T E T HE CONOMIC IMES IS INDIA INC. READY FOR RECENT CHANGES IN RULES? P12 www.etwealth.co | Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune | June 20-26, 2022 | 24 pages | `8 DOWNTURN WHAT YOU SHOULD DO NOW The sharp fall in the market is worrying investors. Find out how to navigate the choppiness. P2 Tax takes 6 equity How sheen funds that to plan a off extra resisted smooth savings in market transition to the EPF corrections retirement P6 P8 P11 cover ssttoorryy 02 The Economic Times Wealth June 20-26, 2022 DOWNTURN WHAT YOU SHOULD DO NOW The sharp fall in the market is worrying investors. Find out how to navigate the choppiness. S E G A M Y I T T E G By Babar Zaidi the mistake of entering the markets in a big sidering taking a loan because they don’t phase yet,” says Vidya Bala, Co-founder, way at the wrong time and made it worse by want to sell stocks and funds at a loss or PrimeInvestor.in. T he worst investing mistakes trying to average out,” he says glumly. The touch their fixed income investments. are committed during bullish downturn has wiped out the gains made in The sharp decline in the markets has Check the investment horizon times. Jagmohan Dutta has seen the past two years. unnerved investors in stocks and mutual Meet Sunil Jaiswal, a Gulf returnee who many bull runs and bear phases In Mumbai, P. Vishwanathan and his funds. The investment portfolios that were poured a huge amount in equity funds in the past two decades, yet he wife, Usha, are reworking the math of the growing at a fast clip are now awash in red. when the markets were beaten down, in got carried away by the FOMO (fear of house they are getting constructed in their The worst hit are investors who had come July 2020. The bold move paid off hand- missing out) factor when the markets were hometown in Kerala. “We had planned to into this volatile arena with a short-term somely when the markets hit a high last zooming last year. The Pune-based army use our stocks and mutual funds for financ- perspective. “Many new investors who year, but Jaiswal did not book profits. It’s veteran decided to invest heavily in equity ing the construction, but the market crash had entered in the past two years have not as if he had a long-term perspective in funds in September 2020, and added more has upset everything,” says the retired seen only a unidirectional movement in mind; he was just waiting for his money to when the markets fell in December. “I made banker. The Vishwanathans are now con- the markets. They have not seen a bear double before he took it out. “I should have cover ssttoorryy The Economic Times Wealth June 20-26, 2022 03 P. Vishwanathan, 66 Mumbai The retired banker and his wife, Usha, had planned to use their stocks and equity fund investments to f inance the construction of their house in their native Kerala. However, their plans have come unstuck due to the decline in the markets. Their stock portfolio is down almost 20%, while mutual funds are down 10% from their January peak. The Vishwanathans are now considering taking a loan for the house construction instead of redeeming their investments at the prevailing low prices. EXPERT OPINION As the goal date comes near, it’s best to move money to safe debt instruments to avoid the risk of markets declining when you need it. You should take a loan only after assessing the impact of the loan EMI on your pension income. If an EMI makes things very tight, take a smaller loan and fund the balance by selling some of your DEV ASHISH mutual funds. The remaining fund invest- The four buckets for FOUNDER, STABLE ments can be redeemed when the markets INVESTOR recover a bit, though this cannot be guaran- your investments teed in the short term. The bucket strategy splits investments into four categories, based on needs redeemed at least half my investment very frustrating to see the value of your and time horizon. Find out what each bucket holds and for how long. when the stock markets were rallying,” he investment go down with every passing says regretfully. day,” he says. “I am thinking of stopping Even experienced investors are guilty my SIPs and restarting when the markets Money needed immediately of harbouring short-term expectations start to recover,” he says. from their equity investments. Dutta One of the biggest mistakes a mutual As the name suggests, this bucket should be lined invested a large amount in international fund investor can make is stopping SIPs with instruments that can be liquidated at very funds, and kept adding more when the US when the markets fall. SIPs work best short notice. Put in it liquid investments, such as markets declined, in the hope of lowering when the markets are falling, and stop- BUCKET I: sweep-in bank deposits, liquid and debt funds, the average buying price. “I just wanted ping them when prices are low defeats Emergency and other deposits that can be foreclosed without penalty. Returns from this basket are very low, to break even before I exited the invest- the very purpose of the arrangement. funds but that shouldn’t bother you. The objective is to ments. In retrospect, I was trying to catch “Investors like Makhija should focus on ensure that money is available when needed. falling knives,” he says. long-term goals and continue investing in Vishwanathan’s situation is even more equity funds. Panicking at this stage can bewildering. He was waiting for an op- lead to wrong investment decisions,” ad- portune time to