Is investing in popular funds a safe, advisable, and effective strategy?

Of course, checking its Asset Under Management (AUM) is the simplest way to determine that.

Based on this criterion, let’s look at how the top ten funds, have performed.

Table 1: High Popularity – Low Performance?
 

Top 10 schemes based on AUM	AUM (Rs in crore)	5 Years (% CAGR)
HDFC Equity Fund(G)-Direct Plan	20,133	17.5
Kotak Standard Multicap Fund(G)-Direct Plan	20,100	20.7
Aditya Birla SL Frontline Equity Fund(G)-Direct Plan	20,011	16.5
HDFC Mid-Cap Opportunities Fund(G)-Direct Plan	19,702	23.2
SBI BlueChip Fund(G)-Direct Plan	19,097	17.6
ICICI Pru Bluechip Fund(G)-Direct Plan	18,870	16.2
ICICI Pru Value Discovery Fund(G)-Direct Plan	16,130	20.3
HDFC Top 100 Fund(G)-Direct Plan	14,699	16.1
Motilal Oswal Multicap 35 Fund(G)-Direct Plan	12,236	-
Reliance Large Cap Fund(G)-Direct Plan	11,070	19.3
Category Average Returns	-	18.0
NIFTY 500 – TRI	-	15.1

Note: AUM as per the portfolios disclosed on October 31, 2018
Performance data as on November 28, 2018
(Source: ACE MF)

 

Any mutual fund scheme that has an AUM over Rs 10,000 crore can be considered a popular scheme. From the table above, we see 10 schemes in the diversified equity category. You would be surprised to know that 5 out of 9 schemes that have completed a 5-year track record have underperformed the category average returns.

In other words, their performance hasn’t been at par even with an average performing scheme and they are still popular.

Star-ratings are probably to be blamed.

What’s wrong with star-ratings?

Most mutual fund rating agencies give higher weightage to quantitative factors such as returns, risk, and risk-adjusted returns, say over a 3-5 year period and compare mutual fund schemes to decide the top performers.

However, the ratings based solely on quantitative factors can change abruptly depending on the changing market environment. Now, while this approach of assessing the schemes’ past track record, isn't necessary ineffective, this cannot indicate how the scheme would perform in the future – whether it would continue to create wealth for its investors or not. To know that, one must consider the important qualitative parameters such as the investment philosophy of a fund house, its investment style, portfolio characteristics, fund managers’ experience, along with the track record of schemes they manage.

These qualitative factors are more important than the historical performance, to judge the future growth potential and consistency of the fund. So, while the quantitative factors could be just a start point, you need to delve deeper and understand the qualitative aspects too; because if you ignore the qualitative factors you may never get to the real stars of tomorrow.

[Read: Why Qualitative Aspects Are So Important To Pick Mutual Funds]

Also, do note that after the Securities and Exchange Board of India (SEBI) introduced the new scheme categorisation norms, the historical star ratings have become completely redundant.

[Read: Why You Should Stop Looking At Mutual Fund Star Ratings Now]  

Now you may ask if not popular funds where shall I invest my money?

Prefer undiscovered funds over popular funds...

Compared to popular funds, their performance could be higher and the performance margins they achieve could surprise you. 

At PersonalFN, we, term such undiscovered funds as hidden gems.

Why should you trust our assessment?

PersonalFN follows the S.M.A.R.T. Score Matrix. This means that mutual fund schemes are selected on the basis of five variables:

Systems and Process

Market cycle performance 

Asset management style 

Risk-reward ratios 

Performance Track Record

How difficult is it to identify undiscovered funds?

If you have time and skills necessary to identify potential winners, it won’t be a difficult task. But unless you are well versed with the mutual fund selection process, you won’t be able to assess available options on qualitative and quantitative factors mentioned earlier in this article.

The secret to identifying undiscovered funds…

1. Whether the fund manager possesses decent experience and is not overloaded with multiple schemes. Moreover, the fund house should have well-defined investment systems and processes in place.
    
2. The fund has successfully generated positive returns across market cycles, viz. bulls and bears. It is important for the fund to limit your losses during market downswings.
    
3. The track record of the fund in terms of generating adequate returns over various time periods like 1-year, 3-year, 5-year, and more.
    
4. The fund must offer adequate return for the risk incurred. It should not have high exposure to undue risk.
    
5. An efficiently managed portfolio will not be too concentrated, highly churned, or low quality.

To know more, click here.

Ensure you have considered the following aspects before investing in undiscovered funds

• Your risk profile
   
• Your investment objectives
   
• Your financial goals
   
• Your time horizon to achieve them
   
• Personalised asset allocation based on the above factors

You should opt for a direct plan and preferably opt for the Systematic Investment Plan (SIP) mode when investing in undiscovered funds.

What does it take to make the right investment decision?

Stop being influenced by the ‘celebrity-status’ of popular schemes. Even if successful fund managers manage them, offered by one of the oldest fund houses in the country, and/or have been around for two decades. Invest in the ones you feel confident about because of their ability to outperform their peers along with their benchmarks in the future as well.

Editor’s note:

Believe us, unusual and lesser-known funds are capable of generating big gains for you. Some hidden gems are managed well and have the potential to deliver superior risk-adjusted returns in line with the popular peers in the category.

But any small sized fund will not do. You do not want to pick lesser-known funds that have delivered a one-off performance. You need the ‘right’ ones that can appealingly generate wealth for you.

PersonalFN’s special report 5 Undiscovered Funds will help you invest in the hidden gems. PersonalFN has tested the viability of Undiscovered Funds featuring in this report by applying a stringent selection process.

What are you waiting for? Subscribe to the special report, 5 Undiscovered Funds today!

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