Newly-launched mutual fund schemes adopt varying strategies to survive market volatility

The Rs 37 trillion Indian mutual fund (MF) industry received more than Rs 80,000 crore of inflows into new schemes launched in 2021. Most fund houses launched new schemes to fill gaps in their bouquet of products. Some were found interesting by investors.

Small-cap funds
Despite a solid run by small-cap funds through the Covid-19 market rally (65.37 percent in calendar year 2021 as opposed to 33.64 percent by flexi-cap funds), three fund houses launched such funds.

PGIM India Small Cap Fund (PSCF) was an actively managed fund, and ICICI Prudential Small Cap Index Fund and Aditya Birla Sun Life Nifty Small Cap 50 Index Fund were passively managed. Small cap portfolios tend to beat benchmark indices in the medium to long term so most fund houses have focused on actively managed scheme in the small-cap space.

As investors start looking at indexing, a few more small-cap funds are expected. Axis Nifty Small Cap 50 Index fund NFO has opened for subscription on February 21, 2022.

An Interesting point to note is that PGIM India Mutual Fund limited investments in its PSCF to Rs 10 lakh per application or per instalment from August 2, 2021, immediately after it opened for subscription. On September 1, 2021, the fund house decided to withdraw the limit.

“We launched the NFO (new fund offering) at a time when the valuations of small caps appeared stretched from a very near term perspective though they were well below mid to long term average valuations and there were enough stock specific opportunities. A great entry point, we felt for investors, with a 3- 5 year or longer timeframe,” said Ajit Menon, chief executive officer of PGIM India Mutual Fund.

“In line with our plan, we closed the scheme for large investments as we have raised more than Rs 500 crore in the NFO till the time we deployed all money received in the NFO and constructed the portfolio we wanted,” he added.

Incidentally, the direct plan of PSCF charges 22 basis points compared to around 30 basis points charged by direct plans of passive small cap index funds.

Balanced advantage funds

Investors looking to invest in stocks but worried about volatility found the concept of investing in a mix of bonds and stocks, in line with relative attractiveness, through balanced advantage funds.

Four fund houses, LIC, SBI, Mahindra Manu Life and NJ India launched NFOs of their balanced advantage funds in 2021. NFO of SBI Balanced Advantage Fund was the biggest grosser with Rs 14,500 crore.

NJ Balanced Advantage Fund needs a special mention. It owns 79 stocks in its equity portfolio. The highest allocation to individual stock is 1.68 percent and the lowest 0.42 percent. The scheme assigns low allocations to its top stock picks compared to other schemes. The scheme invested 54.19 percent in stocks as on January 31, 2022. The bond portfolio has money market instruments such as TREPS and treasury bills maturing in much less than one year.

“Our portfolios are rule-based, wherein we look at four factors of investing-- value, low volatility, quality and momentum for stocks. We allocate money to each stock based on how it scores on these parameters and how much overall allocation to equity our asset-allocation model dictates. In bond portfolio we do not take credit risk or interest rate risk,” explained Rajiv Shastri, CEO, NJ Mutual Fund.

Value funds are back

In calendar year 2021, after a long hiatus, fund houses took a serious look at their schemes driven by “value investment strategy.” Curiously, fund houses like Axis and Canara Robeco, which are known for their growth strategy funds, launched their own versions of value funds. Others like Quant and ITI mutual funds too launched value funds.

Nippon India Nifty 50 Value 20 Index Fund NFO was also launched. This strategy is already available through the exchange traded funds of Nippon India and Kotak mutual funds.

Ravi Kumar, founder of Gaining Ground Investment Services, said: “When interest rates and inflation were low, the growth stocks did well. However, as interest rates begin to rise, the value investing is expected to catch up.”

According to Morningstar, Axis Value Fund and Axis Flexicap Fund (this follows a growth-oriented strategy) don’t have much in common. Just about 8 percent of their portfolios were common, as on January 31, 2022. The number stands at 35 percent for the Canara Robeco Value Fund and Canara Robeco Flexicap Fund. This is a good trend.

“We look to buy good-quality stocks backed by sound balance sheets and good managements at a price less than their intrinsic value. For us, a value investment is one where we foresee a tangible, discernible and time-bound trigger playing out,” said Shridatta Bhandwaldar, head-equity, Canara Robeco Mutual Fund.

Some of the value picks are also bought in other diversified equity schemes; hence such an overlap exists. Investors need to take a longer view while investing in value funds compared to other diversified funds, he added.

Multi-cap funds

This category saw many launches as fund houses shifted their erstwhile multi-cap schemes to the flexicap category after the Securities and Exchange Board of India (SEBI), the financial market regulator, instructed fund houses to invest a minimum 25 percent of money each in large, mid and small cap schemes.

That made many fund houses launch NFOs of multi-cap funds. In calendar year 2021, HDFC, Aditya Birla Sun Life, IDFC, Axis and Kotak Mutual Fund launched their multi-cap fund NFOs. SBI MF recently closed the NFO of its multi-cap offering.

As on January 31, 2022, HDFC Multi-Cap fund had 106 stocks in its portfolio and almost deployed all the money. As expected, most of these have assigned a relatively higher allocation to large-cap stocks compared to mid- and small-cap stocks.

Experts believe that the current downturn can offer fund managers a good opportunity to deploy their money.

“In the massive upmove seen till the beginning of calendar year 2022, all stocks did well given high liquidity. However, as the markets turn volatile and liquidity recedes, fundamentals of the business should influence the stock price movements. Fund managers are consciously looking at the quality of the business while deploying the money raised in multi-cap NFOs,” said Ravi Kumar.

As these funds have to invest in mid- and small-cap stocks, which are relatively more volatile compared to large caps, the focus on quality is non-negotiable, he added.

Though many of these NFOs announced in 2021 had interesting investment ideas around them, investors have to look at the schemes’ long term performance before committing their money. Moneycontrol offers a curated list of mutual fund schemes through MC30.