We often hear about multi-bagger stocks but seldom do we see multi-bagger mutual funds. 19 equity mutual fund schemes delivered over 100 per cent returns in the last one year. Quant Small Cap Fund offered the highest returns of 168 per cent among the equity schemes, followed by ICICI Prudential Technology Fund which gave 142 per cent and ICICI Prudential Commodities Fund (138 per cent) in the same time period. We did not exclude the sectoral schemes from the analysis as 2020 remained an unusual year with humongous growth seen in a few sectors amid the pandemic. Equity market which had seen historic low exactly an year ago bounced back to perform like never before.
"Markets were largely driven by the liquidity infused by the government in ways like announcing stimulus packages to increase purchasing power of a common man. Even central bank participated by infusing huge money flow in the system by cutting down the bank rates multiple times within a very short span in expectation to wake up the credit demand," says Palka Chopra, Senior Vice President, Master Capital Services.
Corporates were not left behind. "They have shown their participation which is reflected in their quarterly earnings which has ultimately made India the most favourite investment destination for the world," Chopra adds. The same can be witnessed in tremendous inflow of foreign investments.
2020 completely belonged to digital or technology and small cap space. In the absence of face to face meetings, technology made it possible to work from home, study from home. Meetings over various video apps like zoom, webex etc. made interaction possible. The surge in use of technology obviously gave a boom to the tech sector stocks.
"Due to pandemic, with the work from home culture taking shape there was a surge in demand for digital services such as cloud computing. This put the sector as a whole under spotlight due to which most of the listed IT names gained momentum," says Sankaran Naren, CIO ICICI Prudential AMC.
S Naren manages ICICI Prudential Technology Fund, the biggest and the best performing scheme in one-year period in the technology sector category. The fund manages assets worth Rs 1,580 crore. He says, "The portfolio of ICICI Prudential Technology Fund was largely geared with technology names from the mid and small cap space, which aided in the fund's outperformance.
Apart from a few sectoral winners, small caps stole the limelight as well. Small cap funds on an average have delivered 94 per cent returns in the last one year. Out of 24 small cap schemes, five gave triple digit returns in the last one year.
"The pandemic led to a rally in Indian equity markets, particularly in small caps due to cheap market valuations around March 2020, money pumped by Foreign Portfolio Investors (FPIs) and increased retail participation along with a series of stimulus packages and reforms to boost consumer demand," says Chopra.
Also, 392 equity mutual fund schemes which have completed at least one year of existence delivered whopping returns of 69 per cent on an average.
But are these returns normal? Should you invest in these schemes or sectors on the basis of past performance? Mutual fund analysts suggest investors to focus on their investment goals, risk appetite, time horizon instead.
"As someone rightly said, past returns are not yours if you were not invested. Investors should never invest basis just looking at past returns. Instead investors need to have a clear mindset of focusing on their own investment goals, risk return objectives and time horizon, which drives the overall asset allocation in their portfolios," says Kaustubh Belapurkar, Director - Manager Research, Morningstar India.
S Naren believes when it comes to sector funds, investors should be mindful that the risk profile of the fund is greater than that of a diversified equity fund. But sophisticated investors who understand the risk involved may invest in tech funds with a two to three-year perspective. Timing the entry and exit in a sector fund is crucial.
He says, "This is because digital as a theme is likely to fuel growth in the near term which is a positive for the sector. In terms of ICICI Prudential Technology Fund, we invest largely in high quality companies, with an aim to provide steady returns from a medium term perspective."
In last 7-8 years, the IT sector CAGR has been 15-17% per annum, but fraught with ups and downs, which were largely stock specific in nature.
Those looking to invest in small cap funds must have a comparative longer term horizon. "Have a clear investment time horizon of 7-10 years minimum. Be mentally prepared to witness significant drawdown in fund values over the short term. And do not anchor your expectations basis the short term returns that the funds have delivered," says Kaustubh Belapurkar.
Equity is a long term investment and will go through bull and bear phases. Kaustubh Belapurkar explains that short term returns can look poor or very attractive as that is the nature of the beast. What is important for investors is to invest with a long term investment horizon in mind, keeping a prudent asset allocation and rebalancing portfolios when markets run up or correct sharply.
"Equities is a great long-term investing option. Continue to stay invested for the intended investment period to truly reap the benefits of equity investing," says Belapurkar.
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