3FM Which Fund to Buy Guide

Transcription

1 3FM Which to Buy Guide Published by: Bharosa Club Publication Date: 26 Dec 2015 Next Publication Date: 26 June 2016 Validity: January 1, 2016 to June 30, 2016 Available to: General Public Disclaimer: Bharosa Club is not a registered investment advisor with SEBI and has provided this analysis as a convenience to investors who want to Go Direct and make their own investment decisions. Nothing in this document should be construed as advice. FOR SUGGESTIONS/COMMENTS: FOR RAW DATA: shantanu@bharosaclub.com prakash@bharosaclub.com

2 Overview of this Document The funds mentioned in this document are selected based on an algorithm, as detailed in Annexure - 1. Any user can duplicate the process and will arrive at the same result. Bharosa Club wants the best for its members and is open to changing the algorithm. Anyone who wants to give inputs is welcome to do so. The document is broken into the following Sections 1. How this note can save you money 2. Results 3. Recommended use of Results 4. Annexure 1- The Algorithm & Detailed Results 5. Annexure 2- Interview with Manager of Most Focused Multicap 35 How the document can save you money 1. Go Direct: Going Direct makes a huge difference to investors by adding on an average 1%+ returns every year. Every fund has a Direct NAV and a regular NAV. Direct was introduced on Jan 1, 2013 at which time both NAVs were equal. For any fund you can calculate the difference in returns by seeing the number of units you would have got on Jan 1 and calculating their current value. This is the difference in three years. As an example we have done this for the ICICI Focused BlueChip Equity Investment Amount NAV at Purchase on Jan 2, 2013 Units Purchased NAV on Dec 10, 2015 Value of Current Investments DIRECT 1,00,00, ,53,16,184 REGULAR 1,00,00, ,49,51,768 DIFFERENCE 3,64,416 Direct Options of mutual fund schemes have the word DIRECT in their name ICICI Focused BlueChip Equity Regular You are paying a commission ICICI Focused BlueChip Equity Direct You are NOT paying a commission 2. Use with your advisor If you prefer to use a fee based advisor and go direct or use a free advisor and go regular use this note to have a more informed discussion with your advisor.

3 Remember it is not just about saving fees and commissions. If an advisor can help you pick the right funds and/or do full financial planning for you; they earn their fees or commissions many times over. 3. What is best For most affluent people we feel it is best to use a fee based advisor for advice and the 3FM platform for ease of execution and convenience. For lower income families it is best to use our default funds. Results Our algorithm has made the following picks: Category Pick Comments Diversified Equity Motilal Oswal MOSt Focused Multicap 35 retains its position as our default pick Diversified Equity (MICRO-SIP) Reliance Equity Opportunities retains its position as our default pick Ultra Short Term Debt Reliance Money Manager retains its position as our default pick Tax Saver Axis Long Term Equity Enters 3FM as our default pick For a detailed Analysis, refer to Annexure 1. Recommended Use of Results Our feeling is that just choosing our default funds could work well for most people. This is based on the fact that mutual funds are already diversified and there is no need to diversify further. However fee based advisors and those individuals who have the ability to pick their own funds often invest in a basket of funds. Some like to invest in categories other than the ones we have listed. As stated earlier this note suggests a framework which can help you in choosing the right funds.

4 ANNEXURE 1 THE ALGORITHM: Universe 25 Houses part of MFU Filter Top AUM Scheme from each House Minimum AUM of Scheme to be 1,000 cr (5,000 cr for Ultra Short Term Debt) Weightages 5 Years: 20% 3 Years: 20% 1 Year: 30% 6 Months: 15% 3 Months: 10% 1 Month: 5% Caveats In case a Diversified Equity Scheme does not have a 3yr and 5yr record, then respective weightages added to 1 year data Top 5 Identify Top 5 Schemes for 5 years If Caveat is applicable for Diversified Equity Identify Top 5 for 1 year and 3 year periods also Rank Basket of shortlisted funds to be ranked on the basis of indicators, fund selection, & philosophy. If a change in default fund then examine exit loads, relative performance & tax implications

5 DETAILED RESULTS DIVERSIFIED EQUITY MUTUAL FUNDS DATA ANALYSIS Numbers in brackets reflect rank as per Algorithm, followed by weighted score received by Scheme Filter 1 Top AUM Scheme from Each House Filter 2 AUM more than 1,000 cr Top 5 5 Years Edelweiss D.G.E. Top 100 IIFL India Growth Peerless Equity Taurus Starshare IDBI Diversified Equity Quantum Long-Term Equity Indiabulls Bluechip Principal Emerging Bluechip PPFAS Long Term Value Religare Invesco Contra Tata Equity Opportunities AXIS Equity L&T Equity Tata Equity Opportunities AXIS Equity L&T Equity Tata Equity Opportunities (3, 11.32) Motilal Oswal Most Focused Multicap 35 Motilal Oswal Most Focused Multicap 35 SBI Bluechip SBI Bluechip SBI Bluechip (5, 11.17) Sundaram Select Midcap Sundaram Select Midcap Sundaram Select Midcap (1, 15.54) DSP BR Top 100 Equity DSP BR Top 100 Equity Kotak Select Focus Kotak Select Focus Kotak Select Focus (4, 11.21) UTI-Opportunities UTI-Opportunities IDFC Premier Equity Franklin India Bluechip Birla Sun Life Frontline Equity ICICI Pru Value Discovery Reliance Equity Opportunities HDFC Equity IDFC Premier Equity Franklin India Bluechip Birla Sun Life Frontline Equity ICICI Pru Value Discovery Reliance Equity Opportunities HDFC Equity ICICI Pru Value Discovery (2, 12.22) Top 5 1 Year Tata Equity Opportunities (3, 9.82) Motilal Oswal Most Focused Multicap 35 (1, 19.18) SBI Bluechip (4, 9.10) Sundaram Select Midcap (2, 14.68) Kotak Select Focus (5, 9.00)

