• By Omkeshwar Singh

Returns on NIFTY 50 and SENSEX in the last one year:

Nifty 50: (-)26.10% ; Nifty 50 Year-to-Date: (-)31.09%

Sensex: (-)24.20% ; Sensex Year-to-Date: (-)30.59%

Returns of top 10 Equity mutual funds schemes, rated based upon quality of stock holdings, adequate margin of safety and high strength of the portfolio for the same period have “outperformance by an average of 20% over leading Indices!!”

  • Quality of stock holdings: -When the investors purchase mutual fund units , he actually purchases the underlying portfolio of the scheme
  • Adequate margin of safety: – Quality funds bought at fair value or undervalue leads to superior returns, quality at over value then the returns can be suboptimal

 

  • Strength: Risk of the portfolio holdings and ability of the portfolio to rise quickly after it has fallen! 

 

What does this mean?

  1. if I had invested Rs.1,00,000 in leading indices a year back, my present value of portfolio will Rs. 74,000 to Rs. 76,000 
  2. If I had invested in top 10 mutual funds schemes, rated based upon quality of portfolio and adequate margin of safety for the same period a year back, my present value of portfolio will be Rs. 94,000 to Rs. 96,000
  3. Therefore very few good mutual funds schemes are available, and if we use proper “reference” to select mutual funds schemes, even in this markets when there is all our “panic” selling, we would have been able to reduce the loss to capital. In above example loss of 25% vs 5%!! as on 19th March 2020!

Why do we sanitize ourselves health wise or wealth wise?

 

  • To protect ourselves, with best possible options available in that particular situation.

 

The biggest mistake that we commit is to select, evaluate and hold our mutual funds portfolio based upon 

  1. Past performance, history may or may not repeat therefore it’s a huge risk!
  2. Measuring performance on Relative basis i.e. within the category, this can lead to sub optimal selection of schemes if the category itself is not performing or underperforming as a whole!! 
  3. Getting influenced by Big Names and Big Brands 
  4. Completely ignoring “hidden gems” & “rising star” as ratings are mostly not available for thematic funds, sectoral funds and newly offered funds

Now to sanitize our mutual funds portfolio, we must evaluate the quality and strength of our mutual fund’s holdings.

  • If the quality and the strength of the portfolio is adequate, then the portfolio will be able to recover the capital loss and provide superior returns 
  • If the quality and the strength of the portfolio is not adequate, it is advisable to “switch the portfolio” to good quality and high strength mutual funds so that the chances of recovering lost capital increases when the “tide turns”

 

(Omkeshwar Singh is Head Rank MF, Samco Securities. The views shared are the author’s own.)