Lessons from best and worst performing mutual funds of 2018

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Here are lessons from the best and worst performing mutual funds of 2018. None of the funds mentioned are to be considered for investment. Observing annual returns can make us understand risk better and sometimes introduce us to a new investment strategy adopted by mutual funds. In this 2018 return means return between Jan 1st 2018 to Dec 31st 2018. Last one year return means return between Jan 14th 2018 to Jan 14th 2019 or the trailing return as on date of publication

Index returns in 2018 (dividends included)

  • Nifty and Sensex ~ 4-5%
  • Nifty 100 2.6%
  • Nifty 100 Low Volatility 7.3%
  • Nifty next 50 -7.8%
  • Nifty 50 Equal Weight -4.6%
  • Nifty 100 Equal Weight -8.4%
  • NIFTY 50 Value 20 TRI 10.4%

Last 1Y Index returns (dividends included)

  • NIfty and Sensex 2%
  • Nifty 100 -0.3%
  • Nifty 100 Low Volatility 3.4%
  • Nifty next 50 -12%
  • Nifty 50 Equal Weight -8%
  • Nifty 100 Equal Weight -12.3%
  • NIFTY 50 Value 20 TRI 6%

Best and worst performing mutual funds of 2018: Lessons

Observations

  • Are thinking, “NIFTY 50 Value 20 or Nifty 100 Low Volatility seem like a good investment”?  Stop right there! First, these are available as only ETFs with only a few crores of assets. So if you are interested, pick individual stocks. See for example: Seven months of lazy stock investing! Dec 2018 Update
  • Look how different Nifty next 50 returns are from Nifty 50. I have said it once and I will say it again Warning! Nifty Next 50 is NOT a large cap index! Just because SEBI says so, does not make it one!! The risk is different and so the categorization should be different
  • Noticed the importance and difference between market capitalization based weighing and equal weighting. Equal weighting = higher risk.
  • Sundaram Smart NIFTY 100 Equal WeightFund – Direct Plan has returned over 1% above its index. This is a worrying sign! Readers may recall that Sundaram and Principal I removed Nifty 100 from Handpicked Mutual Funds January 2019 (PlumbLine) I am glad I did that. This begs the question is it hard to manage a 100 stock equal weight index? Possibly due to liquidity issues? More on this later.

Large cap funds

  • Axis Bluechip emerged as the top performer in 2018 comfortably beating the NIfty 50.
  • The worst actively managed fund is Taurus Large Cap with -8%

Large and Mid Cap Funds

  • The Nifty 200 TRI move up 0.3% in 2018 and fell -2.6% in the last year
  • Only Sundaram Large and Midcap and Invesco India Growth Opportunities fared better in the last year (trailing return).
  • There is a huge spread in last year returns: -1.44% to -19.44%. Another reminder that binning funds into the same category does not make them the same or even similar! Just because it is convenient to so and apply a star rating, does not make it right.

Multicap funds

  • I do not understand how a multicap fund differs from a large and mid cap fund but happy to see seven funds did better than Nifty 200 TRI in past year (trailing)

 

Midcap funds

  • NIFTY Midcap 100 TRI returns -14.5% in 2018 and -18% in the last year. Axis mid cap is the only fund in this category to have move up in 2018 by 4.5% and 1.5% (trailing) even though it still holds about 78% of midcaps. Not bad at all.
  • SBI Magnum MId cap is the worst performer with -17% in 2018 a clean 4% higher fall than Nifty Midcap 150 TRI

Small cap funds

  • Axis small cap beat NIFTY Small cap 100 TRI by a huge margin!  The small caps index fell 31.8% in the past year but the axis fund fell only 9.4%. It does not hold any large caps.Looking at its NAV growth, there is a distinct change in correlation with index from Jan 2018!
Axis Smallcap NAV growth
Source: Value Research
  • Sundaram Small cap is the worst performer with -30% trailing a touch more than its benchmark NIFTY Small cap 250 TRI

Aggressive Hybrid funds

  • CRISIL Hybrid 35+65 Aggressive the typical benchmark for this category returned 3% in 2018 and only Sundaram Hybrid Equity could top that. Makes you wonder if we should have index funds in this category.However the associated risk is unknown (as we do not have public data)