6 FUND PERFORMANCE INDICATORS Shortlisted s Tata Equity Opportunities SBI Bluechip Sundaram Select Midcap Kotak Select Focus ICICI Pru Value Discovery Motilal Oswal Most Focused Multicap 35 Min Inv Min Add Inv Expenses Exit Load 5,000 1, % 1% (365) # of Stocks Top 10 stocks Annualized Standard Deviation Annualized Sharpe Ratio Beta Treynor Ratio % ,000 1, % 1% (365) % , % 1% % (365) 5,000 1, % 1% % (365) 5,000 5, % 1% % (365) 5,000 1, % % 15.24% TOP PICK AFTER RANKINGS: MOTILAL MOST FOCUSSED MULTICAP 35 FUND Apart from being the Top what impressed us was the philosophy of the fund manager. To our mind, a narrow focus (maximum 35 stocks) is bound to result in a greater commitment and accountability when it comes to stock picks. While the fund has performed below par in the last few months, its long term performance has been spectacular. The fund continues to be our default pick in the Diversified Equity Category. A detailed interview of the fund manager is in Annexure 2. TOP PICK AFTER RANKINGS (MICRO-SIP): RELIANCE EQUITY OPPORTUNITIES FUND The Reliance Equity Opportunities is the only fund with a Micro-Sip starting with Rs The fund also ranked #6 with a score of It becomes our default fund selection for Micro-Sips.

7 ULTRA SHORT TERM DEBT FUND DATA ANALYSIS Numbers in brackets reflect rank as per Algorithm, followed by weighted score received by Scheme Filter 1 Filter 2 Top AUM Scheme from Each AUM more than 5,000 cr House Edelweiss Ultra Short Term Bond Peerless Ultra Short Term Motilal Oswal MoSt Ultra Short Term Taurus Ultra Short Term Bond Tata Treasury Manager Principal Debt Opp Conservative IDBI Ultra Short Term Indiabulls Ultra Short Term L&T Ultra Short Term AXIS Treasury Advantage DSP BR Money Manager Sundaram Ultra Short Term Religare Invesco Ultra Short Term IDFC Ultra Short Term Kotak Treasury Advantage Top 5 5 Years Franklin India Ultra-Short Bond Franklin India Ultra-Short Bond Franklin India Ultra-Short Bond (1, 9.16) Birla Sun Life Cash Manager Birla Sun Life Cash Manager Birla Sun Life Cash Manager (4, 8.40) HDFC Cash Mgmt - Treasury Advantage HDFC Cash Mgmt - Treasury Advantage SBI Ultra Short Term Deb SBI Ultra Short Term Deb SBI Ultra Short Term Deb (2, 8.76) UTI-Treasury Advantage UTI-Treasury Advantage UTI-Treasury Advantage (3, 8.54) Reliance Money Manager Reliance Money Manager Reliance Money Manager (5, 8.37) ICICI Pru Flexible Income Plan - Retail ICICI Pru Flexible Income Plan - Retail TOP PICK AFTER RANKINGS: RELIANCE MONEY MANAGER FUND For us, the three key determinants for investing in ultra-short term debt funds are a) Returns comparable to FDs b) Easy entry for Small Investor and c) Easy Liquidity While the Reliance Money Manager fund was not the highest ranked in the category, it still continues to be our pick because a) the real difference in returns between this and other funds was negligible b) The requires a minimum initial investment of only Rs. 500 and thereafter additional investments of Rs. 100 and c) there is no exit load on withdrawals. In addition, the fund offers benefits such as free debit card and uses extremely good technology and a smart user interface, which makes it easy for investors to transact.

