A common investor while thinking of investing in Mutual Funds, always wants to invest in top performing schemes. Let’s understand whether this is a right thought process.
Let’s take Equity Flexi-Cap segment for example.
Which are the top-performing mutual fund schemes in the Equity Flexi-Cap category during the past five years?
Top Performers in Equity Flexi-Cap & Focused segment (SIP route)
(As on 06.05.2023)
| Name of Fund | 5 Yr SIP Returns (%) |
| Quant Flexi Cap Fund – Regular Plan | 25.51% |
| HDFC Retirement Savings Fund Equity Plan – Regular Plan | 19.77% |
| Parag Parikh Flexi Cap Fund – Regular Plan | 19.48% |
| HDFC Focused 30 Fund – Regular Plan | 18.84% |
| HDFC Flexi Cap Fund– Regular Plan | 18.45% |
Source: www.valueresearchonline.com
Flexi-cap category in Mutual Funds offers flexibility & freedom to a Fund Manager to invest across all Market caps. Fund manager can make the best use of his abilities.
But here one point to note is that there are the top performers as on today. However, if we see their performance in 2020 or 2019, theses funds were not top performers.
Year 2020
| Name of Fund | 1 Yr SIP Ret (%) |
|
Year 2020 |
|
| Quant Flexi Cap Fund |
47.43% |
| PGIM India Flexi Cap Fund |
35.87% |
|
Parag Parikh Flexi Cap Fund – Regular Plan |
32.29% |
|
UTI Flexi Cap Fund |
31.55% |
| ICICI Pru. Focused Equity Regular | 24.64% |
Year 2021
| Name of Fund | 1 Yr SIP Ret (%) |
|
Year 2021 |
|
| Quant Flexi Cap Fund |
57.91% |
| ICICI Pru. Retirement Fund-Pure Equity |
47.31% |
| Bank of India Flexi-Cap Fund |
46.01% |
| Parag Parikh Flexi Cap Fund – Regular Plan |
45.51% |
| PGIM India Flexi Cap Fund |
43.49% |
Year 2022
| Name of Fund | 1 Yr SIP Ret (%) |
| Year 2022 | |
| HDFC Focused 30 Fund |
18.29% |
| HDFC Flexi Cap Fund |
18.29% |
| Quant Flexi Cap Fund |
11.10% |
|
Franklin India Focused Equity Fund Regular |
8.87% |
| ICICI Pru. Flexi Cap Regular |
8.78% |
As you can see, the performance of other funds changes over time, with the exception of Quant Flexi Cap Fund and Parag Parikh Flexi Cap Fund – Regular Plan. Top performers (as on date) may not necessarily have been top performers in prior years. Further, they could not deliver the same in the upcoming years, too.
For instance, UTI Flexi Cap Fund was among the top performers in 2020. However, as of today, 2021, or 2022, the same is not rated as one of the best funds. Returns in the future are not certain.
Now coming back to our top performers as on date for 5 years, let’s see their ranks in terms of returns.
Ranks in Terms of Returns
| Name of Fund | 2020 | 2021 | 2022 | Rank based on 5 Yrs. Rtn.
06.05.2023 |
| Rank based on Annual Returns | ||||
| Quant Flexi Cap Fund – Regular Plan |
1 |
1 | 3 | 1 |
|
HDFC Retirement Savings Fund Equity Plan – Regular Plan |
17 |
8 | 6 |
2 |
| Parag Parikh Flexi Cap Fund – Regular Plan |
3 |
4 | -ve returns |
3 |
| HDFC Focused 30 Fund– Regular Plan |
50 |
11 | 1 |
4 |
| HDFC Flexi Cap Fund– Regular Plan |
49 |
19 | 2 |
5 |
- Year 2020: Annual Returns were ranging between 4.19% to 47.43% (Fund with 1st rank offered 47.43% and fund with 48th rank provided 4.19%).
- Year 2021: Annual Returns were ranging between 36.17% to 57.91%
- Year 2022: Annual Returns were ranging between negative 7.23% to 18.29%
This table indicates that overall performance over long-term varies and depicts completely different picture. Parag Parikh Flexi Cap Fund – Regular Plan has offered even negative returns in 2022, despite of that, as on date this fund is a top performer based on 5 years returns. One year negative or lower performance does not mean that the fund is not good.
What possible factors could make a mutual fund the best performer?
Selection of Stocks & Diversification of Investment across the sectors
The number of stocks and investment percentages among sectors change amongst various funds. The most popular investment sectors include those in finance, energy, construction, transportation, and healthcare & services. The fund with a bigger exposure would benefit if the sectors do well.
Diversification in terms of Market Capitalization
As a flexi-cap fund, a fund manager makes investments in all market caps based on his assessment of the market. As a result, each fund invests differently in large, mid, and small cap stocks. Almost all stocks perform well in a bullish market. For instance, there is a strong possibility that small-caps will grow with much higher pace than the large-caps. Accordingly, the fund with a bigger exposure to Mid & small-cap, would benefit. As opposite, the fund with a bigger exposure to large-cap, would benefit, if the market is sluggish.
Buying price of stocks
Let me explain this with example. Assume that Fund A & Fund B, both have invested in the stock of HDFC Bank. However, the buying price is that stock is different. Hence, the proportionate returns provided as on date could be different.
Portfolio Turnover ratio
The frequency with which the stock owned by a fund have changed over time is measured by the portfolio turnover ratio. In simple terms, this ratio measures the frequency with which fund managers buy or sell the assets (stocks) held by a fund over time. Higher churning of portfolio may provide lower returns. Different funds have different investment strategies, philosophies, & turnover ratio.
Asset Under Management (AUM) of the Fund
While comparing the performance mutual funds, you should consider no. of years, their track record & assets under management (total amount to be invested).
If the fund’s inception year is the same, a fund with a high AUM indicates greater investor involvement, whereas a fund with a low AUM indicates less investor interest in that fund. There may be funds with lesser AUMs that have better track records and risk/return characteristics, even while a fund with a high AUM may not always be the best option.
A large AUM can be challenging for some fund types, such as funds having higher exposure to mid- and small-cap funds, where the opportunities are limited. And the growing AUM may lead to over-exposure the same stock, which can also have a negative impact on the portfolio’s liquidity.
Conclusion:
No matter how much in returns the fund is currently offering, prior performance does not guarantee future results.
Some of the characteristics to consider include consistency in returns, risk associated to the fund, risk-adjusted returns, Alpha, fund manager’s experience, expense ratio, and performance against an index or benchmark. Further, don’t forget to review your funds twice a year.
In short, you don’t need to invest in top performing funds as on date. What you require is to invest in the fund that is consistent and having better risk-adjusted returns over the years.
In our next blog, let’s see what should we look at before considering investing in a particular Mutual Fund, besides returns.
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