Are You Holding The Worst Performing Schemes In A Market Rally?
Nov 20, 2019

Author: Aditi Murkute

Are You Holding The Worst Performing Schemes In A Market Rally?
(Image source: Image by dawnfu from pixabay)

When you hear that the market sentiment has improved, you assume that your investment portfolio must be performing extremely well. But then to your dismay it's not. You don't understand the reasons for this until, finally, you reach out to someone who explains it to you.

Something similar happened with my friend Chitra, a thoughtful and calculative person with her decisions. Few days ago, she met me for a cup of coffee, she seemed little tensed.

When I enquired, "Hey Chitra, is all well with you?"

Chitra responded, "Not really! Worried about my investments, that's why I wanted to meet you so that you can give me some insights."

"Sure, but regarding what?", I probed.

Chitra explained, "The markets are up, but my portfolio is underperforming; and when I read an article, Do You Hold These Worst-Performing Equity Mutual Fund Schemes In Your Portfolio? it worried me all the more."

Quickly I replied, "Oh yes! my colleague, Divya, wrote that to explain about the importance of creating a robust portfolio strategically so that it helps to deal with market volatility. "

"So then what should I do?", she asked.

This is what I explained to Chitra.

Generally, mutual funds are professionally managed by experienced fund managers from reputed fund houses which conduct thorough research and adhere to the best processes and systems.

The performance of a mutual fund scheme is linked to various factors---internal and external.

But, it is extremely essential to choose funds carefully as you could land up holding the worst schemes in your portfolio, which in turn will prevent you from achieving any set financial goals.

Always choose consistently performing funds based on the performance of schemes in various market cycles, i.e. in bull phase and bear phase of the market and after evaluating on quantitative & qualitative aspects of the schemes.

Consistency of your mutual fund portfolio across market cycles plays an important role in your success as an investor.

Inconsistent funds may generate high returns in the bullish phase, but what purpose will it serve if it can't protect the downside under bearish market conditions?

Note that, interestingly, under bearish market conditions, mutual funds find it difficult to outperform Nifty 50; and under bull market conditions, it's hard to outperform Nifty 500.

[Read: Why To Evaluate Mutual Fund Performance Across Bull And Bear Market Conditions]

Table 3: 15-Worst performing schemes in the current mark rally

Market Cycles Bear Phase Bull Phase Bear Phase Bull Phase Bear Phase Bull Phase Corrective Phase
Scheme Name 08/Jan/08 To 09/Mar/09 09/Mar/09 To 05/Nov/10 05/Nov/10 To 20/Dec/11 20/Dec/11 To 03/Mar/15 03/Mar/15 To 25/Feb/16 25/Feb/16 To 23/Jan/18 23/Jan/18 To 20/Nov/19
HSBC Small Cap Equity Fund -66.20 96.41 -46.60 39.37 -18.29 45.43 -20.54
Quant Small Cap Fund -8.69 37.15 -10.88 10.50 6.28 7.87 -11.72
SBI Magnum Midcap Fund -72.74 102.22 -29.31 43.64 -8.26 29.82 -10.55
Nippon India Vision Fund -54.58 79.98 -31.63 31.01 -24.69 34.76 -9.12
Sahara R.E.A.L Fund -58.39 65.93 -33.46 31.71 -13.60 37.32 -7.04
ICICI Pru Midcap Fund -68.75 101.19 -33.82 42.02 -18.85 36.42 -6.87
IDFC Focused Equity Fund -43.57 65.01 -23.62 20.61 -23.80 38.65 -5.76
Taurus Discovery (Midcap) Fund -75.33 93.33 -34.60 36.85 -20.15 39.22 -4.65
ICICI Pru Value Discovery Fund -55.58 117.29 -23.73 41.28 -17.74 25.83 -3.39
Quant Mid Cap Fund -31.37 13.55 -10.35 18.77 -4.55 17.87 -1.99
Franklin India Bluechip Fund -49.52 79.43 -18.79 24.38 -15.84 26.05 -1.84
HDFC Equity Fund -53.90 110.75 -28.53 29.56 -27.33 40.65 -1.64
JM Value Fund -77.59 80.20 -43.11 29.70 -23.23 43.61 -1.40
LIC MF Multi Cap Fund -58.27 68.17 -27.53 26.20 -28.61 27.37 -0.32
UTI Dividend Yield Fund -44.14 79.55 -20.22 21.64 -22.60 29.48 -0.18
(Source: ACE MF, PersonalFN Research)
(Data as of November 20, 2019)

