Ask Morningstar: Do not transact unnecessarily

By Nehal Meshram | Dec 05, 2022

The SIP amount per month: ICICI Bluechip (Rs 5,000), ICICI Value Discovery (Rs 5,000), ICICI Nifty Next 50 (Rs 10,000), HDFC Mid-Cap (Rs 6,000), SBI Smallcap (Rs 10,000), Nippon Smallcap (Rs 4,000), Motilal Flexicap (Rs 4,000), PPFAS Flexicap (Rs 15,000).

How will these funds perform in 10-15 years?

There are funds in which SIP stopped, but I have a corpus accumulated: ICICI Tax Saving (Rs 2 lakh), HDFC Index (Rs 6 lakh) and ABSL Tax Relief. Should I redeem or STP to another fund?

I understand that the investments in tax-saving funds (ELSS) have stopped. But when it comes to other equity funds, you have to play the long game. You will witness the true benefits of staying invested over the long term.

Even if your SIPs have stopped, there is no need to redeem your investments. If you do, you will end up paying tax. Do not transact unnecessarily.

We cannot predict the returns of individual funds, but based on historical returns, equity as an asset class can generate a CAGR of 12% over the long term.

The passive funds that you invested in are a good way to diversify. The active funds you've mentioned are reasonably well-managed strategies with different mandates. They have a good track record in their respective categories.

ICICI Prudential Bluechip is a large cap fund with a Morningstar Analyst rating of Silver (Direct). The lead manager Anish Tawakley is one of the highest experienced research professionals. The portfolio managers ply a benchmark-conscious strategy, and sector weightings are aligned to those of the IISL Nifty 100 Index, subject to a deviation of plus or minus 5%. The manager has a quality bias when choosing stocks and favour companies with robust business models, strong entry barriers, and the ability to scale up without eroding profit margins.  It is a well-diversified portfolio of 50-60 stocks, with lower turnover.  With this approach the fund has outpaced its peers over the long run.

ICICI Prudential Value Discovery has a Morningstar Analyst Rating of Gold (Direct). The fund is being led by CIO Sankaran Naren since last year following Mrinal Singh’s exit. Naren is one of the most seasoned managers in the Indian mutual fund industry. The fund is run with a value-driven investment approach and Naren has a distinct skill of uncovering value opportunities. However, the value tilt requires significant patience as value stocks can underperform growth stocks for lengthy periods.

ICICI Prudential Long Term Equity (ELSS) has passed through multiple hands in the past and now resides with Harish Bihani at the helm. While Harish is highly experienced as a research analyst, this is his first stint as a fund manager. Bihani uses his bottom-up stock-picking abilities. While Bihani is mindful of valuations, he wouldn’t mind paying a premium for a company as long the numbers meet his growth criteria. While we like the investment process here which is robust but execution will be key to how this fund performs.

HDFC Midcap Opportunities is managed by Chirag Setalvad who ranks amongst the best portfolio managers in the small/mid-cap category. He emphasizes gaining an in-depth understanding of a business before investing. Given the bias for quality stocks, we expect the fund to underperform the competition in market phases when speculative fare is in favour. Nonetheless, over a market cycle, we believe the fund is equipped to serve investors well.

SBI Small Cap is managed by R. Srinivasan who is also the head of equity. The manager is an astute stock picker. He runs the strategy with a blend of growth and value style of investing and follows a bottom-up investment strategy for stock selection. However, typically the fund has been investing 95-100% of its net assets in small-cap stocks. Small-cap stocks are excellent wealth creators over the long term, but also can be quite volatile in the short term.

Nippon Small Cap is managed by Samir Rachh. He focuses on identifying good growth businesses with reasonable size, quality management and rational valuation. The investment approach adopts prudent risk management measures like margin of safety and diversification across sectors & stocks with a view to generate relatively better risk adjusted performance over a period of time. Small caps have extreme growth potential, however, the investors need to exercise patience in turbulent times and hold on to investment for a longer term.

ABSL Tax Relief has recently witnessed change in portfolio manager. The fund was earlier managed by Ajay Garg from 2006 to 2021. It is now being managed by Atul Penkar and Dhaval Gala. The fund follows a multi-cap approach and invests across market capitalization. The managers follow a bottom-up strategy while selecting stocks, focusing on businesses with strong profitability and scalability. However, there is uncertainty around how the new managers will execute the process. The fund also maintains higher allocation to mid and small cap space as compared to most of its peers. Hence, the fund could witness some volatile in the short term. Also, given the recent changes in fund managers, it's critical to observe how the new portfolio managers operate these they execute the strategy.

Motilal Oswal Flexicap witnessed frequent changes in the lead manager over the last few years. Sidhharth Bohra, Niket Shah and Ankush Sood recently took the reins of the fund. The fund was also recently reclassified from Multi cap fund to a Flexi cap fund and renamed as Motilal Oswal Flexi Cap Fund from Motilal Oswal Multicap 35 Fund. However, the broad contour of the portfolio remains unchanged. The fund is a good mix of both large, mid and small-cap companies. Although the fund mandate allows the managers to take higher allocation is mid and small cap stocks, they haven’t breached the limit of 25%. Since the fund managers have recently changed, it is important to see how the new portfolio managers navigate these funds.

Parag Parikh Flexi Cap invests dynamically across large-cap, mid-cap and small-cap stocks. The fund had consistently maintained higher allocation to large cap stocks. In addition to domestic companies, the fund invests in overseas stocks. The fund is managed by Rajeev Thakker who is an able and experienced manager. He follows a value style and invests in quality stocks that are available at reasonable or attractive valuations.

It is also important to note that Motilal Oswal Flexicap and Parag Parikh Flexicap follow a concentrated approach to investing with around 30-35 stocks. With this approach Parag Parikh Flexicap has successfully been navigating the market volatility and generate superior long-term performance, however Motilal Oswal Flexicap has delivered inconsistent returns.

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Articles authored by Nehal Meshram

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