Dynamic asset allocation funds (Balanced Advantage)

  •  CRISIL Hybrid 50+50 Balanced Index returned 3.6% in 2018. This however involves no tactical asset allocation (TAA)
  • NIFTY 50 & Short Duration Debt – Dynamic P/B Index which uses PB based TAA returned 7.2% in 2018
  • NIFTY 50 & Short Duration Debt – Dynamic P/E Index which uses PE based TAA returned 6.2% in 2018 (I shall discuss these TAA indices in detail soon)
  • SBI Dynamic Asset Allocation Fund – Direct Plan returns  8.4% in 2018. This employes a three component momentum based TAA strategy. However it can swing from equity to debt fund with respect to taxation and also literally. This is best in this category.
  • Franklin India Dynamic PE Ratio Fund ofFunds – Direct Plan managed 5.3% in 2018 and is a distant second.
  • Invesco India Dynamic Equity Fund returns an awful -4.6% in 2018. According to its scheme document

The allocation to equity is guided by a proprietary ‘asset-allocation’ model which combines Equity Market Price to Earning (PE) along with Equity Risk Premium to arrive at a precise allocation to equity

well whatever that means, it has not worked in 2018 (relatively speaking). Aditya Birla Sun Life Asset Allocator Multi-Manager FoF Scheme and BOI AXA Equity Debt Rebalancer Fund also suffered losses in 2018.

Gold

  • All gold funds beat equity funds this year with 6-8% returns

Arbitrage

  • Among the star rated funds (that is funds that have not changed much due to SEBI rules), the spread is reasonable 5-7%.
  • Will 2019 be the year when an arbitrage fund see a credit rating crisis? Could be as the SEB rules only require 65% arbitrage in the portfolio.

Debt

  • The year saw huge falls in many debt funds due to the IL&FS Bond Downgrade. Motilal Oswal Ultra Short term fund fell 7.6%
  • CCIl All Sovereign bond index that had an avg duration of 7-8 years in 2018 returned 8.25% and (only) five gilt funds beat that.
  • Amusingly Franklin India Government Securities Fund got the last place with 4.2% returns in 2018. Debt space has become complex after the SEBI categorization rules.So I will not go any further.

Special mentions

  • BOI AXA Mid & Small Cap Equity & Debt Fund (an aggressive hybrid fund) fell 17.8% (1Y trailing) and 13.4% in 2018. Well, that is one to avoid!!

  • HSBC Infrastructure fund fell 38.6% (you don’t need a 2008 to experience such falls!!)
  • Only IT funds (due to a weak rupee?) and few banking funds had gains. Tata digital grew by 21% (1Y trailing). All other sectors fell, with infra the hardest hit.
  • HSBC Brazil fund grew 13.4% last year (trailing)
  • Edelweiss Greater China offshore fund fell 17.6% (1Y, trailing)

Summary

Axis MF has impressed in equity. The “large cap” indices continue to teach us new lessons about risk  and portfolio weights. Debt fund investors who chased returns lost big. The momentum strategy of SBI MF demands a close look, while the time-tested PE strategy of Franklin worked yet again.Most import of all, many new investors saw negative returns for the first time. How did they feel? We shall find out in an upcoming article. Happy Pongal.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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6 Comments

  1. For your CSR activities, GOOD CAUSE is the place for you. It is a totally professional and transparent way to donate.
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  2. You have compared index returns in 2018 last 1 year. With last 1 year, do you mean 2017? Also, is there anything called annualized rolling return for any calendar year and if yes, do you see sense in computing and comparing each CY annualized rolling returns?

  3. Hi Pattu,

    Can you share your understanding on tax on sovereign gold bonds (sgb) purchased from secondary market. What I have observed is if we buy gold via sgb then we get 5% rebate and no tax if held for 8 years. However sgb’s in secondary market which are maturity in say 2+ years are available at 10-20% discount (Though there are only few demats allowing secondary sale of sgb) would buying in secondary market offer same tax benefit (0% for long term). In this case 0% after 2+ years.

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