Covid-proof Equity MF

The disruption across sectors demands a review of your equity mutual fund schemes

The Mutual Fund Sahi Hai campaign has helped draw hundreds of crores into equity mutual funds (MFs) over the last couple of years. A market downturn coincides with rising retail investments in MFs - something marketmen associate with a maturing investor class. However, a consistent fall in MF net asset values (NAVs) after the coronavirus-led market crash has left investors wondering if they have made the right decision. NAVs of equity MFs have plunged up to 36 per cent over one year up to May 19.

Should one exit, hold or invest more in the current scenario?

Given the virus-led disruptions, many schemes with high exposure to the worst-hit sectors may be in for more pain going ahead. This calls for a review of your investments. We have compiled lists of worst and best performers in key categories - large-cap, mid-cap and multi-cap - to help you manage your equity MFs better.

Dig Deeper for Insight

Large-cap funds are supposed to be the safest as they rarely fall steeply. Since they invest in companies which have become winners after struggling through several economic cycles, they are expected to fall the least in a market crash. However, these funds have lost up to 29 per cent in the last one year. Nippon India Large Cap, HDFC Top 100 and Tata Large Cap Gr are the three worst performers, losing between 23 per cent and 29 per cent. Bank stocks account for one-fourth portfolio of Nippon India. Some of the scheme's top holdings are ICICI Bank, ITC, SBI, HDFC Bank, and Larsen & Toubro, which have fallen up to 55 per cent in the last one year.

HDFC Top 100 has nearly 36 per cent exposure to the banking sector. It also has exposure to ITC and L&T, which have fallen by 42 per cent each.

Tata fund has invested over 37 per cent of its money in banking. Some schemes have, however, fallen in single digits. Axis Bluechip Fund Gr and Canara Robeco Bluechip Equity Reg Gr have shed only 8 per cent during the period. "That is because both funds have a focus towards high- growth quality large-cap stocks. This is the segment of the market that has done exceedingly well for the last couple of years running up to the market peak in January 2020. Axis Bluechip has also been holding significant cash positions, which has helped it in the market fall," says Kaustubh Belapurkar, Director and Manager, Research, Morningstar India.

Mid-cap funds have been hit badly with worst-performing funds such as ICICI Pru Midcap Gr, Aditya BSL Mid Cap Gr, Sundaram Mid Cap Gr, Motilal Oswal Midcap 30 Reg Gr and Franklin India Prima Gr falling 22-27 per cent. The category best performer - Axis Midcap - is down 2 per cent for the year, while others have lost 4-9 per cent. In small-cap funds, even top five best performing schemes have lost 7-15 per cent, while the worst performers have shed up to 36 per cent. Overall, value-oriented category had the worst fall (24.22 per cent), followed by smal-cap (23.72), large- cap (20.22 per cent), ELSS (19.84 per cent), large mid-cap (18.86 per cent), multi-cap (17.34 per cent) and mid-cap (18.66 per cent).

In comparison, international funds stood tall, with 8 per cent gains for the year. Parag Parikh Long Term Equity fund (down 4 per cent), in fact, arrested losses owing to its up to 35 per cent exposure to US stocks. It was the best performer in the multi-cap fund category.

Has Your Fund Lost Its Way?

Legendary investor Peter Lunch once said: "Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." Hence, you shouldn't take a fund manager's decision at face value and must take note of what he is doing at a time when coronavirus-led slowdown has increased risk for a majority of companies. If your MF scheme has incurred double-digit losses, you need to do an in-depth study of each sector to check out individual stocks where the scheme has invested.

In financial services, for example, if your scheme is exposed to PSU banks or NBFCs with heavy exposure to personal loans and SMEs, you may consider switching to another scheme. "NBFCs were favourites over the last two-three years and some of them were quoting at mind-boggling PEs before the Covid-19-linked crash. MFs with major exposure to NBFCs should be reviewed," says independent market analyst Ambareesh Baliga.

As for PSU banks, even though a further fall is unlikely, estimating recovery is difficult. "PSU banks have been underdogs for the last couple of years. So, there isn't much room for them to fall. Neither will they face any huge institutional selling pressure. The question now is whether the tables will turn after consolidation of PSU banks or will the elephant be too tired to move?" wonders Baliga.

Take stock of more such sectors that may not perform well in the Covid-affected world and exit if your scheme is heavily exposed to them. This is especially true if you have invested in sectoral or thematic funds of such sectors.

