The markets have breached 19,000 levels. Some experts say that a correction around the corner whereas others are fairly bullish about India`s prospects. In this article, we look at how different fund categories have performed across market cycles and understand the importance of risk profiling!
``Equity is for long-term!`` is the most commonly given advice to anyone wishing to take an exposure to stock markets. True, then how does one determine when to enter or exit from the markets? While we may attempt to time the market but can never be 100% accurate with the predictions. Due to lack of guarantee, retail investors prefer to put their hard-earned money in fixed deposits. Though an allocation to capital protected products is must, certain portion of the investible surplus can be allocated to different asset classes and products but after knowing the level of loss acceptable to them on that investment. In the mutual fund space, there are several fund categories within each asset class. Broadly speaking, equity and fixed income are two major asset classes. Several fund houses offer gold ETFs and fund of funds which invest in gold mining companies. Each of these fund categories have a specific time horizon and risk rating. In this article, we look at how different fund categories have performed across market cycles and understand the importance of risk profiling!
Within Equity, the main fund categories include -
> Diversified
> Index
> Style based
o Contra/Value
o Dividend Yield
o Large-cap
o Mid-cap/ Small-cap
> Thematic
o Banking
o FMCG
o Infrastructure
o Pharmaceuticals
> ELSS or Tax Saver funds
In equity fund, the risk rating goes up for thematic funds (risk rating =10) as they depend on performance of a particular sector or industry. Likewise, the mid- and small-cap (risk rating =9) offer higher returns than large-caps but at higher risk whilst the Index funds (risk rating = 5) and Dividend Yield (risk rating = 6) are relatively conservative equity class. Index funds follow the broad-based index such as S&P CNX Nifty or BSE Sensex and Dividend Yield Funds invest in companies that offer high dividend yield. Contra/Value funds (risk rating = 7) require patience on part of investors to hold the fund till the contrarian calls in the fund portfolio work.
Similarly, Debt categories offer fixed income funds as per expected period of holding an investment in the portfolio and risk appetite.
``Equity is for long-term!`` is the most commonly given advice to anyone wishing to take an exposure to stock markets. True, then how does one determine when to enter or exit from the markets? While we may attempt to time the market but can never be 100% accurate with the predictions. Due to lack of guarantee, retail investors prefer to put their hard-earned money in fixed deposits. Though an allocation to capital protected products is must, certain portion of the investible surplus can be allocated to different asset classes and products but after knowing the level of loss acceptable to them on that investment. In the mutual fund space, there are several fund categories within each asset class. Broadly speaking, equity and fixed income are two major asset classes. Several fund houses offer gold ETFs and fund of funds which invest in gold mining companies. Each of these fund categories have a specific time horizon and risk rating. In this article, we look at how different fund categories have performed across market cycles and understand the importance of risk profiling!Within Equity, the main fund categories include -
> Diversified
> Index
> Style based
o Contra/Value
o Dividend Yield
o Large-cap
o Mid-cap/ Small-cap
> Thematic
o Banking
o FMCG
o Infrastructure
o Pharmaceuticals
> ELSS or Tax Saver funds
In equity fund, the risk rating goes up for thematic funds (risk rating =10) as they depend on performance of a particular sector or industry. Likewise, the mid- and small-cap (risk rating =9) offer higher returns than large-caps but at higher risk whilst the Index funds (risk rating = 5) and Dividend Yield (risk rating = 6) are relatively conservative equity class. Index funds follow the broad-based index such as S&P CNX Nifty or BSE Sensex and Dividend Yield Funds invest in companies that offer high dividend yield. Contra/Value funds (risk rating = 7) require patience on part of investors to hold the fund till the contrarian calls in the fund portfolio work.
Similarly, Debt categories offer fixed income funds as per expected period of holding an investment in the portfolio and risk appetite.
