Where to invest Rs 10 lakh today? Umeshkumar Mehta of Samco Mutual Fund suggests large-cap MFs and these 5 sectors

Umeshkumar Mehta, chief investment officer, Samco Mutual Fund

Samco Mutual Fund, the country’s 37th largest fund house with assets worth Rs 1,307 crore (as on September 2023),  entered the Rs 47 trillion Indian mutual funds (MF) industry relatively recently, in 2022.

Among the challenges facing any new fund house in an industry comprising 44 fund houses is how to differentiate itself and gain the trust of investors, especially when they have big brands to choose from.

Actively active

Umeshkumar Mehta, chief investment officer, Samco Mutual Fund, has a plan. So far, the fund house has launched three actively-managed equity funds: the Samco Flexi Cap Fund, Samco ELSS Tax Saver Fund, and Samco Active Momentum Fund. Aside from these, it also has the Samco Overnight Fund (a short-term debt fund), but that’s mainly to cater to large institutional investors and facilitate systematic transfer plans (STP).

Samco Mutual Fund: A short-term report card.

Keeping the overnight and the tax-saver funds aside, a look at the portfolios of the flexi-cap and the momentum funds shows that the fund house aims to chart a slightly different course,  even though it’s a relatively new player.

Samco believes in active management, as opposed to companies like Zerodha Fund House and Navi Mutual Fund, which focus on passive funds. Mehta says Samco MF is one of the first fund houses to publish the active share of its equity funds on its website.

The active share is a measure of the extent to which a fund’s portfolio deviates from the benchmark index. The active share of a mutual fund ranges from zero (pure index fund) to 100 percent (no overlap with the benchmark). Funds with a high active share have been found to outperform their benchmarks.

“It tells you how different the portfolio of the fund is compared to its benchmark, whether it is truly active, or is it a closet index fund,” says Mehta.

In July 2023, the fund house launched the Samco Active Momentum Fund (SAMF), the only actively-managed thematic fund in the industry. This seems a bit of a risky bet for a new fund house, which has just two other equity funds in its stable.

“If you look at the NSE indices, you will find that the momentum indices have generated among the highest returns of all. So, with our plans to innovate and add value to investors, we decided to focus on creating an algorithm that can help investors gain from the momentum style of investing,” says Mehta. He adds that the investment community has done a lot of studies on the momentum strategy, and appears ready to launch more such funds.

The actively-managed Samco ELSS Tax Saver Fund also aims to walk a slightly different path. Unlike most other schemes in the category, this one is tilted largely towards mid- and small-cap funds.

Too much risk?

At present, the fund house’s portfolios are heavily tilted towards small- and mid-cap stocks, either by design (momentum fund) or mandate (ELSS fund).

Take a look at SAMF. Its weighted-average market capitalisation is Rs 58,062 crore, the second lowest among 12 momentum funds. The lower a scheme’s weighted-average market capitalisation, the lower is the market capitalisation of the underlying stocks. Due to its active stock-picking strategy, Mehta and his team fish for stocks at the bottom of the barrel and strays away from the benchmark. Its top 10 stocks include Man InfraConstruction Ltd (5.09 percent, its top holding), Tips Industries (3.76 percent) and CreditAccess Grameen Ltd (3.68 percent).

Top 5 holdings in Samco mutual fund schemes

Isn’t this a bit risky for a mutual fund house that is barely a year-and-a-half old? Mehta disagrees. He says the momentum fund is tilted towards small- and mid-cap stocks as its mandate is to invest in stocks with momentum regardless of sector or market cap.

“We have witnessed strong momentum in mid, small, and micro-cap stocks in the last six months, and that’s why the fund is currently tilted towards this space. When the momentum shifts to something else, the portfolio might reflect the same,” he says, but adds: “By its nature, in momentum investing the strategy is to not predict markets but to follow the price action.’’ However, now that the markets are showing signs of weakness,  Mehta says the fund can liquidate its positions “quickly” if there is no momentum or the markets are in a bear phase.

Samco’s active strategy is visible in its Flexi Cap fund too. Its two largest holdings are Bajaj Finance (9.2 percent) and Bajaj Finserv (8 percent), both from the same family. Besides, the scheme doesn’t hold any bank stocks — a stark departure from most other actively-managed diversified equity funds.

“We do not have anything against holding good quality banks in the portfolio. But for now, we believe there are better opportunities available elsewhere. Lending is a great business to own because it earns interest 24-7.  We have exposure to this through Bajaj Finance, Bajaj Finserv, and Aditya Birla Capital. Many of the biggest banks in the industry have about 40-50 percent wholesale loan exposure, which could lead to higher NPAs during a bad cycle. Most banks also operate at lower ROAs and higher NPAs than NBFCs like Bajaj Finance,” says Mehta.

Where to invest Rs 10 lakh today?

Mehta believes that rising bond yields in the US can impact foreign flows into Indian markets as well. He says that higher yields in the US will make India less attractive for investors, and can lead to outflows in both equity and debt markets. “This is because the US is still considered a safe haven for investments. The narrowing gap between yields in the US and India can make more and more investors invest in the US, rather than take higher risks elsewhere,” he says.

Geopolitical tensions, sticky inflation, and a gloomy economic outlook are the biggest threats that he sees for equities in the short-to-medium term. But investors should stick to their investment discipline, he adds. “Based on the current market situation, we believe that investors should have a mix of equity, debt, and precious metals. Interest rates have been rising and there is an expectation that this might pause or decline in the middle of next year. This can lead to price appreciation for bonds, especially the longer duration bonds,” he explains.

Mehta advises an allocation to large-cap stocks. He believes that this segment’s valuations are reasonable, albeit prone to normal correction. He likes information technology (IT), financial services, large non-bank finance firms, green power, and distribution companies. “These sectors are trading at reasonable valuations and can be accumulated during the ongoing correction,” he adds.