Best Funds For FY 2022
With the markets performing like a ship in churning waters over the past two years, a carefully thought out and well-devised strategy needs to be adopted by investors to be able to park their money in the right choice of mutual funds. Taking the performance of the funds last year which turned tables upside down, we have picked the top five funds which you may consider for your investment plans in FY 2022
The year 2020 was quite active wherein the pandemic-induced lockdown in the already dwindling economy led the equity market to shed close to 40 per cent all across the globe. Nifty 50 Total Returns Index (TRI) fell from its high of 17,349.12 in January 2020 to a low of 10,710.41 in March 2020, registering a fall of 38 per cent. On the flip side, from the month of June 2020 we started to witness a rally. Nevertheless, Nifty 50 TRI took seven months (April 2020 to November 2020) to reclaim its previous high.
As can be seen from the graph (1.1), it took almost thrice the time to recover to the previous high. That said, from the low of March 2020 to the high of 21,739.69 in February 2021, this rally gave almost 103 per cent return. This return seems to be quite stunning.
Even mutual funds in this period gave sparkling returns despite witnessing outflows via redemptions.
It is evident from the graph (1.2) that any equity MF category you might have picked in this period would have fetched you double-digit returns. It was the PSU theme that generated the lowest average returns of 55.2 per cent whereas it was technology funds that outshined other categories of mutual funds, returning 134.1 per cent.
What if we say that in the period starting from March 23, 2021 to February 15, 2021 even if you had invested in the worst fund, you would have earned double-digit returns? Yes, that’s right! Even if you had invested in the worst fund, you would have earned 28 per cent. Therefore, we can say that indeed FY 2021 was quite rewarding for people who invested when the markets were heading southwards. But now a lot of you might be curious to know what’s going to happen in FY 2022. Though no one can predict what is going to happen for sure and since basing your decisions on wild guesses could prove dangerous, we have cherry-picked the best five equity funds that you can consider investing in FY 2022. Moreover, we have also provided our rationale for selecting them.
If we compare the beginning of FY 2022 with that of FY 2021, then we have more than one successful vaccine to treat the deadly virus. Even the world GDP growth has been revised upwards and we can now see optimism rising over pessimism. According to the predications made by the International Monetary (IMF) for 2021, the world GDP growth rate might stand at 5.5 per cent which is the highest in the last 50 years. It is quite possible that this might further be revised upward in the coming months. Since it is likely that the Indian economy will spring back strongly aided by strong reforms by the government, earnings of the corporates are also being revised upwards.
However, we would urge investors not to expect those spectacular returns that you have seen in FY 2021. In FY 2022, the returns are likely to cool down, but volatility is likely to persist. Therefore, we believe that mutual fund is one of the best options to get consistency in returns with volatility lower than the market. For FY 2022 we have selected five funds from five different categories, namely, flexi-cap, mid-cap, small-cap, technology fund and quality exchange traded fund (ETF). As you might be aware, mid-cap and small-cap stocks continued their lacklustre performance from the start of 2018 till the next 30 months. It is in the 2020 rally when they picked up momentum. However, we feel that there is still much steam left. Moreover, we believe that the likelihood of economic growth will further enhance their performance.
Therefore, we have recommended funds from the mid-cap and small-cap space as these companies grow at a faster pace when the economy is doing well. When it comes to flexi-cap, we have recommended funds to give you a better large-cap exposure while quality ETF is recommended from a diversification perspective. Now you might ask how to create a portfolio? So, let’s say you are an investor with a conservative risk profile. In such a case, having higher exposure to flexi-cap fund and quality ETF and lower exposure to mid-cap and small-cap funds is advisable. However, if you have an aggressive risk profile, then you can have higher exposure to mid-cap and small-cap funds and lower exposure to flexi-cap fund and quality ETF.
Parag Parikh Flexi Cap Fund (Growth) – Direct Plan
Quantitatively, this fund outshines other funds in the category due its better risk and returns combination. The two graphs Graph (2.1) & Graph (2.2) give you a glimpse of its performance. The first graph shows the one-year, three-year and five-year rolling returns of the scheme, its benchmark and its category. The period of study spans from April 2013 to March 2021. In terms of rolling returns, Parag Parikh Flexi Cap Fund scores over not just its benchmark but also its category. The second graph shows the risk aspect of the fund as measured by maximum drawdown. Maximum drawdown shows the maximum observed loss from a peak to the trough of a portfolio, before it attains a new peak. So, even in this aspect Parag Parikh Flexi Cap Fund scores over its benchmark Nifty 500 TRI as well as its category.
On a qualitative basis, Parag Parikh Flexi Cap Fund despite being a concentrated portfolio consisting of only 21 stocks does offer diversification. The highest weightage to stocks is 8.87 per cent with the top 10 stocks forming 49.53 per cent of the portfolio, which is far from extreme concentration. Moreover, this fund also has international exposure which takes its diversification a notch above.
Looking at its portfolio compared to the category, it is quite overweight on the technology sector followed by services and automobile, while it is underweight on financials and healthcare. Furthermore, it holds almost 60 per cent in large-cap stocks and the remaining 33 per cent and 7 per cent in mid-cap and small-cap stocks, respectively. Therefore, we would recommend conservative to moderate investors to have higher exposure to this fund.