sell his stocks and mutual vises Harshad Chetanwala, Co-founder, funds to finance his house construc- MyWealthGrowth. Money required in 6-24 months tion. “If a part of the house construction Advisers believe SIPs keep emotions at This bucket is for goals that are coming up shortly. costs was planned via equity funds, why bay and inculcate the savings habit. The Here again, the focus should be on capital protection weren’t these moved to debt instruments key ingredients for success in investing and not returns. In no circumstances should this before the actual need?” asks Dev Ashish, are patience, discipline and the ability to BUCKET II: money be allocated to volatile assets, such as stocks, Founder, Stable Investor. “As the goal stomach volatility. Back-testing studies equity funds or even hybrid funds. If the markets date approaches, it’s best to move money show that an investor who continues his Short-term decline (as they have right now), the investor will to safe debt instruments to avoid the risk SIPs irrespective of the market move- goals not be in a position to wait till the prices recover. Go of markets going down when you need it,” ments is likely to make more money than for short-term debt and dynamic bond funds. he says. the one who lets market sentiments affect Financial planners advise investors his decisions. For instance, if a mutual to divide their portfolios into 3-4 buckets fund investor had stopped his SIPs or based on the time horizon of their finan- withdrawn his investments after the cial goals. The investments align with the March 2020 crash, he would not have Money needed in 3-4 years goals in each bucket. The instruments gained from the rise in the market in the For goals that are 3-4 years away, you need to and approach for immediate and short- subsequent months. invest in assets that will keep pace with inf lation. A term goals will be very different from the At the same time, do not think of your pure 100% allocation to debt will not be suff icient to strategy and investments for long-term SIP as a magic pill that can cushion you BUCKET III: beat the march of prices. At the same time you can’t goals (see graphic). against a market downturn. The markets have too much in high-risk assets. You can put 20- Medium- are in correction mode right now and it is 25% in stocks and equity funds, and the rest in the Don’t give in to fear likely that the SIPs that have been started term goals safety of debt. If you are not able to handle the mix, This is why long-term investors such as recently will be in the red. As the bucket go for conservative hybrid funds. Divya Makhija should not be worried by strategy dictates, do not get obsessed by the current decline in the market. Three short-term performance when you are years ago, this Gurugram-based mother investing for long-term goals. started SIPs in equity funds for her chil- So, if you are investing for long-term dren’s education. She has earned good goals, there is no need to stop your SIPs Money can be invested for 5+ years returns till now, but the current down- now. Equities can give good returns over The long-term bucket should be packed with stocks turn has brought back memories of 2020 the long term, but if your goals are very and equity funds that can grow wealth. But this crash caused by the Covid scare. “I know close (1-2 years away), you should consider strategy is rarely followed, and the intermittent I should have a long-term perspective, but shifting to the safety of debt. BUCKET IV: volatility that is inherent in equities makes investors am still unable to stomach the decline in nervous. Most Indians tend to put long-term money Long-term the value of my investments,” she says. Have you rebalanced? in the safety of debt-based small savings schemes Her misgivings are shared by While most investors are unsettled by goals and life insurance policies, even though equity Shashank Srivastava, a 35-year-old fi- the market decline, those who regularly investments will help them reach goals more easily. nance professional who is worried by the rebalance their portfolios are not panick- decline in his mutual fund portfolio. “It is ing. Rebalancing restores the asset alloca- cover ssttoorryy 04 The Economic Times Wealth June 20-26, 2022 Jagmohan Dutta, 78 years, Pune tion of a portfolio and controls the risk. Experts say this should be done at least once a year and after any major change The former army off icer has been investing in stocks and equity funds for many years and has earned good returns in the past. Last year, he in asset prices. Back-testing studies have put a large amount in equity funds, especially in US-focused global shown that rebalanced portfolios earn funds. As the US markets started declining, he invested more. About higher long-term returns than static port- `50 lakh invested in equity funds since October 2021 is now worth folios with no modifications. `35 lakh, wiping out the gains of the past 2-3 years. Dutta is not sure More importantly, it instils confidence whether to wait for the US markets to recover or exit now. in the investor. “Rebalancing protects the portfolio against volatility, which helps EXPERT OPINION small investors gain confidence,” says Rohit Shah, Founder and CEO, Getting The US market is more attractively You Rich. Investors with rebalanced port- placed in terms of valuation than the Indian market. However, with the reces- folios are less inclined to panic and more sion