Top 7 diversified Multicap Mutual Funds: Strong returns in the last 3 years

Diversified multicap funds have the potential to deliver strong performance on a consistent basis across a long time horizon. Different segments of the market outperform each other in different market cycles. For example large cap companies outperform midcap companies in bear market conditions and in the initial phase of the bull market. When large cap valuations run up in bull markets, midcap companies tend to do well. The diversified funds have 25 – 50% of their portfolio invested in small and midcap companies. During bull market rallies, the valuations (P/E multiples) of large cap stocks run up faster and unless earnings growth keeps pace, the valuations can look stretched, making the investors wary. Small and midcap stocks tend to outperform large cap stocks in bull markets. On the other hand, in bear markets small and midcap stocks go through sharp declines and also have to suffer from liquidity issues. Diversified funds on the other hand do not face liquidity problems, since large cap stocks comprise a substantial portion of their portfolio. We have discussed the merits of diversified multicap funds in our article, Diversified Multicap funds are ideal for retail investors. As such funds of this category should comprise a substantial part of the investor’s mutual fund portfolio.

If we look at the performance of mutual funds over the last 15 – 20 years, some diversified multicap funds have delivered exceptional returns since inception and created wealth for their investors. Examples are Reliance Growth Fund, HDFC Equity Fund, ICICI Prudential Dynamic Plan, etc. However in the past 3 – 4 years, some of their relatively lesser known peers have delivered outstanding performance on a number of parameters. Most of these funds have less than र 1,000 crores of assets under management, while some have even less than र 500 crores of assets under management. CRISIL ranks equity funds based on several parameters like average 3 year annualized returns, volatility, portfolio concentration risk (both industry and company) and portfolio liquidity risk. On each of these parameters, each scheme is accorded a cluster rank (from 1 to 5) relative to its peer group. To derive a composite cluster rank, CRISIL has assigned different weights to each parameter, with average 3 year annualized return given the highest weights at 50%, volatility 30%, industry concentration risk 10%, company concentration risk 5% and liquidity risk 5%. The period of analysis is broken into four periods, latest 36, 27, 18 and 9 months. Each period is assigned a progressive weight starting from the longest period as follows: 32.5%, 27.5%, 22.5% and 17.5% respectively. In this article, we will discuss the top 7 diversified multicap fund picks, based on CRISIL’s most recent ranking.

The table below lists the top 7 diversified multicap funds, based on CRISIL’s latest ranking for the quarter ended September 2014. Morningstar has also given most of these funds excellent rating. Returns in the table are for growth options in regular plans. NAVs as on Dec 15, 2014.

Franklin India High Growth Companies Fund

This fund has given nearly 15% annual returns since inception. It has an asset base of over र 1,200 crores and an expense ratio of 2.58%. The fund has outperformed the category of diversified multicap in terms of risk adjusted returns. It has an above average Sharpe Ratio of 1.55. The chart below shows the 5 year returns of र 3000 monthly SIP investment in the Franklin India High Growth Companies fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Dec 15 2014.

The chart above shows that a monthly SIP of र 3000 started 5 years back in the Franklin India High Growth Companies fund (growth option) would have grown to over र 3.6 lacs by Dec 15 2014, while the investor would have invested in total only than र 1.8 lacs.

ICICI Prudential Exports and Other Services Fund

This fund has given nearly 17% annual returns since inception. It has an asset base of over र 565 crores and an expense ratio of 2.62%. The fund has outperformed the category of diversified multicap in terms of risk adjusted returns with an above average Sharpe Ratio of 1.84. The chart below shows the 5 year returns of र 3000 monthly SIP investment in the ICICI Prudential Exports and Other Services Fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Dec 15 2014.

The chart above shows that a monthly SIP of र 3000 started 5 years back in the ICICI Prudential Exports and Other Services Fund (growth option) would have grown to over र 3.7 lacs by Dec 15 2014, while the investor would have invested in total only than र 1.8 lacs.

Kotak Select Focus Fund

This fund has given nearly 16% annual returns since inception. It has a small asset base of nearly र 1,400 crores and an expense ratio of 2.49%. The fund has outperformed the category of diversified multicap in terms of risk adjusted returns. The chart below shows the 5 year returns of र 3000 monthly SIP investment in the Kotak Select Focus fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Dec 15 2014.

The chart above shows that a monthly SIP of र 3000 started 5 years back in the Kotak Select Focus Fund (growth option) would have grown to over र 3.1 lacs by Dec 15 2014, while the investor would have invested in total only than र 1.8 lacs.

Mirae Asset India Opportunities Fund

This fund has given over 18% annual returns since inception. It has an asset base of र 810 crores and an expense ratio of 2.53%. The fund has also outperformed the category of diversified multicap in terms of risk adjusted returns, with a Sharpe Ratio of 1.29. The chart below shows the 5 year returns of र 3000 monthly SIP investment in the Mirae Asset India Opportunities Fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Dec 15 2014.

The chart above shows that a monthly SIP of र 3000 started 5 years back in the Mirae Asset India Opportunities Fund (growth option) would have grown to over र 3.1 lacs by Dec 15 2014, while the investor would have invested in total only than र 1.8 lacs.

UTI MNC Fund

This fund has given nearly 19% annual returns since inception. It has an asset base of र 580 crores. The expense ratio of the fund is a bit on the higher side at 2.81%. The fund has delivered above average risk adjusted returns. The chart below shows the 5 year returns of र 3000 monthly SIP investment in the UTI MNC Fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Dec 15 2014.

The chart above shows that a monthly SIP of र 3000 started 5 years back in the UTI MNC Fund (growth option) would have grown to over र 3.5 lacs by Dec 15 2014, while the investor would have invested in total only than र 1.8 lacs.

Tata Ethical Fund

This fund has given nearly 23% annual returns since inception. It has a small asset base of र 240 crores and an expense ratio of 2.52%. The fund has outperformed the category of diversified multicap in terms of risk adjusted returns. It has an above average Sharpe Ratio of 1.59. The chart below shows the 5 year returns of र 3000 monthly SIP investment in the Tata Ethical Fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Dec 15 2014.

The chart above shows that a monthly SIP of र 3000 started 5 years back in the Tata Ethical Fund (growth option) would have grown to nearly र 3 lacs by Dec 15 2014, while the investor would have invested in total only than र 1.8 lacs.

Principal Growth Fund

This fund has given nearly 17% annual returns since inception. It has an asset base of र 388 crores and an expense ratio of 2.52%. The fund has also outperformed the category of diversified multicap in terms of risk adjusted returns. The chart below shows the 5 year returns of र 3000 monthly SIP investment in the Principal Growth Fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on Dec 15 2014.

The chart above shows that a monthly SIP of र 3000 started 5 years back in the Principal Growth Fund (growth option) would have grown to over र 3 lacs by Dec 15 2014, while the investor would have invested in total only than र 1.8 lacs.

Conclusion

In this article, we have reviewed the top picks among diversified multicap equity funds based on the most recent CRISIL rankings. While all these funds have delivered strong returns across different time cycles, the suitability of each of these funds would depend on risk profile and time horizon. You should consult with your financial adviser if these diversified multicap equity funds are suitable for your portfolio.