MC30: Ranking slips for three funds, but that’s no reason for worry

In August 2021, Moneycontrol introduced MC30; a curated basket of 30 top mutual fund schemes for you to invest in. To make MC30 more robust, our process involves curating schemes only from among 5-star and 4-star rated schemes from MC30 MF rankings and star ratings. However, sometimes, ratings fall. Markets punish the fund manager’s strategy or bad calls.

To be sure, we do not take schemes out of MC30 just because their ratings dip. If a scheme’s ratings dip to a 3-star, it continues to remain in MC30. But if the rating dips to 2-stars or below, the scheme goes out of MC30 and gets replaced with a better alternative.

Three schemes saw their ratings dip, marginally. Let’s see if you should continue to hold them or sell out.

Also see: The complete MC30 basket of mutual fund schemes

We had a detailed discussion with the fund managers of these schemes to understand what went wrong, their current conviction on the market dynamics and future course of action.

Kotak Flexicap Fund (Equity – Flexicap)

With a corpus of Rs 37,760 crore (as of January 2022), Kotak Flexicap Fund (KFF) is the largest actively-managed equity fund in the MF industry. A large corpus is one of the reasons behind its underperformance. Its tilt towards large-cap stocks is the other reason.

Harsha Upadhyaya, President & Chief Investment Officer - Equity, Kotak Mahindra AMC admits that although large-cap stocks got a head start soon after equity markets recovered post the Covid-19 March 2020 crash, “mid and small caps have done even better around two and a half times better.” In this liquidity-driven market, it was difficult for schemes with large corpus to adapt to sudden market shifts and build even large positions without impact.

However KFF is backed by long-term performance and an experienced fund management team. The large corpus remains a concern. For now, KFF continues to remain in MC30.

Also read: How to use MC30?

DSP Midcap fund (Equity – Midcap)

One of the reasons why DSP Midcap fund (DMF) went through a slightly rough patch was its sector allocation to banks and pharmaceuticals. These sectors didn’t do as well as many others in the past year. But Vinit Sambre, Head – Equities at DSP Investment Managers and also the scheme’s fund manager is not worried. “We haven’t yet seen a complete market cycle,” he says.

Sambre says that post the Covid-19 March 2020 market crash, equity markets went up too sharply. At the time, many sectors did well, making the equity market rally a broader one, as opposed to the narrow rally we had seen before Covid-19 had set it. The flipside, Sambre adds, was that some unworthy stocks got swept up in the momentum. DMF, he adds, weren’t invested in such stocks. “We follow buy and hold strategy and do not chase momentum. Therefore, many stocks that do not fit our criteria also went up”, he says. One of the sectors DMF missed opportunity was IT midcap space.

Mid- and small- cap funds are prone to market volatility. Fortunes risk as well as fast. In this category, it is unwise to get swayed by past performance alone. To that extent, DMF has maintained a steady, long-term track record, even though it doesn’t quite set the charts on fire at all times.

It remains in MC30, for now.

Sundaram Corporate Bond Fund (Debt – corporate debt)

With just eight schemes that qualified for the MC30 MF rankings in this category, there was very little to separate one from the other. That apart, Sundaram Corporate Bond Fund’s (SCBF) conservative investing style meant that its performance was subdued.

Unlike peers (category average of 2.6 years), the modified duration of the scheme has brought down almost half to 1.2 years in the last 18 months. “We will have significantly less capital losses (compared to peers) in case yield hardens going forward” says Sandeep Agarwal, one of the fund managers of the scheme. But on the other hand, it has resulted in having the lower YTM of five percent compared to the category average of 5.7 percent. It has eventually lowered the return of the scheme.

Just like the other two schemes, SCBF continues to remain in MC30.

Also see: The complete MC30 basket of mutual fund schemes