BT Insight: Pharma, global funds lead MF recovery; will it sustain?

BT Insight: Pharma, global funds lead MF recovery; will it sustain?

The markets have surged by 31 per cent and have almost reached to 81 per cent of their highest point registered in mid-January 2020. BSE Sensex closed at 34,731.73 and BSE 500 at 13,330.72 on June 19

BSE Sensex closed at 34,731.73 and BSE 500 at 13,330.72 on June 19 BSE Sensex closed at 34,731.73 and BSE 500 at 13,330.72 on June 19

Equity mutual funds after witnessing an extreme fall have started marching on the growth path. From its peak in mid-January 2020, stock market went into a tailspin for next two months and fell by 38 per cent by March 23. The widely tracked index BSE Sensex fell to 25,981 from its peak of 41,953, while much broader BSE 500 index slipped to 9,896.25 from the peak of 16,062.95. However, there has been a quick turnaround. The markets have surged by 31 per cent and have almost reached to 81 per cent of their highest point registered in mid-January 2020. BSE Sensex closed at 34,731.73 and BSE 500 at 13,330.72 on June 19.

However, the fall and recovery have not been even for different schemes of mutual funds. This crisis has thrown out contrasting differences and outperformers have shown resilience in the falling market. They are also leading the charge in the recovery. Although it's too early to take a decisive call, the momentum of recovery is indeed giving indications that many of these will turn out to be front-runners in terms of returns when market fully recovers. We tell you which mutual funds categories and schemes are leading in the race to recovery:

Funds that stand out

The combination of currency and US stock movements has delivered handsome return for the global funds. The top three funds in this category -- Edelweiss Greater China Equity Fund, PGIM India Global Equity Opportunity Fund and Franklin India Feeder-Frank US Opportunity Fund -- have given more than 30 per cent return in last one year. Their compounded annual growth for last three years is also touching 20 per cent. "Strong performance in US Oriented funds was led by significant central bank and government stimulus measures in the US. Rupee depreciation also enhanced the returns," says Arun Kumar, Head of Research,

Among the domestic equity funds, pharma funds have continued their unparalleled return in the coronavirus-led economic slowdown. The top performer in this category are Nippon India Pharma Fund, UTI Healthcare Fund and SBI Healthcare Opportunities Fund, which all have delivered more than 35 per cent return in last one year. "The pharma sector also has been resilient in the recent fall, given that the sector is one of the least impacted sectors in the current environment. The not so expensive starting valuations of the pharma sector also helped," says Kumar.

Other categories of funds that have performed well in terms of positive one-year trailing return or recovering most part of their losses come from large and mid-cap, technology and multi-cap funds. Quant Large and Mid Cap is the only fund in this category which has registered a positive one-year return of 5.07 per cent. In technology, the only fund with positive one-year return is Franklin India Technology Fund with one year return of 5.04 per cent. In the multi-cap category, Parag Parikh Long Term Equity Fund is alone with positive one-year return of 4.20 per cent.

Some mid-caps funds have also registered decent growth. Funds in remaining categories are still distant from making complete recovery.

Will pharma and global funds continue performing in future? Although pharma as a category has outshone every sector of equity market, investors must be wondering if it can sustain the return in future. This could be a risky proposition. "Investing in sector funds requires taking a bet on four things going right - picking a winning theme/sector, selecting a fund that is well-placed to harness that theme/sector, valuations which haven't already priced in the theme/sector's potential and ability to enter and exit the theme/sector at the right time. Going by history, the odds of getting all these four parameters correct are very low, but the payouts can be meaningful," says Kumar.

Can global fund category repeat its performance which it delivered recently? "While International equities have done well this decade, in the last decade 2000-10, indian equities had outperformed international equities significantly. International exposure makes sense from a diversification point of view but return expectations need to be tempered down."

Why market is moving up

Be it bluechip stock index or wider index, the recovery is happening in every segment of the market. When economy is facing a tough challenge, what are the reasons for the rally in the stock market? Interest rates have fallen world over and there is no incentive left for people looking for safe havens to park money in fixed income products. Therefore, there is increased liquidity in the global economy. This liquidity is returning back to the equity market in search of better return. "Index heavyweights like Reliance Industries have recovered sharply from March lows and have contributed quite significantly to the overall market recovery. Secondly, after selling huge amounts in March, FIIs have been buying into Indian equities in May and June. Many stocks which funds hold across the market capitalisation spectrum have recovered substantially from March lows," says Kaustubh Belapurkar, Director - Fund Research, Morningstar India.

What should you do?

As far as investing in top performing pharma funds is concerned, it may not be the right time to invest significantly. As returns in this category have soared to new highs it may not be the right time to invest significantly in this fund. "Investors have often piled into these funds at precisely the wrong time, only to be disappointed. The long-term performance figures for the majority of thematic funds are mediocre. Given their non-diversified exposure, higher risk profile and the need to time both entry and exit, we would recommend avoiding sector funds and sticking to well-diversified multicap equity funds. However, if investors still want to explore sectoral funds with the hope of boosting returns, use them to complement rather than replace existing core holdings," says Kumar.

It will be better to invest in global funds only with the objective of diversification as it carries all the risk of sectoral or thematic funds. "Recent performance should not be the sole reason to consider both gold and global equities. The overall idea behind asset allocation and diversification is to spread your money across different asset classes which have different return trajectory and underlying risks so that if an unexpected risk occurs, not all investments are adversely affected. The basic idea is to reduce the volatility of the total portfolio as different assets should be rising and falling at different times - smoothing out the returns of the portfolio as a whole," says Kumar.

Even if you wish to take a bet on the current chartbusters, you should not do it in one go. "Given the recent run up and above average valuations, we would suggest a staggered approach to investing in this segment," advises Kumar.

Given the moment of recovery in Indian stocks, many other categories are there with higher potential in leading the recovery without high risk. "We continue to like large cap & multi cap funds and they should form core holdings in each investor's equity portfolio," says Belapurkar of Morningstar India.

However, if you have greater risk appetite and are willing to invest to gain higher returns, you may consider funds with long-term horizon. "Investors looking to invest into mid and smallcap funds should have a clear seven to 10 year investment horizon and have the ability to digest large drawdowns in portfolio values in the interim," adds Belapurkar.

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