"The near-term outlook for metals and oil & gas sectors looks bleak as they suffer the most whenever the global economy slips into severe deflationary or recessionary conditions. Due to the steep rise in unemployment in the US and Europe, IT and IT-enabled services exports from India will be hit significantly. These western economies will promote domestic job opportunities and, hence, outsourcing of services from countries like India will happen at much lower prices. Capital goods will suffer on account of lack of adequate capital expenditures due to deflationary conditions in the domestic economy," says G. Chokkalingam, Founder, Equinomics Research & Advisory.

Besides, travel and tourism-related sectors such as hotels and airlines and the ones dependent on high-ticket discretionary spends such as auto and consumer durables are unlikely to join the market recovery.

Identify Covid-proof Sectors

Since the longevity of the crisis is not known, the best option is to bet on sectors that will sail through the crisis unscathed. "Investors should prefer companies engaged in businesses such as pharmaceutical, necessities (FMCG, sugar, etc), stock exchange, TV media, mobile telecom, which people continued to consume even during the crisis," says Chokkalingam.

Baliga says domestic demand will drive consumer staples, spending on infrastructure to revive the economy will drive cement, steel and heavy commercial vehicle demand, whereas the initial shift of global buyers from China could drive many export-oriented segments, especially specialty chemicals.

Besides, even though the financial sector has contributed the most to the fall in the market, it could be among the first ones to recover over the next five years along with FMCG and chemicals. "Banking and finance is the most beaten sector right now and recovery will be gradual but will definitely happen. FMCG has been a consistent performer in India. Chemicals is an upcoming sector and has the potential to generate a couple of large caps in the next five years," says Harsh Jain, Co-founder and COO, Groww.

Hunt for Best Schemes

Restructure your MF portfolio once you are clear about companies whose business models will stay viable.

Although fund managers of active schemes take investment calls as per the changing economic scenario, you must still take note of latest changes in your MF schemes.

If the fund manager has switched sector allocations towards Covid-proof sectors, continue your SIPs in large-cap, mid-cap and small-cap funds. However, consider fresh lump-sum investments across multi-cap funds and index funds in the ratio of 4:1, suggests Sahil Arora, Director & Head of Investments, Paisabazaar.com. "As index funds are passively managed, they will ensure gains from steep market recoveries in case actively managed funds fail to make the most of the market correction."

As for multi-cap funds, these are best suited in the current market scenario when market correction is broad-based. "Valuations have become attractive across market capitalisations. Multi-cap funds are best suited for such a situation as they can invest across market capitalisations based on changing valuations and market fundamentals, without any Sebi-imposed caps," suggests Arora of Paisabazaar.

Another strategy is to choose mid-ranked fund houses provided the fund house and the fund manager have a credible record. "One should look for MFs whose AUM falls in the mid-segment as these can be focussed and nimble," says Baliga. Besides, large-cap funds having blue-chip stocks should always be a decent part of your portfolio.

However, if you can take risk and have a horizon of two-three years, mid-cap and small-cap funds hold value, thanks to their underperformance over the last few years. "If an investor is willing to wait for another two-three years, he shouldnt exit the small-cap funds. Before Covid-19, 'leaders' were performing well, while small-caps lost substantially. In the Covid period, while 'leaders' from the defensive segments recovered significantly, most small-cap stocks have failed to recover," says Chokkalingam.

But why invest in an underperformer, you may ask? Remember that one theme doesn't play out in the stock market for long. If yesterday belonged to big companies, mid-cap or small-cap segments may rule the roost tomorrow. Risk, of course, is higher in these funds given the changing economic environment due to Covid. "The history of Indian stock markets reveals a fact that they are always moved by certain themes periodically. It is also true that never has the same theme played out again and again. Neither does a particular theme have long durability. That said, themes encompassing small-cap stocks look set to play out over the next two-three years," he adds.

Although Covid-19 makes a review important, you need not make sweeping changes to your portfolio. You must always focus on your asset allocation and investment time horizon before making a decision. During these uncertain times, the best option is to diversify across managers with varying investment styles, which will give good diversification. "Identify well-diversified funds that are run with a consistent mandate and let the professional fund manager take sector calls," says Morningstar's Belapurkar. Thus, make a right choice to build an MF portfolio diversified across Covid-proof sectors. Take the SIP route and, if lump-sum is available, invest it in a staggered manner in preferred large-cap or multi-cap funds.

@apri_sharma