High 5 SIPs

Those who invest in equity mutual funds are often advised by financial planners to take the SIP (systematic investment plan) route to average costs and benefit from volatile markets. But more often than not, the decision to invest is based on how a fund performs on a point-to-point basis — usually one-, three- and five-year returns — vis-à-vis its benchmark. Mostly suitable for lumpsum investments, this method may not be ideal for SIPs in funds, given that sums are deployed in a staggered manner.

The returns generated from SIP investments differ significantly from that of lumpsum amounts deployed in most schemes, as the cost of purchase of units would vary in line with market movements and there is a time value of money aspect as well.

To help investors make informed choices, we have put equity funds in five categories — large-cap, large- and mid-cap, multi-cap, mid-cap and small-cap — through multiple filters, to get the best schemes that would be suitable for saving towards long-term goals. We have chosen funds with a minimum asset size of ₹500 crore.

First, we generated the SIP returns (XIRR) of these schemes and then compared them with those of their respective benchmarks. Next, the fund returns were also compared to the category’s average returns. The schemes that made the cut from the above filters were then tested for consistency of returns. Funds that underperformed their benchmarks on one- and three-year SIP returns were excluded. Also, funds that outperformed benchmarks for one- and three-year periods, but underperformed over longer time-frames were excluded as investors cannot take informed long-term calls.

We took the three-year rolling returns, based on the daily NAV for the past seven or 10-year time-frames, as the case may be, depending on a specific fund’s history, and the best of the lot — the fund that consistently exceeded its benchmark’s returns — was chosen. The three-year rolling return was chosen, as that is a reasonably long period to a fund’s consistency; also, the holding period for equity funds should at least be three years.

These filters were applied to each category and the best funds for SIP investments were obtained.

Where there was a tie after the consistency test, the fund with higher SIP returns and a longer track record was given preference.

In addition to the best fund to start an SIP, in some categories, we have also suggested one to two other schemes that make the cut and can be considered for future investments, given their proven track records.

In almost all categories, several funds lag benchmarks even over a three-year SIP returns basis. Financial experts advise exiting SIP investments, if the underperformance is for a period of 12-18 months.

If investors are seasoned enough, they can consider opting for the direct plan in the schemes suggested to reduce costs.

Here is a fund that scores on all counts: returns, relatively moderate risks and consistency. SBI Small Cap must be a part of the core portfolio of investors who have a horizon of seven to 10 years.

Despite being a small-cap fund, the scheme has managed risks deftly and delivered superior returns. Across time-frames, the fund has outperformed the BSE Small Cap TRI by a whopping margin of 9-10 percentage points, based on SIP returns. It has delivered 4-6 percentage points ahead of the category average. A seven-year SIP in the scheme would have generated a healthy 21.1 per cent return annually.

SBI Small Cap exceeded its benchmark all the time (100 per cent) on a three-year rolling basis. Reliance Small Cap too scores the same on this measure. But given SBI Small Cap’s slightly longer track record and higher returns, it remains the better pick between the two.

What works? The fund has a portfolio of 40-50 stocks across market cycles. Exposure to individual stocks is restricted to less than 5 per cent, making for a fairly diffused, well-diversified portfolio.

In addition, SBI Small Cap takes cash position to the tune of 6-13 per cent of the portfolio during volatile and corrective markets, which reasonably insulates its NAV from erosion.

The scheme also takes exposure to mid-cap stocks, sometimes to the tune of over 30 per cent of the portfolio.

Another aspect to note is that the fund’s exposure to banks and financial services companies has been at relatively low levels — usually around 10 per cent of the portfolio. This has kept the fund insulated from the turmoil in those segments. Consumer durables, consumer non-durables, industrial products and chemicals are some of the fund’s preferred segments.

Thus, the fund keeps risks associated with a typical small-cap portfolio at relatively moderate levels.

The scheme churns its portfolio periodically, but the expense ratio is still quite reasonable. Some of the fund’s top holdings include JK Cement, Sheela Foam, NIIT, HDFC Bank, Chalet Hotels, Techno Electric and Hatsun Agro.

Other funds to consider: As mentioned earlier, Reliance Small Cap is also a quality scheme in the category and may be a good addition. HDFC Small Cap too is a good pick. L&T Emerging Business has just completed five years and delivered reasonably well and can be considered for investments later.

The mid-cap category is a bit tricky, with many high-quality schemes competing for prominence. DSP Midcap, Franklin Prima, HDFC Midcap Opportunities, Kotak Emerging Equity and L&T Midcap have all outperformed the BSE Midcap TRI index, exceeded the category average and recorded robust returns of 15-16 per cent over the past 10 years on an SIP returns basis. They have all outperformed the Nifty Midcap 100 TRI as well.

But when three-year rolling returns are taken for the past 10 years, while other schemes outperformed the BSE Midcap TRI 80-84 per cent of the time, L&T Midcap managed a clean sweep of 100 per cent. Thus, it becomes our preferred choice for SIP investments. But each of the other four funds are worthy of periodic investments as well.

What works? L&T Midcap manages a highly diffused and well-diversified portfolio, with individual stocks accounting for less than 4 per cent of the portfolio. The fund holds shares of as many as 70-80 companies across time-frames. By taking cash and debt calls to the extent of 10 per cent of the portfolio, the fund also reduces risks considerably.

The company has been able to take the right calls on sectors. It has increased stakes in segments such as cement and select banks, where there are expectations of a bounce-back.

Even the holdings in various segments are mostly less than 10 per cent of the portfolio.