When you invest in mutual funds, assess the investment processes and systems followed by the fund house to make the right investment decisions. So, do take note of the following:

  • Delve a little deeper in understanding the fund house's investment philosophy;

  • Check whether a fund house has a dedicated research team backing its investment decisions or if stock picking is done based on whims and fancies of the fund manager;

  • Weigh the investor services and the degree of transparency, which is also vital for you as an investor; and

  • Be wary of fund houses which act as asset gatherers in their race to garner more Assets Under Management (AUM) rather than being prudent asset managers.

Your investment success will not depend on how much the Assets Under Management (AUM) of the scheme or the fund house is, but how well those assets (hard-earned money of investors) are managed. Hence, paying attention to the proportion of AUM of the fund house is actually performing, is necessary.

Fund houses that follow robust investment processes & systems can manage the downside better and hold the potential of generating attractive returns in the long run.

Furthermore, every mutual fund scheme follows a particular investment style - market capitalisation based on its objective and pre-defined strategy. And each investment style has its own cycle. So, a top-performing fund that made the best in a bull phase of its investment style may end up among the laggards, if the style enters the unfavourable phase. This also results in inconsistent performance.

So, never ignore these aspects to select winning mutual funds.

Watch this video on how to select mutual fund schemes for your portfolio:

At the same time, it is equally important to consider these seven important portfolio characteristics while investing in mutual funds.

That's not all. You should also keep yourself abreast with the latest developments in the economy and the industry.

Remember every mutual fund comes with its own strengths and weaknesses and depends whether it suits the investors, risk profile, broader investment objectives, financial goals, and the investment horizon before goals are realised, among many other aspects.

So, just as you avoid self-medication and consult a doctor when it comes to your medical health, it is best to approach a Certified Financial Guardian, who can comprehensively guide you to create a financial a plan based on needs and risk and suggest accordingly.

Before you invest in mutual funds, you should know:

  • Your age;

  • Your current financial health;

  • Your risk profile;

  • Your investment objectives;

  • Your financial goals; and

  • Time horizon before financial goals befall

Based on the above, chart out your asset allocation and then invest in mutual funds. And to get the best results, invest in the direct plans of carefully picked mutual funds through Systematic Investment Plans (SIPs).

Chitra was pleased to know about what I shared with her, she thanked me, and we parted ways.

From this it struck me, she is just one of many people who fail to choose worthy schemes for their portfolio. I would like to remind you, if you find this task difficult, seek the advice of an experienced professional (financial planner/distributor) who provides unbiased, ethical and research-backed guidance.

Editor's Note:

 If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

PersonalFN's mutual fund recommendations tend to beat the market by a significant margin over long time periods. FundSelect has beaten the market by over 70% in a decade.

Each fund recommended under  FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

With FundSelect, you get access to high quality and reliable funds picked by our research team using their comprehensive S.M.A.R.T. score fund selection matrix.

S - Systems and Processes

- Market Cycle Performance

- Asset Management Style

R - Risk-Reward Ratios

T - Performance Track Record

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

Our aim is to assist you in creating the ultimate portfolio that has the potential to top the market. If you are serious about investing in a rewarding mutual fund scheme, subscribe to PersonalFN's flagship mutual fund research service FundSelect today!

Happy Investing!

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