The Mutual Fund Show: Here Are Crisil's Top-Rated Schemes
Top rated-mutual fund schemes, according to Crisil
The Indian mutual fund industry had a rough June quarter this year with all categories losing money amid volatility, according to a recent survey of funds by ratings agency Crisil.
Based on the latest findings of the Crisil Mutual Fund Ranking, Piyush Gupta, director-fund research at Crisil, spoke with BQ Prime's Niraj Shah on flexi-cap, multi-cap, hybrid and focused fund categories.
HDFC Best Among Flexi-cap Funds
The flexi-cap funds category saw a major turnaround with HDFC Flexi Cap Fund climbing two positions to become the top fund in the category in the June quarter.
Meanwhile, Axis Flexi Cap Fund, which shared the third rank with the HDFC scheme in the March quarter, slipped two ranks to end at fifth position.
HDFC Flexi Cap Fund's improving ranking largely on the back of the performance of PSU stocks. While the portfolio-based parameters are weaker for this fund, it is concentrated at the company and industry level, Gupta said.
Axis Flexi Cap Fund's ranking fall in tandem with a decline in its performance.
Quant Funds' Gold Rush In Multi-cap Category
Quant Active Fund retained the top spot in multi-cap category.
"At this stage, it is performance that is playing out for this particular fund," Gupta said. Diversification across sectors without bias makes for better stock selection, which is also helping this fund, he said.
HDFC At Top Among Focused Funds
The HDFC Focused Fund scheme rose two positions to the top, and Axis Focused Fund scheme dropped two positions from three to five.
The deciding factor again was the funds' performance, based on sector allocation and stock selection, Gupta said.
Portfolio Boosts Kotak In Hybrid Funds Category
In the conservative hybrid funds category, Kotak Debt Hybrid Fund once again became the best scheme on account of better portfolio-based parameters.
A strong portfolio—with limited exposure to papers rated below AAA and a good selection of equities—helped the scheme nullify dips in performance levels, said Gupta.
Franklin India Debt Hybrid Fund, which rose a spot to rank three, also had a similar run in the June quarter.
The Crisil Mutual Fund Ranking for the June 2022 quarter ranked 498 mutual fund schemes across 25 categories.
All categories closed the quarter with losses due to volatility emanating from rising commodity prices, higher upside risks to inflation, geopolitical tensions in Europe and monetary policy tightening by central banks.
The flexi-cap fund category fell the most at 10.37%. The value/contra category gave the highest returns among the surveyed categories in the three- and six-month period.
The ranked schemes—broadly classified under equity funds, debt funds, and hybrid funds—account for 73.21% of the Indian mutual fund industry’s open-ended quarterly average asset under management.
The sample size included 232 schemes from the equity category, 205 from debt, and 61 from the hybrid category. Of the surveyed schemes, 151 featured in the top 30 percentile (with very good or good performance as per Crisil rankings), and formed 41.27% of the total ranked AUM in the June quarter.
View the full interview here:
Edited excerpts from the interview:
Can you give us a quick rundown on the methodology and how investors can make use of the Crisil rankings?
Piyush Gupta: Since we are focusing on equity funds largely, I will talk first about that. So, when we look at the rankings, we look at multiple parameters.
This is, of course, a combination of both performance-related parameters–which is return and volatility. We also look at portfolio-based attributes on the lines of how diversified is the portfolio, what is the liquidity in the underlying holdings of the fund. These factors are looked at when we put out our final rankings. On the hybrid side, it's a mix of both equity and debt-oriented parameters.
So, apart from performance–which is mean return and volatility–we look at factors like what is the asset quality of the portfolio on the corporate bond side, the liquidity both on equity and debt side, and the interest rate risk which is measured during modified duration. So, it's a composite score that we arrive at by looking at each of these factors and then the rankings are published. So, this is how we look at the ranking.
Any funds which are doing well on performance as well as portfolio-based attributes will tend to come on top. Of course, there are different weights assigned to each of these factors. At times, performance does play a role in the final ranking of the funds that we publish.
So, performance doesn’t have a dominating presence in the ranking?
Piyush Gupta: If I were to look at rankings across categories, there is a higher way to performance in the equity-oriented funds. As we move towards hybrid, debt and liquid, there is a higher weight that is assigned to portfolio risk parameters.
Don't look at these ratings necessarily in isolation. If you look at the rankings over a period of two or three releases, it gives you great insight into what funds are doing well and what funds aren't, and maybe that helps people in choosing funds as well.