Fund Category | Time Horizon | Risk Rating (Highest =10, Lowest =0) |
Liquid | 0-3 months | 1 |
Ultra-Short Term | 3-6 months | 1 |
Short-Term | 6-12 months | 2 |
Income | Greater than 1-5 years | 3 |
GILT | Greater than 1-5 years | 3 |
FMPs | Depends | - |
Floating Rate/Floater | <1-3 years | 2 |
Besides these two fund categories, there are Balanced Funds (risk rating = 5) which have 60-80% allocation to equity and rest to debt and Monthly Income Plans (risk rating = 6) which have 15-20% exposure to equity and remaining in fixed income. There are dynamic asset allocation funds which may invest in equity, debt or gold in a specific pattern as given in the investment objective in the fund factsheet.
Risk Return Trade-off
We analyze the returns generated by different fund categories each calendar year. For this review, we have considered Recommended Funds as they are already filtered by Fundsupermart.com Research team on parameters of performance, volatility, resilience and expenses. We have classified the funds as per their asset class exposure. The funds are listed in the ascending order of their risk rating so the Recommended Fund from Ultra Short-Term category, Reliance Money Manager is at the top with the lowest rating and the thematic funds with the highest risk rating of 10, belonging to Banking, Infrastructure and Pharma are shown at the bottom (in alphabetical order).
The three year annualized volatility represents deviation in the past returns over a period of three years and is expressed annually. As the risk rating goes up, the volatility in historical performance also goes up.
Clearly, the equity funds have generated superior returns albeit with high volatility. During 2008, the year of global financial crisis, most funds on equity side were hit badly. Although majority of equity funds in India invest in local companies and domestic markets, the fluctuations in the stock indices around the world have a cascading effect on funds. Then again, 8% GDP growth rate coupled with consumption story seem to build a strong case for a robust economy and hence, a subsequent revival as seen in 2009 and 2010. On the contrary, the fixed income funds have consistently given returns in the last five years though on the lower side and at lower risk.
Risk Return Trade-off
We analyze the returns generated by different fund categories each calendar year. For this review, we have considered Recommended Funds as they are already filtered by Fundsupermart.com Research team on parameters of performance, volatility, resilience and expenses. We have classified the funds as per their asset class exposure. The funds are listed in the ascending order of their risk rating so the Recommended Fund from Ultra Short-Term category, Reliance Money Manager is at the top with the lowest rating and the thematic funds with the highest risk rating of 10, belonging to Banking, Infrastructure and Pharma are shown at the bottom (in alphabetical order).
The three year annualized volatility represents deviation in the past returns over a period of three years and is expressed annually. As the risk rating goes up, the volatility in historical performance also goes up.
Clearly, the equity funds have generated superior returns albeit with high volatility. During 2008, the year of global financial crisis, most funds on equity side were hit badly. Although majority of equity funds in India invest in local companies and domestic markets, the fluctuations in the stock indices around the world have a cascading effect on funds. Then again, 8% GDP growth rate coupled with consumption story seem to build a strong case for a robust economy and hence, a subsequent revival as seen in 2009 and 2010. On the contrary, the fixed income funds have consistently given returns in the last five years though on the lower side and at lower risk.
Calendar Year Performance (%) | 3 yr Annualised Volatility | |||||
Fund Name (Ascending order of Risk Rating) | 2009 | 2008 | 2007 | 2006 | 2005 | |
Fixed Income | ||||||
RELIANCE MONEY MANAGER FUND- GROWTH | 5.8 | 9.09 | - | - | - | 0.55 |
BSL FLOATING RATE FUND LONG TERM PLAN- GROWTH | 8.17 | 9.27 | 8.74 | 5.98 | 5.38 | 0.42 |
