levels of trading volumes, ensuring enough liquidity in the portfolio.
These are the least risky among diversified equity funds as shares of large-cap companies are usually well-known. Also, they are well-researched by analysts, which means there is ample information about them. They provide stable growth during periods when markets are up, and tend to have lesser declines during downturns. Ideally, these funds should form a part of your portfolio. Also, these funds are a good starting point for new investors. If you still believe that your fund may not outperform its benchmark, you may go for index funds.
Mid- And Small-Cap: In this list we have included three schemes from the mid-cap segment and four from the small-cap space. Mid- and small-cap funds are riskier compared to large-cap funds as they invest in relatively smaller companies, which are in the growing stage and may be under-researched.
However, their risk-reward ratio is high. The mid- and small-cap segments are good investment picks as they have the potential to deliver superior returns in the long term. For instance, the average compounded annual growth rate (CAGR) returns from mid-cap funds is 18.40 per cent in the last 10 years. Over 15 years, it is 13.99 per cent. Similarly, the average return delivered by small-cap funds in the last three, five, 10 and 15 years is 24.92 per cent, 15.23 per cent, 18.81 per cent and 13.62 per cent, respectively, according to data from MFI360.
Before you decide to invest in these categories to take advantage of the returns kicker, remember that they cannot form the foundation of your portfolio. They should be included only to the extent that your risk profile permits.
The best way to gain from both the equity and debt market is proper asset allocation depending on your financial goals, risk appetite and investment horizon. Hybrid funds step in to help with asset allocation on your behalf as they invest across equity, debt and other categories.
In this category, we have included funds from three sub-segments—hybrid aggressive (equity-oriented), hybrid conservative (debt-oriented) and dynamic asset allocation (balanced advantage funds or BAF)—as different investors may have different needs.
The BAF category, from which we have included three schemes, came into existence in October 2017. Market regulator Securities and Exchange Board of India (Sebi), through its circular on Schemes Categorization and Rationalisation, created a new sub-category—dynamic asset allocation or BAF in the hybrid category. The acceptance of these funds has grown exponentially in recent years, especially in 2021. Among the three schemes in the list, two follow conservative equity allocation, while one (HDFC Balanced Advantage Fund) follows an aggressive model. You may choose as per your asset allocation.
Traditionally, the debt asset class has been a favourite among investors for its quality of providing more stable returns than equity. Debt investments help tide over volatility—when the equity market tanks, typically, debt acts as a cushion against erosion of portfolio returns.
In this asset class, debt mutual funds hold a special position because of their tax efficiency and other characteristics. This category can help you achieve short- and medium-term goals.
Given the current market scenario, where interest rates are likely to go up, we have included two dynamic bond funds in OLM 50. If your investment horizon is two to three years, you may pick them as they will help gain from the emerging interest rate scenario.
Though liquid funds are not considered an investment option, we have included some as they can be used to park money for emergency needs. The pandemic has further highlighted the need for an emergency fund. You may also park money in liquid funds for very short-term needs.
Watch this space for quarterly updates to find out whether your fund still makes the cut three months later. While we do not recommend frequent churning, we believe it’s important to revisit your financial portfolio regularly.
OLM 50 Methodology
The basket of 50 funds that is OLM 50 has been chosen after much care and deliberation. The cutoff date for our analysis was March 31, 2022, and we have considered categories defined by the capital markets regulator, the Securities and Exchange Board of India. We have only considered direct growth plans. Icra’s MFI 360 database was used for all the data and analysis.
We primarily used two ?lters to reduce the number of funds. We have only taken schemes with assets under management (AUM) of at least 10 per cent of the respective category’s average corpus. For instance, if the category average AUM was Rs 1,000 crore, we did not consider schemes with an AUM size of less than Rs 100 crore in that category.
The other filter that we used is the number of years considered for the performance track record. We have only taken funds that have at least three years of track record. This means we did not consider schemes launched on or after April 1, 2019.
Equity Funds: Equity funds were evaluated on three key parameters: risk-adjusted returns, downside risk and the fund manager’s stock-picking acumen. We considered these parameters keeping in mind retail investors’ risk-averseness as well as the fund manager’s ability to deliver returns.
We considered the fund managers’ track record with the respective schemes. For this, we evaluated other schemes managed by the fund manager to ensure consistency of performance and strategy. For managers who started managing funds only in the last one year, we evaluated the past track record with other funds.
Debt Funds: We evaluated all debt funds on risk-adjusted returns and their credit quality (the score of investments in sovereign plus AAA/P1+ rating was evaluated and given due weightage) for three years. These ratings stand for relatively high safety and less risk.
Industry’s Average Annual Growth Rate* 18.8%
Monthly SIP Contribution Rs 12,328 cr
Average Assets Under Management Rs 37.7 lakh cr
SIP Accounts At An All-Time High 52.7 mn
*Ten years. Data is as of March 2022. Source: Amfi