It has taken nearly four years for BSE companies to reach the mark of $3 trillion, after achieving a market capitalisation of $2 trillion in 2017.
Some of the schemes managed by a set of fund managers delivered healthy returns in this period.
Incidentally, most of these top-performing funds were from mid and small-sized fund houses.
Parag Parikh Flexi Cap Fund, which is managed by Rajeev Thakkar of PPFAS MF, along with Raunak Onkar and Raj Mehta, has given annualized returns of 19.2 percent in the four-year period (July 10, 2017-May 24, 2021). The scheme among the top-performers within diversified equity funds.
“Sometimes, good-quality companies, if they are out of favour, give good entry points,” says Thakkar, who is also the chief investment officer at PPFAS MF.
Looking for good-quality companies at reasonable valuations and sticking to long-term investing has worked well for the fund house.
That’s also the reason why the fund’s turnover ratio is among the lowest in diversified equity schemes.
PPFAS MF has never believed in the idea of launching new funds to gain more investor assets. In the last eight years of its operations, the fund house has only had two funds, and only recently rolled out a debt fund.
Also read: PPFAS Mutual Fund: A success story in value investing
Quality and conviction
SBI Small Cap Fund, managed by R Srinivasan, chief investment officer-equity at SBI MF, is not far behind, as it has given returns of 18.4 percent annually.
Srinivisan believes that too much diversification doesn’t really help beyond a point. Hence, he takes higher conviction calls on his investments.
“There is enough evidence out there to tell you that the benefits of diversification beyond 20 stocks peter out significantly,” he says.
Also read: For market levels to sustain, we need strong earnings recovery: SBI Mutual Fund
Axis Midcap Fund, which is managed by Shreyash Devalkar, senior fund manager-equity, Axis MF, has given compounded annual returns of 18 percent.
Devalkar’s investment approach is to look for high-quality high-growth businesses, with free cash flows, high return on equity, low debt-levels, and good corporate governance.
While his approach to large and mid-sized companies is more or less similar, within mid-caps he tries to look for companies with differentiated products or services or those operating in areas where larger-sized companies cannot operate.
Devalkar also tries to spot mid-cap companies that can potentially turn into large-caps by changing their scope or ambit of operations.
PGIM India Midcap Opportunities Fund, managed by Aniruddha Naha, has given compounded annual returns of 16.6 percent.
"Investing in companies with steady cashflows, clean balance-sheets and no major corporate governance issues, has helped the fund. Investments in structurally strong IT and pharma companies and lower exposure to financial sector because of asset quality concerns, also helped the fund during volatile periods," says Aniruddha Naha, Senior Fund Manager PGIM India Mutual Fund.
UTI Flexicap Fund, managed by Ajay Tyagi, senior fund manager at UTI MF, has given returns of 16.3 percent.
Tyagi looks for companies that can consistently generate value for a decade or longer. He looks for companies with high-quality businesses, strong balance-sheets and cash flows, with strong growth prospects.
Also read: Rising stars in mutual funds: Ajay Tyagi on why paying a premium for a stock is not such a bad thing
Valuations only come last on his checklist, as Tyagi says it is the low-quality businesses that tend to get cheaply valued.
Axis Bluechip Fund, again managed by Devalkar, has been among the top performing large-cap funds with 15.8 percent returns.
Canara Robeco Bluechip Equity Fund is another scheme in the list with an impressive 15.1 percent annual returns over this four-year period.
The fund is managed by Shridatta Bhandwaldar, head-equities, Canara Robeco MF, who looks at building his portfolio with steady-growth companies and firms that can deliver strong performance when the business conditions start to favour their sector. He calls these alpha generators and allocates 30 percent of his scheme’s kitty to such stocks.
Also read: Rising stars in mutual funds: Shridatta Bhandwaldar on why promoter integrity is crucial in stock picking
“Small and mid-sized schemes have done well, as the smaller size helps fund managers to be more nimble-footed in their investment decisions,” says Deepak Chhabria, chief executive officer and director at Axiom Financial Services.
In other words, smaller funds have smaller positions, which they can sell a stock quickly if the fund manager senses that it has achieved its potential.
After the COVID-19 outbreak last year, Bhandwaldar cut his positions to FMCG companies expecting pressure on margins from rising input costs. He was also among the fund managers who moved early to add auto stocks, expecting the demand to recover.
Kotak Small Cap Fund, managed by Pankaj Tibrewal, executive vice president and fund manager-equity at Kotak MF, has also given returns of 15.8 percent.
Tibrewal looks for companies that have a leadership position in the sectors they operate in. He says leaders are found in in mid and small-caps too.
Also read: Rising stars in mutual funds: Pankaj Tibrewal on spotting mid and small-cap stocks early
The difference is these companies operate in smaller sectors such as electrical wires, cables, bearings and tiles.