talk, India may gain faster in a mar- likely to stay invested when the markets ket recovery. If you have high exposure decline. to the tech-heavy Nasdaq 100, try to Despite the advantages of rebalancing, shift some amount to S&P 500. Instead small investors rarely check their asset of adopting a strategy of not exiting in allocation or modify their portfolios. a fall, use it to weed out poor perform- Most keep investing without an eye on VIDYA BALA ers, especially in stocks. There is a high their overall asset allocation. This is also CO-FOUNDER, chance that the best performing mid- because rebalancing requires some con- PRIMEINVESTOR.IN and small-cap stocks of the previous trarian calls: you have to sell the assets rally lose out in the next rally. that are doing well, and buy those that are in the dumps. Investors like Jaiswal did not redeem equity funds when the markets had shot up last year. If they had, Divya Makhija, 41 yrs, Gurugram their portfolios would not be as badly hit. Similarly, not many investors would be Three years ago, she started investing in equity mutual funds for her willing to allocate more to equities now, children’s education. She will need the money in 5-7 years. Though even though the markets have climbed she has earned good returns till now, the recent downturn has pared down almost 20% from the 2021 peak. her gains, reducing the value from `11-12 lakh to around `8-9 lakh Financial planners say small inves- now. She is haunted by memories of the 2020 crash caused by the tors have neither the discipline nor the Covid scare, but also acknowledges that the markets eventually bounced back to touch new heights. emotional maturity to make critical investment decisions that rebalancing requires. “A portfolio should be rebal- EXPERT OPINION anced once a year. A more frequent rejig Focus on the goal and continue investing not only leads to higher transaction costs in equity funds. Panicking at this stage but also results in tax implications,” can lead to wrong investment deci- says Raj Khosla, Managing Director of sions. In particular, avoid the mistake of MyMoneyMantra. If debt mutual funds stopping SIPs in a falling market. If you are sold early or fixed deposits are broken continue with SIPs, you buy more units prematurely, the investor is slapped with with the same amount and reduce the exit loads and short-term capital gains average cost. The de-risking strategy tax. If stocks and equity mutual funds should begin when the goal is about 1-2 HARSHAD are sold within a year, there is a 15% tax years away. You can start a systematic CHETANWALA on the capital gains made. There is also a withdrawal plan from your equity funds CO-FOUNDER, MYWEALTHGROWTH 10% tax on long-term capital gains from to low duration debt funds or even a stocks and equity funds beyond `1 lakh. savings bank account. Choose the right funds In a way, rebalancing is like the Covid vaccine: it won’t completely protect you Sunil Jaiswal, 53 yrs, Bengaluru from the infection, but will reduce its se- verity. Indeed, no equity fund can escape This Gulf returnee took a leap of faith in July 2020 when he poured unscathed when the markets decline, `51 lakh into equity funds. The bold move paid off handsomely when though some schemes are able to with- the markets recovered and touched an all-time high level in 2021. stand bear markets better than others. Jaiswal rues his decision not to book prof its when the value of his investments had crossed `80 lakh. After the recent correction, It is When the market is in correction mode, now down to around `62 lakh. Jaiswal does not need the money im- the downside resistance of a fund can mediately, but is disturbed by the decline from the peak. help judge its ability to manage market risks. Better resistance reflects superior EXPERT OPINION portfolio quality of a fund with fine stock selection, rebalancing, or asset churn- Equities are inherently volatile, and ing. Good quality funds tend to bounce you were lucky to have entered when back as the macroeconomic stress settles the markets were down. If you don’t down. We have gauged the performance need the money for the next 4-5 of 648 equity funds across fund categories years, ignore the noise and remain during market corrections in the past invested. However, it seems you do 10 years and identified six schemes that not intend to stay invested for long. showed better resistance. Turn to page 8 If unable to stomach the volatility, it to see which schemes are more likely to is better that you shift to less volatile RAJ KHOSLA instruments such as balanced hybrid weather the coming storm better. MANAGING DIRECTOR, funds or conservative schemes that MYMONEYMANTRA allocate only 20-25% of the corpus to equities. Please send your feedback to [email protected] guest ccoolluummnn 06 The Economic Times Wealth June 20-26, 2022 Taxation takes sheen off extra savings in the EPF The arithmetic of large EPFO contributions has changed because of taxation. Savers should examine if these still make sense, says Dhirendra Kumar. I f something is good, then more of it must be better, right? Not always, but this has been the firm belief of EPF DHIRENDRA KUMAR contributors in India. Putting in more CEO, VALUE RESEARCH than the required amount in the EPF money has been standard practice among salaried individuals for long. This extra contribution mysteries was not matched by the employer, nor did it provide any tax incentive on the invested