8 TAX SAVER FUND DATA ANALYSIS Numbers in brackets reflect rank as per Algorithm, followed by weighted score received by Scheme Filter 1 Filter 2 Top AUM Scheme from Each AUM more than 1,000 cr House Quantum Tax Savings Edelweiss ELSS Taurus Tax Shield Tata Long Term Equity Religare Invesco Tax Plan Principal Personal Tax saver IDFC Tax Advantage (ELSS) IDBI Equity Advantage Kotak Tax Saver Top 5 5 Years DSP BR Tax Saver DSP BR Tax Saver DSP BR Tax Saver (5, 8.97) Sundaram Tax Saver Sundaram Tax Saver L&T Tax Advantage L&T Tax Advantage UTI-Master Equity Plan Unit Scheme UTI-Master Equity Plan Unit Scheme Franklin India Taxshield Franklin India Taxshield Franklin India Taxshield (3, 11.11) Birla Sun Life Tax Relief '96 Birla Sun Life Tax Relief '96 Birla Sun Life Tax Relief '96 (2, 12.43) ICICI Pru Tax Plan ICICI Pru Tax Plan ICICI Pru Tax Plan (4, 9.56) Reliance Tax Saver (ELSS) Reliance Tax Saver (ELSS) SBI Magnum Tax Gain Scheme HDFC Tax Saver SBI Magnum Tax Gain Scheme HDFC Tax Saver AXIS Long Term Equity AXIS Long Term Equity AXIS Long Term Equity (1, 15.64) TOP PICK AFTER RANKINGS: AXIS LONG TERM EQUITY FUND While the Axis Long Term Equity was the Top picked by the algorithm, it has also been the top performer across most of the individual time periods. It has managed to create a large corpus within a short time span which illustrates its reputation. These are the reasons which make the Axis Long Term Equity our Default Tax Saver pick.

9 ANNEXURE 2 Interview with the Manager of Motilal Oswal MOSt Focussed Multicap 35 Mr. Gautam Sinha Roy 1. What are your unbiased comments on our algorithm? What do you like? What do you think can be improved? The filter of taking the top AUM funds in a fund house may cause a bias. You should look at ways of avoiding this bias. The default picks will be used mostly by people who do an SIP so instead of weights it may be better to look at SIP performance in a 1, 3 and 5 year period and pick top five in each. In your final pick I suggest you pick a diversified multicap fund, as your default pick may be used by lower income investors as well. 2. Why do you think your fund came out on top? We have a relatively short track record and made a very fast start which helped. But I think I would attribute our success to the QGLP (Quality, Growth, Liquidity, Profitability) methodology we use. We have fewer stocks so we can do better primary and secondary research. 3. Please explain the core values based on which the fund is run? We follow a rigorous approach which narrows the number of stocks we can pick to about 150. We use a bottoms up approach more than a top down approach 4. Your fund has lagged in performance if one were to look at shorter time frames of 1 month and 3 months. Why do you think that happened? The stocks we picked had a stellar run and some of them took a pause. The market rotates - sometimes certain areas come in focus and at time others. This is why when you look at any fund, there will be periods when it lags its peers. 5. Is this likely to change your approach going forward? We are believers in our core values so we will not adapt based on short term fluctuations 6. As the fund size grows how will you ensure performance? Many high flier funds have faltered as their size has increased. As a fund we have to worry about liquidity so as we approach 10,000 crores this may be a concern but we are far from that and as we get there the market will grow as well. We also have the ability to invest up to 10% in foreign markets. South East Asia and USA are interesting markets for us so we do not believe that size itself is a barrier. We could buy stocks such as Uber when they list on NYSE and if we feel the valuations are acceptable. We held Warren Buffet s Berkshire Hathaway for some time but sold it. Currently we are not holding any foreign stocks. Some funds may have not done that well because they lost their stock picking edge. That can happen to any fund and we will do our best to see that does not happen to us. 7. The current Market Cap distribution of the fund is Giant 44%, Large 35% and Mid Cap 11%. Is this distribution by design and likely to continue?

10 We do not target specific market cap numbers but in general these numbers are probably the kind of numbers you will see. 8. What is the lowest market cap stock you would buy? The smallest market cap stock we own is around 7,000 crores. While we can buy small caps we want companies that have a wide moat and do not want to take bets on which companies will build those moats. 9. For the next six months which sectors are you bullish on and which will you avoid? We do not think sectors as we are a bottom up approach fund house. That being said, consumer plays interest us, especially in banking. We also like the IT sector. 10. You recently increased your holdings in HDFC Bank, Eicher Motors, HPCL & Britannia. Why? These companies fit the themes we mentioned and meet our QGLP. Given issues around air pollution we would avoid diesel based auto companies 11. You recently reduced your holdings in TCS and Lupin. Why? We think these are good companies but we have pruned our exposure. In IT we think under Mr. Sikka s leadership, Infosys is likely to do very well in the near term so we have added Infosys. 12. Do you have any guidance on what kind of return stock investors can expect over the next six months? It is hard to say but the Fed rate hike in USA is out of the way and most of the pessimism is priced in. Oil prices remain a concern but low oil prices are good for India. On the balance, the next six months could be good but please remember equity mutual funds are for long term investors 13. Can you further encourage Direct? Can you do a Rs 100 SIP and what impact do you think it will have on your profitability? What measures are you taking to reduce expenses without affecting returns? These are more business decisions then fund management decisions but in general I agree that Ghar Ghar mein Folio should happen and our CEO/Management team will keep interacting with Bharosa Club to see all stakeholders including households can win.