Piyush Gupta: Yes, one has to look at fund ranking over a period of time and if at all there are any significant movements in a quarter, then there is re-looking at the portfolio in case you are holding on to that particular fund. If it is on the downward side, then we will see.
I saw an interesting observation that the HDFC Flexi Cap Fund has climbed rankings quite substantially and the Axis Flexi Cap Fund has gone down quite a bit. Can you tell us about this?
Piyush Gupta: Flexicap, as a category, allows fund managers to take allocation across different market capitalisation. So, there is no restriction in terms of portfolio construction. Now, having said that, the funds still have a bias or higher allocation towards large caps, when you look at this category as a whole.
Now, talking about these two particular funds, we have seen that HDFC Flexi Cap has seen improvement in the ranking and has gone up from rank three to rank one. Largely, the improvement in the ranking has been driven by improvement in the performance. The fund has improved its ranking from two to one in the performance parameter.
While the portfolio-based parameters are still weaker for this fund, it is concentrated at company and industry level.
Given the size of the fund, the HDFC Flexi Cap Fund also ranks lower on the liquidity parameters. Coming to the performance, this particular fund has actually delivered the highest return when we look at different time frames up to one year–three months, six months, nine months, one year.
There is highest performance that this particular fund has given within the peer set.
Key drivers for the performance of this fund have been largely the stocks in the PSU segment. These stocks have actually done well in the recent quarter and relatively recent period, which has meant that the performance of the fund has gone up during this period.
And these stocks largely belong to sectors like power, energy, auto and again dominated by PSU stocks, which are actually helping it in improving its performance.
At a sector level, the fund had lower allocation to I.T. or software which was a weaker performing sector during this period. That has also helped in protecting sort of a downside in the fund.
Coming to Axis, we have seen that over a period of time, there is a decline in performance of this particular fund or equity funds within the AMC across categories.
When we look at this fund, it has slipped from rank three to rank five at an overall level as well as the performance parameter levels.
By design, the fund has maintained higher concentration both at the company and at the sector level over a period of time.
What we have seen is that both sector allocation and stock selection has been adverse from the performance perspective, which has meant that the fund has seen decline in its performance.
What we also see in this particular fund, and Axis funds in general tend to have higher cash allocation. So, despite having higher cash allocation in the recent quarter, when the markets actually corrected, the fund was not able to protect the downside.
So, basically, the adverse stock selection and sector allocation has contributed to its decline in its performance.
But something that worked for it in the recent past, in the last two years during the Covid era, is coming back to bite it?
Piyush Gupta: Yes, in the earlier period, both the sector and stock selection were playing out favourably for this fund, which is not happening as we look at the recent period.
So many people talk about the Quant mutual fund schemes, which are top quartile or the best performing funds across various categories. For example, in the multi-cap fund, the Quant Active Fund is right up there, and I see that across some of your other rankings as well as ratings of some of the other companies as well. Over the last few quarters, they have managed to stay at the upper end. Is it the size that is working for them or is it something else?
Piyush Gupta: Smaller size does provide flexibility to the fund manager and also their style is different from others within the peer set. So, this particular fund Quant Active Fund has been ranked one in the last four quarters continuously. So, there is that bit of consistency that we see in the performance.
Large part of its higher ranking is driven by its performance. Again, the portfolios are constructed with high conviction, concentrated bets at the company level. So, they have those select stocks that they make part of the portfolio which have done well in terms of performance.
What we also observe is that the fund doesn't have any sectoral bias, which means that the fund is diversified across sectors. So, it is the stock selection within those sectors which are part of the larger universe is what is favouring this fund.
Unlike other equity funds, this particular fund tends to have a lower horizon in terms of stock exposure, so they have lesser time horizon compared to other funds...
Having said that, the fund has been able to beat the benchmark as well as category over one-year as well as three-year period, and it’s sort of helped the fund.
The other trend that we are observing in this fund is if you look at earlier periods within a three-year time frame, there was lower allocation to large-cap stocks which has gradually improved in the recent period. To that extent, the exposure to the small-cap stocks were higher earlier which has come down in the recent period.
When we look at the contributors, that has also changed accordingly. So, in the initial period, it was the small and mid-cap stocks, which were contributing to its performance. But when you look at the recent three-month period, it's the large-cap stocks which are the key contributors.