amount. However, in every other way, it was not a bad deal. The interest earned was not taxable; the rate was always high compared to other investment options; and there was an effective sovereign guarantee on the Taxation of the EPF money. The lock-in period was onerous, but amount means that given the high and tax-free interest rate, it the true post-tax was a good trade-off. internal rate of Now, however, the story has changed. return will be just Those who routinely get a large EPF deduc- 5.62%. So, it’s a tion need to pay attention. From this year onwards, the tax-free interest income is deposit with a long available only up to an annual EPFO deposit lock-in period and of `2.5 lakh. If there is no employer contribu- a return of 5.62%. tion, the limit will be `5 lakh. For an annual Does this seem like contribution above this limit, the interest a good deal to you? earned will be added to your taxable income No, not to as in the case of any other deposit. As with me either. banks and other deposits, TDS will be de- ducted quarterly. To implement the new rule from this year on, the EPFO will maintain two separate accounts for all those who start Instead of the taxable EPF, why not invest in an equity fund? The true IRR would S E G be 7.48% instead of 5.6% A M YI for the EPF contribution. TT E G contributing more than `2.5 lakh a year. One Had `3 lakh a year gone into the non- difference be the taxation. of the EPF accounts will continue to operate taxable EPF account, it would have grown In this case, with the same inflow, you as it currently does. In the other account, the to `1.48 crore in 20 years. However, in the would end up with `1.39 crore instead of amount will be taxable and TDS will be de- taxable account, given the above conditions, `1.12 crore. Remember, in an equity mu- ducted. The taxable part of the balance and it will accumulate to only `1.12 crore. The tual fund, the money would accumulate its interest income will accumulate here. continuous taxation means that the true without taxation and will be taxed once This part of the EPF will be just another post-tax internal rate of return is just 5.62%. at the end when it is withdrawn, and that deposit (for the time being) with a slightly So, it’s a deposit with a decades long lock-in too at only 10%. The true internal rate higher interest rate than that for bank or period and a return of 5.62% a year. Does of return here would be 7.48%. In equity, other deposits. However, the long lock-in this seem like a good deal to you? No, not to 20 years of uninterrupted accumulation period in the EPF becomes more relevant, me either. with just one taxable event means that changing the equation completely. So what should you do? Here’s a heretical 8% gets reduced to 7.48%. In reality, you Let’s consider an example, wherein you idea. Instead of a taxable EPF account, why get a far higher return with equity. contribute `3 lakh a year to the EPF over and not invest this money in an equity fund? Taxability makes the extra contribu- above the `2.5 lakh limit. Let’s also assume You could choose a conservative large- tion to the EPF a highly questionable that the interest rate from now onwards is cap fund or, perhaps, a Sensex or Nifty idea. I don’t think anyone who has read 8% and that your marginal tax rate is 30%. ETF. Of course, there would be volatility, the above argument carefully would So, every year, you will earn 8% on your but over 20 years, it would get evened out. need any more convincing about addi- accumulated amount and pay 30% of that The returns would almost certainly be tional contribution. earning as income tax. To simplify, I’m con- better. Let’s run the same calculation sidering the entire annual inflow and tax as again, but let us assume that these 20 years a single event; this is not how it happens, but are exceptionally damp for equity and Please send your feedback to [email protected] will suffice for my argument here. returns are also the same 8%. Let the only stocks The Economic Times Wealth June 20-26, 2022 07 Promoters crucial in small-caps When you pick a small-cap stock, you are choosing the promoter as the success of smaller companies is usually determined by the person at the helm of affairs. Hence, checking the promoter is crucial. by Nikhil Agarwal Shareholding Dividend vs reinvestment In a note to investors of Marcellus Promoters have an option to either take A big worry for investors hunting Investment Managers, Mukherjea says out the profit of the company through for small-cap stocks is figuring that the higher a promoter’s stake in dividend, or reinvest it back in the out which promoter to back as the company, the greater the likelihood business for growth. “Prioritising sufficient information about that he thinks and behaves in the best reinvestments over dividends is a sign them might not be available in interests of the company’s minority that promoters are not driven by short- the public domain. Top PMS fund manager shareholders. Besides, the manner in term gratification, but by long-term Saurabh Mukherjea believes that taking which the promoter’s shareholding in value creation through fully exploring a call on a small-cap company is akin the company has been evolving can also the business potential. The only caveat to deciding on the promoter. Smaller provide vital clues regarding his view of here is that reinvestment should not be companies are, by and large, family-owned the company’s