While understanding why certain mutual funds underperform is important, in the same breath it is also important to understand why certain mutual funds outperform their peers.
It is natural for many mutual fund schemes to not do well
when the market is down but then there are certain mutual fund schemes that
perform much better than their peers despite the market being down.
No matter what fund managers speak about, fund presentations
say or how the fund house advertises its fund there is no substitute for
performance.
A mutual fund performing well for a short period is not a
strong enough reason to invest.
This is because they might be certain factors that
contributed to the fund’s higher returns in a very short time that you might
not be comfortable like:
- Allocating to companies with high debts
- Allocating to volatile sectors
- More weightage to sectors and companies than its peers.
Therefore knowing why a particular mutual fund has done well
recently, being comfortable with the strategy applied by the fund manager and
finding out the reasons behind its performance is far more important than
merely high returns.
Why
Parag Parikh long term equity fund rallied?
Parag Parikh long term equity fund as a multicap fund has
recently gained popularity among investors for its stellar performance leaving
behind all its peers by a long margin.
So what has worked for this multicap fund that other
multicap funds could not replicate?
International exposure
- Parag Parikh Fund long term equity has since the beginning always had 35% of its equity portion in international equity.
- In fact even today it still remains the only multicap fund with international exposure being mandatory in its portfolio.
- Within its international exposure too, parag parikh long term fund has mostly concentrated on US companies and that too technology companies.
The US stock market had a dream run during the lockdown
period which was a sad contradiction to what was happening with and in the rest
of the world.
An interesting point to consider here is that the US economy
is largely a consumption driven one whereas the US stock market is largely a
technology driven one.
Therefore, even though the forecasts and data for economy
during this period was bleak, the US stock market still rallied due to it being
dominated by technology stocks and a large influx of liquidity due to economic
stimulus.
The latter though was not unusual and in fact the reality
for most global economies.
With lockdowns announced in most countries, work from home
had become the norm.
- Most companies and sectors were affected but the least of them all were IT companies.
- IT companies as compared to most other companies had to make the least adjustment for work from home and therefore their functioning and performance also had the least impact on the overall results.
- In fact in some cases, IT companies also posted better numbers than the pre lockdown quarter.
The fact that parag parikh long term equity fund except for Suzuki had
all US based IT companies worked in the funds favour.
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Avoiding
Momentum Investing
- Parag parikh long term equity avoids going with momentum stocks.
- Momentum stocks are those that could be the flavour of the month.
- Momentum stocks are those that either reap rewards in a short time or are perceived to do so.
During this period, various multicap funds made several
changes to their respective portfolios.
Heavy buying and selling were seen in stocks related to the
banking, pharmaceuticals, IT and consumption sectors.
Parag Parikh long term fund more or less stuck with the same set of stocks even before and during the lockdown.
- This included even stocks that could have been considered as very fragile given the ever-changing scenario.
- This mutual fund scheme has historically seen a very low turnover ratio with its portfolio.
- It applies the buy and hold philosophy with its portfolio rather than buying and selling looking at prices rather than valuations.
As can be seen by the above image, the fund continued to
hold Mahindra Holidays, a stock belonging to the hospitality sector which was one of the most affected sectors during the lockdown.
PPFAS long
term equity fund portfolio
- The fund more or less stuck to its philosophy with respect to its portfolio.
- In fact for the month of May 2020, there were no new additions or deletions from its portfolio.
- This was a period when the markets were volatile and naturally various fund houses and fund managers were making changes to their portfolios as they saw fit.
- This was not the case with Parag Parikh long term equity fund though.
It did not raise its allocation to Pharmaceuticals or IT
stocks which were seen as defensive sectors at the time.
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When times are volatile it is easy to panic and go with the
flow of the ongoing market trends than to stick with your philosophy with the
long term view in mind.
If not then there’s always the case of FOMO (Fear of missing
out).
The fund unlike other multicap funds though decided to go
against the current trend and decided on maintaining the stability of the
portfolio.
As it is, Parag parikh long term fund usually has a focused
approach despite being a multicap fund with limited stock pickings.
It is easier to invest in a bear market than to stay invested in a volatile market.
Summary
- As is the case with an underperforming fund, it is also important to analyze and understand why a certain fund has performed so well during a particular time period.
- In fact it is all the more important to understand why a fund is doing well because you may have the tendency to add more to the same fund expecting it to rise further.
- A fund that outperforms its peers by a huge margin is certainly doing something very different from its peers.
- Be very well aware if you would be comfortable with the factors that led to its stellar rise because these very factors could be the reason for its fall as well.
For example a fund that is sitting heavy on a cash during a
fall may statistically show to have done well during the fall but in case the
same fund does not deploy cash, it would lose out on a rally and therefore fall
behind too.
Various funds within the same category can all be run very distinctly from one another, which is why we have such a big margin between a category’s highest and lowest performing fund.
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