Prominent picks in the portfolio include off-beat choices such as City Union Bank, RBL Bank, Emami, The Ramco Cements, ACC, Kajaria Ceramics and Indian Hotels.

Other funds to consider: Franklin Prima has a 25-year track record, while DSP mid-cap has been around for over 12 years. Both are low-risk bets as well. HDFC Midcap Opportunities and Kotak Emerging Equity are quality picks.

Here is a scheme that is multi-cap in nature, but has a large-cap bias. Benchmarked against the Nifty 200 TRI, Kotak Standard Multi-cap (Kotak Multi-cap) delivers on returns as well as consistency, with a solid record of nearly 10 years.

The fund managed to beat its benchmark as well as other multi-cap indices such as the Nifty 500 TRI by 1-5 percentage points on an SIP returns basis, across time-frames. A SIP in Kotak Multi-cap over the last seven years would have delivered a healthy 15 per cent annual returns. On a three-year rolling basis, the fund managed to beat its benchmark almost always (99 per cent of the time). It also does much better than the category average.

What works? As indicated earlier, Kotak Multi-cap has a large-cap bias, with mid-cap stocks accounting for 20-25 per cent of the portfolio. This gives the portfolio a low-risk profile. Additionally, the fund also takes cash and debt calls to the tune of 6-11 per cent of its assets during volatile markets to insulate it from severe corrections. Other than the top three to four stocks, exposure to individual companies is much less, generally 2-4 per cent.

Kotak Multi-cap has been able to churn its portfolio and benefit from a blend of momentum and defensive bets. Though banking and financial services stocks feature prominently, exposure is restricted to the best names in those segments. The fund was able to enter and exit automobiles, ancillaries and FMCG sectors at the right time in the last couple of years. It has upped stakes in IT, gas and petroleum products stocks.

Bluechip index stocks such as Reliance Industries, Axis Bank, HDFC Bank, TCS, L&T and SBI are prominent holdings. Other prominent picks include Petronet LNG and RBL Bank.

Other funds to consider: HDFC Equity is a reasonable bet, as it has a track record of over 24 years. On consistency, it scores a modest 65 per cent, but not on returns over the very long term. Parag Parikh Long Term Equity too can be considered, but it invests in overseas stocks and, hence, investors need to weigh those risks as well. On consistency, it scores a reasonable 75 per cent.

As with the large-cap category, this segment had almost no competition. Mirae Asset Emerging Bluechip is the winner, thanks to its consistent and superior performance compared to peers in the category.

Benchmarked against the BSE 250 LargeMidCap TRI, the fund outperforms by 4-9 percentage points over the long term, while edging past the index in the one and three-year time-frames. The scheme delivers 4-8 percentage points more than the category average across all horizons.

On a three-year rolling return basis, Mirae Emerging Blue-chip has outperformed its benchmark all the time in the last seven years. An SIP in the fund over the past seven years would have delivered a robust 20.8 per cent annually.

What works? Earlier, Mirae Emerging Blue-chip was a mid-cap oriented fund, and has morphed into a large and mid-cap fund in recent years. It maintains a near 50:50 mix of large and mid-cap stocks in its portfolio.

Though it has upped stakes in banks and financial services segments in recent months, it has done so in proven names such as HDFC Bank, Axis Bank and ICICI Bank. The fund has reduced stakes in consumer non-durables and auto ancillaries, while increasing exposure to pharma and IT segments, as valuations get attractive.

Quality names such as Reliance Industries, Tata Global Beverages, Infosys and Voltas are among its other prominent holdings.

Other funds to consider: Almost all other funds in the category have modest records. Canara Robeco Emerging Equities is a good choice if the holding period is 7-10 years. It has underperformed over the short and medium terms though. A seven-year SIP would have delivered 19 per cent annually, as it was heavily biased towards mid-caps earlier.

The large-cap category has been one of the worst performing segments among mutual funds. Most funds have lagged behind their benchmarks across time-frames, both on an absolute lumpsum returns basis as well as on SIP returns. A narrowly-led market with very few giant-cap stocks leading the rally in the last few years and the shift to total returns (including dividends) based benchmarks has meant that most funds in the category lagged behind significantly.

Even so, the shining knight in the category is Axis Bluechip (earlier Axis Equity). The scheme has outperformed its benchmark — Nifty 50 TRI — across timelines by 50 to 150 basis points.

A seven-year SIP in the fund would have returned 13.1 per cent annually. Axis Bluechip’s returns exceeded its benchmark 87 per cent of the time on a three-year rolling returns basis over the past seven years.

What works? Axis Bluechip has been able to take the right momentum calls across market situations and cycles. Though it has moved from having a slightly diffused portfolio to a more concentrated one over the past two to three years, with exposure to some stocks exceeding 9 per cent of the overall assets, the associated risks haven’t increased much.

Banking and financial services firms have consistently been the fund’s favourites and have generally accounted for a lion’s share of the portfolio. But it has consistently held on to and even increased stakes on quality names that rallied well, such as HDFC Bank, Kotak Mahindra Bank, IndusInd Bank, ICICI Bank, Bajaj Finance and HDFC.

The fund was also successful in churning underperforming segments such as auto, auto ancillaries and consumer non-durables relatively early over the last year or so. It has also been able to make winning bets in IT, with TCS and Infosys figuring among the fund’s top holdings.

By taking cash positions to the tune of 8-12 per cent across market cycles, the fund insulates itself from steep corrections.

Other funds to consider: Mirae Asset Large Cap is a quality scheme. It was an opportunities fund till recently and sported a multi-cap look, though with a large-cap bias. Its performance must be monitored and a consistent show will mean investors can consider the fund as well.

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