As BSE’s m-cap rises from $2 trillion to $3 trillion, here’s how equity mutual funds fared during the rally

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On May 21, 2021, the market capitalisation of BSE-listed firms touched the $3 trillion mark.

India had the first hit $1 trillion market capitalisation in May 2007. It breached the $ 2 trillion mark in July 2017, after 10 years. However, it took only about four years to hit the $3 trillion mark.

Between July 2017 and May 2021, the S&P BSE Sensex gave 14.1 percent returns on an annualized basis. The Nifty Midcap 150 TRI and S&P BSE Small-Cap TRI delivered 13.5 percent and 11.4 percent compounded annual returns, respectively.

But how did equity mutual funds fare during this period?

Technology funds win the race

Sector and thematic funds that invested in technology stocks did exceedingly well. The sector showed resilience, particularly in 2020, as companies and work places adopted to technology as work-from-home became the new normal during the pandemic.

The most favoured stocks for these schemes, Infosys, TCS and HCL technologies, gained 105 percent, 62 percent and 80 percent, respectively over the last one year. Top performing funds in the category such as ICICI Prudential Technology, Aditya Birla SL Digital India and Tata Digital India delivered more than 30 percent during the period.

On the other hand, funds investing primarily in PSU banks were the laggards during the last four years. Troubled balance sheets of state-owned banks on account of non-performing assets (NPAs) hampered their prospects. The coronavirus outbreak too hit the sector hard. The Nifty PSU Bank index was down 9 percent during the period.

Mid-sized AMCs stay ahead of the pack

Mid-sized schemes did better than those of most large-sized fund houses.

Axis MF (Axis Bluechip, Axis Midcap and Axis Small Cap), Mirae Asset MF (Mirae Asset largecap, Mirae Asset Emerging Bluechip and Mirae Asset Tax Saver), Canara Robeco MF (Canara Robeco Bluechip Equity and Canara Robeco Equity Tax Saver) and also Quant MF (Quant active, Quant Mid Cap and Quant Small Cap) outshone most of the rest.

Thanks to the resilient show in their funds’ performance, many such AMCs registered higher AUM growth over this period. For instance, the AUM of Mirae asset, Axis and Canara Robeco grew by 729 percent, 222 percent and 194 percent, respectively over the last four years.

Among the larger fund houses, Kotak MF (Kotak Emerging Equity and Kotak Small Cap), ICICI Prudential MF (ICICI Pru Technology and ICICI Pru Bluechip) and SBI MF (SBI Small Cap and SBI Large & Midcap) have done well. At the same time, large fund houses such as HDFC MF (HDFC Top 100 and HDFC TaxSaver), Aditya Birla Sun Life MF (Aditya Birla SL Midcap and Aditya Birla SL Small Cap), and Nippon MF (Nippon India Vision and Nippon India Tax Saver) disappointed.

Over the last few years, it has been increasingly tough for large-cap funds to generate higher returns than their benchmarks. Schemes that followed a slightly concentrated approach and made lower allocation to value stocks delivered better returns among the large-cap funds – Axis Bluechip and Canara Robeco Bluechip being good examples.

Small and mid-cap funds: Wide performance variation

After a dismal show in 2018 and 2019, the mid and small-cap segments registered an unprecedented rally. Schemes that had defensive portfolios on the back of the market crash following the declaration of COVID-19 global pandemic, fell behind. But those that seized opportunities gained.

This resulted in a major swing in the performance. Funds that had been the outperformers in the past turned underperformers (for instance DSP mid-cap, Nippon India Growth and ICICI Prudential small-cap) and vice versa. However, the likes of SBI Small cap and Axis small cap delivered consistently better returns.

ETFs and index funds delivered competitive returns

In the past 2-3 years, index and exchange-traded funds (ETFs) have become popular. More so in the large-cap category. ETFs and index funds are known for their lower expense ratios compared to those on active funds.

The efficacy of passive funds is measured through their tracking error. However, among these funds, ETFs tracking the Nifty 50 Value 20 index were the chart toppers. Higher allocation to IT sector (around 40 percent) has been the main reason for the outperformance of the Nifty50 Value 20 index during the period. Similar to the trend seen in the active funds, passive funds tracking the PSU bank index were the laggards during the period.

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