The mutual fund industry has gone through a GST kind of moment in the past six months, where SEBI has enforced rules for categorisation and rationalisation of MF schemes.
The circular clearly defined the large, mid and small cap universe – large cap stocks are defined as the top 100 stocks by market capitalisation; mid cap as the stocks from 101st till 250th by market capitalisation and the rest stocks (251st onwards) are classified as small caps.
SEBI also has categorised equity MF’s as multicap, large cap, large and mid cap, mid cap, small cap, dividend yield, value fund, contra fund, focussed fund, sectoral fund and ELSS.
Similarly SEBI has categorised debt schemes in 16 categories, hybrid funds in 6 categories, solution oriented schemes in 2 categories ( retirement and children’s fund) and other schemes as Index and Fund of funds.
SEBI has also mandated that each fund house can only have one mutual fund in each category.
Due to this, many MF schemes have been merged, renamed, reclassified in the past three months. The fund managers had to rebalance their portfolios based on this SEBI mandate.
Now that these changes have been implemented, the MF industry would slowly get back to normal business of trying to outperform their peers and attracting more investor money. I believe, the industry will take a few months to stabilise.
My MF selection methodology remains the same – it starts with defining the different investment objectives that you (my reader) may have and the category of funds that you will need to invest in.
Then I look at the size of the fund – the amount of total investor money the fund is managing (called Assets under management) – as per me, the bigger the fund size, the more likely it will have a better fund management team and better governance.
Then I look at the past history of performance. The past qtr rationalisation of funds means that it is difficult to look at the past history ( many funds have been merged and renamed) and so I will go more with the size of fund as of now.
So here are my current quarterly recommendations (July – Sept 2018):
If you are looking for growth in capital for long term (3 years or more investment timeframe):
Moderate risk and moderate return –Kotak standard multicap fund and SBI Blue Chip Fund and Aditya Birla Sun Life Frontline equity fund . All these funds manage large amount of investor money and have given 15% plus per annum compounded over the past five years. As long as the Indian economy and GDP is growing, these funds are expected to do well.
Slightly higher risk and higher return – HDFC Mid cap opportunities fund – this fund manages appx 17000 crore investor money and has given 25% per annum compounded over five years. This fund invests in stocks mid cap and small cap companies.
There are also some industry specific themes that would do well in 2018 -19. I believe that Rural theme and FMCG industries whould give good returns in 2018-19. The funds for these themes are Sundaram rural and consumption fund and SBI consumption opportunities fund.
Low risk and reasonable return – ICICI Prudential equity and debt fund – right now this category ( and this fund) is not performing ( as compared to a FD) as the equity markets have been not performing since Jan -but over a 3 year period, it should give you appx 10% – this fund has 65% -70% of it’s money invested in equity markets and remaining 30% in bonds.
Really low risk and OK with low returns – You can look at investing in ultra short term debt funds – the fund that I recommend is ICICI Prudential savings fund – this fund should give slightly above FD rates in the coming year (and this interest is taxed).
If you are looking to avail tax savings under Section 80C – then invest in Aditya Birla Sunlife Tax relief (96G) fund – As you are investing for section 80C tax savings, you need to stay invested for three years.