prospects. return-dilutive or below the opportunity and family-operated businesses, usually cost of capital for the shareholders,” the involving a single promoter or a few Remuneration note said. promoter family members, who are at the The second yardstick to measure the helm of affairs. promoter’s skin in the game is to find out Business interests outside “For such companies, the promoter’s or the proportion of his remuneration, listed company group of promoters’ skills (technical, sales that is variable (that is, dependent If the promoters have significant business and/or managerial) become the defining on profitability), rather than interests outside the listed company, competitive advantage for the company. fixed. “The higher the share notwithstanding the high shareholding Further, the promoter’s strategic and of variable (versus fixed), in the latter, it raises a question mark capital allocation decisions shape the the greater the promoter’s over the time and focus that they can destiny of the company,” says Mukherjea. incentive to focus on allot to the company’s business. “This is The PMS fund manager, who handles as- profitability, and greater the particularly concerning where promoters sets worth over `11,000 crore, has listed out alignment with the interests are involved in an executive role in the four parameters to evaluate a promoter’s of minority shareholders,” listed company’s business, as is the case involvement in smaller companies. according to Mukherjea’s note. with most smaller companies,” it said. NPS investors can change asset Risk factor in the NPS The subscribers will soon be able to see the risk profile of any pension fund man- mix, fund manager 4 times in FY ager’s NPS scheme. The same has already been followed by mutual fund houses with risk-o-meter, which informs the investor of the level of risk handled by the scheme’s by Sneha Kulkarni portfolio. An equivalent metric in the NPS would assist the subscribers in making The National Pension System (NPS) sub- better decisions. scribers can now change their asset The total number of subscribers for the allocation four times during a financial NPS and the Atal Pension Yojana (APY) year. PFRDA Chairperson Supratim stood at 5.33 crore as of 4 June . The AUM Bandyopadhyay says this has been al- of the NPS and APY was `7,39,393 crore. lowed in response to the requests from many NPS subscribers who wanted more changes in a year. Till now, the NPS sub- scribers were allowed to change the in- vestment pattern twice in a financial year if they opted for the active choice. S E G A Rule for both tier I & tier II M YI Subscribers can tweak their asset alloca- TT E tion four times a year for each of their tier G I and tier II accounts. Tier I is a required cate their investments in a mix of instru- during a webinar held in December 2021. account with a longer lock-in period and ments, such as government securities, associated tax benefits. debt instruments, asset-backed and trust- More pension fund managers However, subscribers should keep in structured investments, short-term debt The NPS subscribers can choose any mind that the NPS is a long-term product, investments, and equities and related one of the seven pension fund managers and the flexibility of four changes should investments. to handle their money. PFRDA plans be handled with caution. “People sometimes confuse it with to add more fund managers to provide “Use this feature with a little bit of cau- mutual funds that can give good re- more choice to the investors. Three new tion. If one becomes too impatient with a turns. You have to give it some time and, pension fund managers—Axis Pension long-term product, it will not help. You will thereafter, you can use it (changing op- Fund, Max Life, and Tata—have gained have to be patient with your investment,” tion). Use it judiciously. We are going to an in-principle authorisation to handle said Bandyopadhyay. increase it to four times in a year (finan- pension funds, bringing the total num- The NPS subscribers are allowed to allo- cial year),” the PFRDA chairman said ber of pension fund managers to 10. mutual ffuunnddss 08 The Economic Times Wealth June 20-26, 2022 6 equity funds that resisted market corrections Mutual funds that manage downside risks well are best suited to dealing with investment volatility. by Sameer Bhardwaj and Sanket Dhanorkar T he macroeconomic stress, in the form of rising inflation and in- terest rates, is accentuating the market risks involved in stock and mutual fund investing. The raging inflation forced the RBI to raise the repo rate by 90 basis points over a five-week period. It also revised its 2022-23 inflation forecast by 100 basis points to 6.7% in its lat- est bi-monthly review. Besides, geopolitical tensions, elevated crude oil and edible oil prices, and supply chain issues are expect- ed to keep inflation high in the future. Investors are getting spooked as rising interest rates are expected to hurt eco- nomic growth by creating a negative im- pact on corporate earnings and consumer GETTYIMAGES spending. The markets have witnessed b3,r0o0a0d B-bSaEs elids tseedll sitnogc,k wsi dthel oivveerri 6n6g% n eogf athtiev e Axis Small Cap AUM: `9,261 cr DOAWVENRSAIDGEE 50% returns in 2022 so far. The equity bench- CAPTURE mark, BSE Sensex, corrected 9.2% during the same period. THIS FUND CONSCIOUSLY runs a low-beta inherent to the small-cap space. In fact, it fund manager avoids chasing momentum, The