So, the fund tends to have a lower horizon, they churn their portfolios quite actively which is visible when we look at the contributors also. The contributors, which were there in the earlier period, have changed completely when we look at the recent contributors in the portfolio.
What a lot of people might, in earlier times, have considered to be a vice is actually turning out to be a virtue for Quant Fund.
Piyush Gupta: At this stage, it is performance that is playing out for this particular fund.
So, there is higher churn but it's resulting in great performance for Quant funds and across categories. The reason why I picked focused funds was again the same factor that I saw a pattern wherein the HDFC fund climbed up the ranking really well and Axis fund dropped in the rankings. Is it due to the same reasons or in the focused fund category, the reasons are different?
Piyush Gupta: Similar reasons, what we spoke about earlier vis-à-vis Axis and HDFC funds. When we look at Axis Focused Fund, it is an almost Rs 18,000 crore fund and the overall category size is about Rs 90,000 crore. Almost 20% of the category AUM is with Axis Focused Fund.
To that extent, it's a significantly large fund within the category, especially a category which is by design, construct a portfolio which is a concentrated portfolio.
The performance has declined significantly for the Axis fund. The fund rank has declined from three to five. Again, this is the fund which has delivered least return up to a one-year time frame, for example, three months, six months, nine months, one year.
Again for all of these time frames, I have seen the decline in the fund performance. Also, the style is similar to what we spoke about earlier—large-cap bias which is there in these funds—also the cash component is significantly higher. The fund has 12%, almost 13% of exposure to cash compared to the category which is about 6% to 7%.
While ideally, the cash should have reduced the downside in its performance, it has not played out even in the three-month period. So, stock selection… has been so adverse that the fund has not been able to deliver or rather delivered lower returns within the category.
HDFC, on the other hand, is relatively a smaller-sized fund, which also provides greater flexibility to the fund when it comes to managing portfolio.
This fund also has high allocation to PSU stocks compared to the category which have done well in the recent period.
Also, select sectors like defence, power, energy… these are the sectors that have played out for the fund, which has sort of resulted in the improvement in performance and improvement in the ranking within the category.
Is conservative hybrid a good category at the current point of time, looking at whatever hypothesis one may have around rates and equities versus debt. Within that, the two funds that we have chosen to talk about are the Kotak Debt Hybrid Fund and the Franklin India Debt Hybrid Fund. What's been with these funds for the last three or four rankings? I don't remember the rankings for each of the last four, but if you have some idea about how they have generally done. What's your sense here?
Piyush Gupta: If you look at current markets, the markets have been quite volatile. So, both on equity and debt side, we have seen a significant amount of volatility.
Given the current market scenario, a hybrid portfolio does offer a better option because it sort of brings in a little bit of stability in the overall portfolio.
To that extent, the current market scenario, irrespective of the interest rate movements or equity movement, conservative hybrid is a good option to consider.
Now, we are looking at two funds–Kotak and Franklin Templeton.
Kotak is a fund which has been ranked one in the last four quarters. It’s a consistent performer within this category.
Again, when we look at hybrid funds, there are multiple factors.
One is the performance. But there are portfolio-based parameters both on the equity and debt side as well. The fund continues to remain one. Having said that, on a performance parameter, it has slipped from one to two, while the overall ranking is still one, largely driven by the portfolio that the fund maintains on the debt side.
Portfolio, which is dominated by sovereign or gilt securities with relatively lesser exposure to papers which are rated below AAA, which means that liquidity of the portfolio on the debt side is superior compared to the peer set.
What we also observe is the portfolio has a good amount of exposure to securities, which are above five years.
Now, in the current market scenario where the yields are hardening, that portion of the portfolio, which is on the longer end of the curve, is adversely impacted, which also gets reflected in terms of recent decline in its performance. Having said that, the overall ranking is still one for this fund.
Now, Franklin Templeton is a fund which is ranked three in our ranking. It has seen improvement compared to the previous quarter. In the previous quarter, it was ranked four.
Again for this particular fund, while the performance parameter is that the fund is ranked four, it is the portfolio-based parameter which has led to an improvement in the ranking. On a concentration parameter, it is ranked two. It was ranked five earlier, so it is a significant improvement in the diversification of the portfolio.
Even on the asset quality and liquidity on the debt side, the fund has higher exposure to sovereign papers.
In fact, it doesn’t have any exposure to papers rated below AAA. So, there is a significant quality in terms of portfolio on the debt side as compared to the peer set.