Is there an MF route to investing in top Indian business groups?

If your goal is steady, lower-risk growth or income, investing in top business houses can be a good strategy.

Investing in large, well-established companies can be a good strategy, as these business houses have a proven track record and offer a level of comfort to investors. However, the only way to invest in these companies, so far, is by directly buying their stocks.

Diversified mutual funds such as large, flexi and multi-caps look at the stability of a business before investing but, so far, it is not available as a specific strategy under the mutual fund route.  But that may change soon. Tata Mutual Fund plans to launch BSE Select Business Groups Index Fund and has sought the permission of the Securities and Exchange Board of India (SEBI).

How the fund is constructed?

The Tata Mutual Fund scheme will track the BSE Select Business Groups index. The index measures the performance of the top 30 companies from the largest seven business groups in India. The stocks are selected based on free-float market capitalisation from the BSE 500 index.

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The index includes business houses such as Tata Group, Larsen & Toubro (L&T), Mahindra & Mahindra (M&M), Adani Group, Aditya Birla Group, Jindal Group, and Reliance Industries (RIL).

In terms of individual stocks, RIL was the heaviest with a weightage of 23 percent at the end of September. L&T was 13.9 percent, M&M 8.45 percent, Tata Consultancy Services (TCS) 7.16 percent and Ultratech Cement 3.92 percent.

Among sectors, refineries & marketing have the highest weightage at 23 percent, followed by civil construction 13.9 percent, information technology 12.4 percent, passenger cars 11.8 percent and cement 8.7 percent.

The Tata Group has the highest weightage at 23.02 percent in the index followed by RIL at 23 percent, L&T 15.63 percent, the Adani Group 12.68 percent and Mahindra and Mahindra (11.49 percent).

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Eleven Tata Group companies, the highest, are represented in the index followed by Adani Group’s eight and three from the Aditya Birla Group stable.

The index is adjusted in June and December.

How does the select business index differ from the Sensex?

While both the BSE Select Business Groups index and the Sensex have 30 companies each the indices are constructed differently.

Banks and financials, the mainstay of the Sensex with a combined weightage of around 28 percent, are absent from the select business groups index. Fast Moving Consumer Goods (FMCG) and pharmaceutical companies are also missing from the business groups index.

Refineries & marketing and civil construction sectors are overweight in the business groups index compared to the Sensex.

How has this strategy performed?

The mean total market capitalisation of the BSE Select Business Groups index is Rs 1,41,822 crore, making it a large-cap index.

Backtesting of data shows that the select business index (on total returns basis) has returned 41.81 percent, 19.34 percent and 27.70 percent on a one, three and five-year basis, respectively.

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During the same periods, the Sensex gave returns of 29.66 percent, 13.99 percent and 18.28 percent, respectively.

Expert view

If your goal is steady, lower-risk growth or income, investing in top business houses can be a good strategy.

Data available with ACE Equity, a stock research platform, shows that among the select business index companies, Trent, a Tata group firm, has gained 93.48 percent on a compounded annual growth rate basis (CAGR) in the past three years. Adani Power has given 72.72 percent CAGR returns and Indian Hotels Company, a Tata group firm, is up 50.64 percent during the period.

According to Nirav Karkera, head of research at Fisdom, the good narrative behind this strategy is that most of these businesses are owned by large groups, which have been tested through many market cycles.

“These companies have benefited from having common promoters with arguably the largest balance sheet. This makes them more immune to market and business cycle and also to larger economic headwinds that might come their way,” he said.

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One must, however, keep in mind that each company of a group has different characteristics, which may not click at the same time. For example, L&T and LTIMindtree are different businesses with distinct technical and fundamental factors working in their favour or against them.

Each company within a group operates with a distinct profit and loss and governance structure.