impact has been felt on the per- portfolio as a counter to the volatility boasts the lowest beta in its category. The emphasising instead on staying invested formance of equity mutual funds, with over longer time frames to capture the over 73% funds underperforming their full potential of his conviction bets. The CATEGORY: SMALL-CAP respective benchmarks in 2022 so far. The FUND CATEGORY fund is also prone to taking cash calls BENCHMARK: NIFTY Smallcap 250 Total Return Index AVERAGE category average of all equity diversified when deemed necessary, as it did before and equity sector mutual funds is negative Sharpe ratio the steep crash in March 2020. This gives PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 year-to-date (YTD), with the average loss it ammunition to quickly deploy during 0.94 0.76 ranging from 4-23%, according to Value Fund returns (%) opportunities in market declines. This Research data. approach has helped the fund not only dur- Sortino ratio This underperformance is overshadow- -7.6 -12.3 -1.6 -29.8 -8.4 ing volatile times, but also over complete ing the long-term benefits of mutual funds. 0.85 0.80 market cycles. The fund has managed to Good quality funds tend to bounce back as limit downside to only 50% of the index fall Benchmark returns (%) the macroeconomic stress settles down. As LATEST STAR RATINGS during declines. Further, its overall risk- market risks are non-diversifiable, that is, return profile is among the top quartile in -14.4 -20.3 -16.1 -41.5 -15.0 these cannot be eliminated through diver- its category. sification, it is important to identify funds that manage such risks better. A widely used method of evaluating a ICICI Prudential Bluechip `31,235 cr AVERAGE 89% fund’s performance is by comparing it with AUM: DOWNSIDE CAPTURE its benchmark. When the market is in cor- rection mode, the downside resistance of a fund can help judge its ability to manage AFTER A VISIBLE drop in performance profile has picked up smartly since last ing during market declines, particularly market risks. Better resistance reflects during 2017-20, the large-cap fund’s return year. This has been aided by a strong show- during the recent sell-off. The fund has superior portfolio quality of a fund with managed to keep the downside contained fine stock selection, rebalancing, or asset to 89% of the index fall, on average, dur- CATEGORY: LARGE-CAP churning. FUND CATEGORY ing the relevant market phases. This fund BENCHMARK: NIFTY 100 Total Return Index AVERAGE For these funds, a lower drawdown focuses on individual stock selection for means they don’t need a big market rever- Sharpe ratio generating outperformance rather than PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 sal to bounce back after a fall. A fund that taking bold sectoral calls. It avoids the 0.55 0.49 loses 20% of its value in a downturn, will Fund returns (%) ‘growth at reasonable price’ segment and need to give 25% return to make up for the prefers a mix of ideas from two opposing Sortino ratio earlier loss. However, a fund that loses only -18.7 -12.4 -9.0 -37.3 -11.7 themes—high quality businesses trading 15% in the same period, will need to deliver 0.59 0.59 at a premium and distinctly value-centric just under 18% to recoup its losses. So even opportunities. Benchmark returns (%) if these funds do not capture the market LATEST STAR RATINGS upside better than others, they tend to per- -19.8 -14.9 -10.4 -37.9 -13.9 AUM as on 30 April 2022 form well over entire market cycles. Source: Value Research mutual ffuunnddss The Economic Times Wealth June 20-26, 2022 09 ET Wealth looked at the performance of ICICI Prudential Value Discovery `23,527 cr AVERAGE 71% equity funds during multiple market cor- AUM: DOWNSIDE CAPTURE rections to come up with those that showed better resistance during corrections. A FUND WITH a clear bias for value invest- another offering that has found its footing tween 2016 and 2019, the fund has climbed How we identifi ed funds ing, ICICI Prudential Value Discovery is again. After remaining on the sidelines be- its way back into the big league. Now in As many as 648 equity mutual funds across the hands of a veteran value practitioner, different categories were considered for the the fund runs a more diversified portfolio. analysis using data from Value Research. CATEGORY: VALUE-ORIENTED CATEGORY The fund manager doesn’t deviate from his FUND The data for the past 10 years, from May BENCHMARK: NIFTY 500 Total Return Index AVERAGE style even when the market favours other 2012 to May 2022, was studied. The market Sharpe ratio themes. While value funds generally offer peaks and troughs were identified using PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 higher margins of safety, this fund has 0.82 0.53 the BSE Sensex daily closing values. A exhibited better downside protection than Fund returns (%) minimum fall of 10% from peak to trough Sortino ratio its peers. It has captured only 71% of the was recognised as a correction. For identi- -13.7 -10.4 -8.8 -33.4 -6.4 big market declines in the recent past. Its 0.95 0.57 fying a correction, the difference between true-to-label value approach, with superior a peak and trough was kept at a minimum Benchmark returns (%) LATEST STAR RATINGS downside protection, has helped it clock of eight weeks. Five such corrections were the best risk-adjusted return in its category -18.7 -15.6 -11.0 -37.8 -14.2 identified and a majority of these were trig- across market cycles. gered by external or market factors. The first correction was between 29 January 2015 and 11 February 2016, when Kotak Small Cap `7,385 cr AVERAGE 75% the Sensex tanked 22.7%, triggered by the AUM: DOWNSIDE CAPTURE Chinese stock market sell-off. The second correction was between 28 August 2018 and 26 October 2018, when the markets tanked PRIOR TO ITS repositioning as a small-cap mandate. Despite the change in focus, the emphasising downside protection. 