Kotak Emerging Equity Fund - Direct Plan | Growth Option
In quantitative terms, Kotak Emerging Equity Fund has performed really well not just in terms of long-term and near-term returns but also in terms of consistency in maintaining those returns. In fact, this fund successfully beats its category when it comes to managing downside risk as it falls comparatively less than the category average and its benchmark Nifty Mid-Cap 100 TRI. This can very well be traced in Graph (3.1) & Graph (3.2)
Comparing its one-year, three-year and five-year rolling returns, this fund outperformed both its benchmark Nifty Mid-Cap 100 TRI and category average as well. Moreover, looking at the maximum drawdown graph, except for a few instances, Kotak Emerging Equity Fund fell less compared to its category average and its benchmark. In terms of its qualitative aspects, this fund invests in a total of 67 stocks with the top 10 holdings contributing only 33.36 per cent of the total assets. Even this fund seems to be truly a mid-cap fund with almost 78 per cent of its assets invested in mid-cap stocks and the remaining 11 per cent each in large-cap and small-cap stocks.
Further, depending upon the market conditions it switches its investment style between growth and value. Compared to its category, this fund is overweight in chemicals followed by engineering, construction and textile sector, while underweight in financial, healthcare and automobile sector. Therefore, we recommend only aggressive investors to have higher exposure to this fund. Conservative to moderate investors should have limited exposure to this fund.
Axis Small Cap Fund - Direct Plan | Growth Option
Talking about its quantitative aspects, in terms of returns it is quite consistent and beats most of the funds in the category with one of the best long-term and near-term performance. This fund is the best when it comes to managing downside risk. In fact, most of it can be well attributed to its cash calls. At present it holds almost 9 per cent of its total assets in debt. This helps the fund to contain its downside risk. Now let us see what the rolling returns (Graph 4.1) and maximum drawdown (Graph 4.2) have to say.
Looking at the one-year rolling returns, you might say that this fund has underperformed the other funds in the category. However, small-cap funds are quite volatile and risky in nature and hence we mostly recommend them for the long term. Therefore, looking at its short-term returns is futile. In fact, in the short-term (one year) it has successfully outperformed its benchmark. However, if we look at the three-year and five-year rolling returns, then this fund outshines its category average as well as its benchmark Nifty Small-Cap 100 TRI. Speaking about its risk as measured in terms of maximum drawdown, it has been able to contain the downside risk way better than any of the funds in this category. If you look at the maximum drawdown during March 2020, the fund fell way less than its category and its benchmark.
Looking at its portfolio and other qualitative aspects, this fund has a well-diversified portfolio with a total of 52 stocks where the top 10 holdings form only 37 per cent of the total assets. Also, this fund is purely a small-cap fund as it holds almost 69 per cent in small-cap stocks and the remaining 31 per cent in mid-cap stocks with very negligible exposure to large-cap stocks. This fund follows a growth investment style and it has helped to pick great growth stocks such as Tata Elxsi, Galaxy Surfactants, JK Cement, etc. Therefore, taking a holistic view on returns, risk, portfolio and other qualitative factors, we recommend moderately aggressive to aggressive investors to have higher exposure towards Axis Small-Cap Fund and conservative to moderate investor to have limited exposure.
Aditya Birla Sun Life Digital India Fund - Direct Plan | Growth Option
The technology sector has been one of the best performing sectors in FY 2021 and we believe that there is still some steam left in it. Therefore, nothing can be much better than Aditya Birla Sun Life Digital India Fund. If we look at the quantitative parameters that we run these funds through, this one scores in each and every parameter. May it be long-term or near-term returns, returns consistency or maximum drawdown, in all aspects it has come out with flying colours. In fact, it beats other funds in the category with a huge margin. This can very well be witnessed in the rolling returns (Graph 5.1) and maximum drawdown (Graph 5.2) graphs.
If we look at the one-year, three-year and five-year rolling returns, this fund beats its category as well as its benchmark. However, one thing to note here is that the benchmark data that we have assumed for study is the Principal Returns Index (PRI) and not TRI. Therefore, actual benchmark returns may vary. That said, even the PRI can give you a good insight about the performance of the benchmark. If we look at the maximum drawdown, then in some instances the fund did fall higher than its benchmark and category. But overall it did manage to contain the downside risk even during the deepest cut in the month of March 2020.
Talking about its qualitative aspects, this fund consists of 30 stocks with highest weightage to Infosys (21.37 per cent), wherein the top 10 holdings itself contribute 70 per cent. Moreover, this fund is not just restricted to the technology sector but also invests smaller proportions in services, communications, engineering and consumer durables. Being a sector-focused portfolio, it is bound to be concentrated. Therefore, we would recommend conservative to moderate investors to have very limited exposure to this fund, while aggressive investors can have higher exposure to this fund.
Edelweiss ETF - Nifty 100 Quality 30
This is purely a smart beta fund and is recommended solely for the purpose of diversification. This ETF seeks to follow quality smart beta strategy where in it tracks Nifty 100 Quality 30 TRI. Let’s take a look at how this index selects top 30 stocks from the Nifty 100 universe. The index selects top 30 companies based on their ‘quality’ scores. The quality score for each company is determined based on return on equity (ROE), financial leverage (debt to equity ratio) and earnings per share (EPS) growth variability that is analysed during the previous five years. This means from all the 100 companies out there only those 30 companies form a part of this index which have higher profitability, lower leverage and more stable earnings. This index is re-balanced semi-annually.
As can be seen from the Graph (6.1) & Graph (6.2), the one-year average rolling returns of the ETF and the benchmark is similar and so is its maximum drawdown. This shows that this ETF tracks the index very closely and has very negligible tracking error.
As the data for the ETF and its benchmark TRI is limited, we have taken the PRI data to calculate the rolling returns of Nifty 100 Quality Index. As can be seen in Graph (6.3), the returns are quite satisfactory and this ETF is more suitable for conservative to moderate risk-takers whereas aggressive risk-takers can have limited exposure to this fund.