RELIANCE SHORT TERM FUND- GROWTH | 8.85 | 12.14 | 9.8 | 6.98 | 2.56 | |
BSL DYNAMIC BOND FUND- GROWTH | 7.45 | 14.96 | 9.16 | 6.01 | 5.39 | 2.1 |
HDFC HIGH INTEREST FUND SHORT TERM PLAN- GROWTH | 9.35 | 12.54 | 9.89 | 6.53 | 5.04 | 2.15 |
Monthly Income Plans (Debt with Equity Exposure) | ||||||
HDFC MULTIPLE YIELD FUND PLAN 2005- GROWTH | 21.84 | -2.41 | 12.5 | 5.74 | 5.05 | |
RELIANCE MONTHLY INCOME PLAN- GROWTH | 21.17 | 9.57 | 8.48 | 14.98 | 14.88 | 8.29 |
Balanced (Equity with Debt Exposure) | ||||||
DSP BLACKROCK BALANCED FUND- GROWTH | 64.98 | -37.97 | 51.26 | 32.7 | 31.16 | 23.61 |
HDFC PRUDENCE FUND- GROWTH | 84.84 | -42.11 | 43.16 | 33.32 | 47.74 | 27.8 |
Equity | ||||||
DSP BLACKROCK TOP 100 EQUITY FUND- GROWTH | 77.13 | -45.54 | 64.93 | 46.6 | 42.9 | 30.43 |
HDFC TOP 200 FUND- GROWTH | 94.46 | -45.35 | 54.46 | 37.44 | 55.25 | 33.62 |
HDFC EQUITY FUND- GROWTH | 105.57 | -49.68 | 53.61 | 35.86 | 62.7 | 35.77 |
HDFC INDEX FUND SENSEX PLUS PLAN- GROWTH | 80.6 | -47.08 | 46.59 | 45.54 | 41.44 | 33.24 |
UTI DIVIDEND YIELD FUND- GROWTH | 85.78 | -44.44 | 70.56 | 20.65 | - | 28.92 |
ICICI PRUDENTIAL DISCOVERY FUND- GROWTH | 134.32 | -54.56 | 39.65 | 28.69 | 63.74 | 37.8 |
UTI MASTER VALUE FUND- GROWTH | 117.35 | -58.05 | 58.7 | 11.26 | - | 37.41 |
RELIANCE GROWTH FUND- GROWTH | 97.4 | -54.11 | 76.85 | 41 | 68.73 | 35.61 |
RELIANCE BANKING FUND- GROWTH | 82.89 | -37.84 | 76.95 | 18.63 | 29.19 | 37.18 |
DSP BLACKROCK INDIA T.I.G.E.R. FUND- GROWTH | 75.99 | -58.19 | 82.85 | 52.43 | 53.57 | 38.2 |
ICICI PRUDENTIAL INFRASTRUCTURE FUND- GROWTH | 68.31 | -51.64 | 92.92 | 58.53 | - | 34.98 |
RELIANCE PHARMA FUND- GROWTH | 118.6 | -34 | 49.8 | 16.73 | 29.4 | 31.42 |
Before deciding to invest in different funds, investors should answer few questions on the Risk Profiler tool on Fundsupermart.com and understand their capacity to fathom a loss on investments.
Additionally, investors should familiarize self with different fund categories. For example, a sector fund may be performing remarkably well over one year period but not necessarily, the fund will continue the upside. Even though debt funds are for conservative investors, these funds are also subject to interest rate movements and macro-economic climate.
Therefore, one should take into account the nature of the industry, the business environment of the sector and the state of the overall economy. Thereafter, one has to choose of investible surplus can be allocated to a fund.
Conclusion
As the markets have breached 19000 levels, retail investors have become wary and are wondering if a 2008 like scenario would emerge again. Investors should keep in mind that markets undergo cycles of upside and downside. More importantly, they should be aware of their risk appetite and work towards fulfilling their financial goals with careful asset allocation and timely portfolio review. A systematic way of investing will help override the fluctuations. Plus, the compounding effect of disciplined and regular investing (even Rs. 100 every month) will reap more gains. Secondly, mutual funds offer variety of options to invest in different asset classes, instruments and industries. Apart from fixed deposits, investors can look at fixed income funds to ensure reasonable diversification.
As the markets have breached 19000 levels, retail investors have become wary and are wondering if a 2008 like scenario would emerge again. Investors should keep in mind that markets undergo cycles of upside and downside. More importantly, they should be aware of their risk appetite and work towards fulfilling their financial goals with careful asset allocation and timely portfolio review. A systematic way of investing will help override the fluctuations. Plus, the compounding effect of disciplined and regular investing (even Rs. 100 every month) will reap more gains. Secondly, mutual funds offer variety of options to invest in different asset classes, instruments and industries. Apart from fixed deposits, investors can look at fixed income funds to ensure reasonable diversification.
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