14.3% due to the US-China trade wars. The offering in 2018, this fund ran a mid-cap fund manager has taken a familiar stance, This is achieved by sticking with third correction was between 3 June 2019 quality names and avoiding the bad and 19 September 2019. The Sensex lost CATEGORY: SMALL-CAP CATEGORY apples. Ensuring enough liquidity in FUND 10.4% as the markets reacted to the Lok BENCHMARK: NIFTY Smallcap 250 Total Return Index AVERAGE the portfolio is also a focus area. At Sabha polls and the first full budget of the Sharpe ratio times, it takes only modest cash calls, PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 NDA government after its return to power. up to a limit of 7%. Its cautious stance 0.94 0.76 The fourth correction was during the Fund returns (%) has resulted in a low downside cap- onset of the Covid-19 when the markets lost Sortino ratio ture of 75% over the specified market over 38% between 14 January 2020 and 23 -11.0 -16.0 -9.4 -34.9 -11.6 declines. This has helped the fund 0.97 0.80 March 2020. The fifth correction took place achieve a superior risk-return profile, Benchmark returns (%) between 18 October 2021 and 19 May 2022, LATEST STAR RATINGS ranking among the top quartile in its when the markets lost 14.5% due to con- category. -14.4 -20.3 -16.1 -41.5 -15.0 cerns about rising global inflation. The returns of equity funds were cal- culated and compared with their respec- tive benchmarks during the correction Nippon India Small Cap `19,768 cr AVERAGE 78% periods. The funds that lost less than their AUM: DOWNSIDE CAPTURE benchmarks across the five corrections were filtered out, and only 26 funds passed THIS FUND TAKES diversification to the asset base is mostly the reason why the size ing 150 stocks. This extent of diversifica- this filter. hilt in order to minimise risk. Its swelling of the fund portfolio has grown to a stagger- tion has led to a diluted portfolio with a To create further robustness, the risk-ad- very long tail. The fund manager insists justed metrics—Sharpe ratio and Sortino CATEGORY: SMALL-CAP that this approach is warranted due to CATEGORY ratio—of these funds were compared with BENCHMARK: NIFTY Smallcap 250 Total Return Index FUND AVERAGE the inherent risk in this space. Beyond their respective category averages. These its small-cap bias, the fund maintains Sharpe ratio metrics were calculated for the past year. PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 a sizeable presence in mid-caps, with The funds with Sharpe and Sortino values 0.83 0.76 minor allocation to large-caps, to ensure Fund returns (%) higher than their respective category aver- sufficient liquidity in the portfolio. Sortino ratio ages were filtered out. Risk-adjusted met- -10.8 -15.5 -12.9 -38.0 -9.7 During sharp market falls, the fund has rics measure the return that a fund gener- 0.90 0.80 kept the downside limited to 78% of the ates relative to the risks it is exposed to. Benchmark returns (%) index slide. It has also put in a better risk- LATEST STAR RATINGS Sharpe ratio measures the excess return adjusted performance compared to its that a fund generates relative to the total -14.4 -20.3 -16.1 -41.5 -15.0 category average in recent years. risk (market and company-specific). The total risk is measured using the standard dmeevaisautiroens othf teh eex ecnetsisr ree dtautran. Sreolrattiinvoe rtaot tihoe SBI Small Cap AUM: `12,098 cr DOAWVENRSAIDGEE 51% downside risk. The downside risk is calcu- CAPTURE lated by taking the standard deviation of only negative returns. THIS IS ANOTHER small-cap offering that drawdown rather than trying to deliver ager is comfortable underperforming in Sortino ratio is considered an improve- places more emphasis on protecting the high excess returns. In fact, the fund man- phases when valuations turn unreason- ment over Sharpe ratio as the former able. As part of this strategy, the fund’s penalises a fund with more downside risk, CATEGORY: SMALL-CAP CATEGORY portfolio is spread out to soften its risk pro- FUND whereas the latter treats both upside and BENCHMARK: S&P BSE 250 SmallCap Total Return Index AVERAGE file. The fund manager gravitates towards downside returns equally. The higher the Sharpe ratio high quality names, where the probability Sharpe or Sortino ratio, the better the risk- PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 of going wrong is lower. Further, the fund 0.89 0.76 adjusted performance. has intermittently gated flows to maintain Fund returns (%) Further, only the funds with Value Sortino ratio portfolio quality and liquidity, when faced Research ratings of 4 and 5 were included. -2.3 -15.6 -7.3 -30.5 -7.7 with heavy inflows and stretched valua- 0.96 0.80 Only six funds cleared all the above filters. tions. This approach has helped the fund The star ratings of these six funds have Benchmark returns (%) LATEST STAR RATINGS to cushion as much as 50% of the downside either remained the same or improved in during market falls, capturing the least -18.9 -20.3 -16.5 -41.2 -15.6 the past year. volatility in its category. fi nancial ppllaannnniinngg 10 The Economic Times Wealth June 20-26, 2022 How to invest PAPER WORK during market :: Transfer of securities in case of death The transfer of securities effected volatility by law due to the death of a de- mat account holder is termed as ‘transmission’. The securities are transferred to the joint holder or Split your investments between nominee or legal heir, as the case may be. Once the transmission is equity and fixed-income complete, the person entitled to the transfer becomes a share- instruments to minimise risk. holder of the company. Transmission form The claimant of securities needs to obtain a trans- mission form from the depository participant (DP) or download from their website. It needs to be f illed and submitted to the DP along ES with necessary documentation. G A M Y I T Jointly held demat account T E G In such cases, the surviv- Thirty-year-old Tushar has a As a first-time investor, it is will have to bring in a large sum of mon- ing holders need to f ill the transmission form natural for Tushar to feel dis- ey to make up for the period when that he well-paying job and good ca- and attach a notorised copy of the couraged about the way his did not save. This is likely to be difficult reer prospects. He acquired the investments have been perform- and his benefit, when the markets rise, death certif icate for transmission of securities. The surviving holders can monthly saving habit during the ing. However, Tushar does not realise will be limited. open a demat account or request that the markets will improve and he He should build on his strength at this pandemic and continues to do the transmission to an existing account. should be in a position to benefit when stage. Since he has been in the habit of same. Apart from regular retiral that happens. The only way this will be saving regularly, he should continue to deductions, he has invested pri- possible is by continuing the good work do so and even increase it to protect his Account with nomination marily in shares. He has made he has been doing so far on his savings financial situation in the downturn. As If the nomination was and investments even during the bad far as his investments go, if the falling some handsome gains, too, over registered, the nominee market conditions. value in equity makes him uncomforta- can apply for transmis- the past two years. However, he is Tushar should actually be saving ble, he can split his investments between sion of securities by submitting the worried about the way his equity more in these times of market uncer- equity and fixed-income instruments. form along with a certif ied copy of tainty. His corpus would have shrunk The plan should be to systematically investments have been perform- the death certif icate to the DP. because of the fall in value of his invest- shift to equity when the markets begin ing of late and wonders if there is ments and he should, therefore, save to stabilise. any point in putting more money more to make up for the erosion in value. Tushar’s focus should be on diversify- Account without nomination in products that are losing value. If he does so, when the market cycle ing his portfolio and investing in prod- In such a case, the legal turns, as it will, he will have a bigger ucts with low costs and charges. Paying He thinks he should put a hold on heirs of the deceased need corpus that will benefit from the growth. a high fee or cost, especially in a falling to submit the transmission all his savings and investments On the other hand, if he stops his in- market, will be detrimental to his port- form along with a no- for the time being and start again vestments now or even withdraws with folio over the long term. Products such torised copy of death certif icate, suc- if things begin to look up. In the the intention of investing when the mar- as ETFs, low-cost mutual funds, and de- cession certif icate or court order if kets improve, his benefit will depend posits fit the bill. Doing all this will keep the deceased has not left a will and meantime, he plans to go on a on his ability to judge exactly when the his portfolio primed for the time when a probate, or letter of administration holiday and have a good time. market will start going up. Moreover, he the growth takes place again. if the deceased has left a will. If the legal heirs are unable to produce the Content on this page is courtesy Centre for Investment Education and Learning (CIEL). above documents and the market Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta. value of the securities held in each account of the deceased does not smart things to know exceed `1 lakh, the DP will process Cardless cash withdrawal the request on submission of: (cid:122) Indemnity letter supported by guar- antee of an independent surety. 1 (cid:122) A ff idavit made on stamp paper 2 4 (cid:122) N OC from all legal heirs. 3 Currently :: Cardless cash 5this service Point to note withdrawals at Customer needs to It offers It also prevents is offered by ATMs is pos- scan the QR code convenience frauds caused some banks (cid:122) After the transmission, deceased’s sible with the on the screen and as there is by card skim- for their demat account is closed by the DP. use of UPI and authenticate using no need for a ming and card customers smartphones. the UPI PIN. physical card. cloning. only.