Over the past four months, India’s equity markets have experienced a wild journey. After hitting their all-time peaks in September 2024, the major indices corrected significantly. For instance, during that time, nearly identical drops of 10-11 per cent were seen by the Nifty 50 total return index (TRI ), Nifty midcap 150 TRI, Nifty smallcap 250 TRI, and Nifty Microcap 250 TRI.
Mutual funds followed suit and corrected up to 19 per cent during the period. Among the active equity diversified categories, schemes that corrected the least during the period were Motilal Oswal Multi Cap (-2.9 per cent), Motilal Oswal Small Cap (-3.2 per cent), Parag Parikh Flexi Cap (-3.8 per cent), Motilal Oswal Large Cap (-5.2 per cent) and HSBC Tax Saver Equity (-5.8 per cent). Meanwhile, the top three schemes that corrected the most were Motilal Oswal Focused (-19 per cent), Quant ELSS Tax Saver (-18 per cent) and Quant Flexi Cap (-16 per cent).
Overall, about one-third of schemes from the active diversified categories saw higher corrections than their corresponding benchmarks. Within that, around 60 per cent of mid-cap schemes corrected higher than the benchmark, indicating a higher correction rate in these schemes. Meanwhile, only 19 per cent of the large-cap schemes corrected higher than the benchmark and contained the downside well.
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Effective drawdown management is key to long-term equity returns, aided by international exposure, defensives, cash reserves, and sector rotation.
The secret to long-term outperforming returns from equity schemes is effective drawdown management. Schemes with international exposure, defensive stock weight, larger cash, and effective sector rotation corrected comparatively less.
Sector rotation
Schemes that were overweight on the defensive sectors and underweight on the high beta stocks managed to contain the current market fall relatively well. The flexi-cap, multi-cap and small-cap schemes managed by Motilal Oswal benefited. On the other hand, since many schemes follow a buy-and-hold approach with an eye toward the long term, they have not adjusted to the sporadic market patterns, resulting in short-term under-performance.
Ravi Kumar TV, Director, Gaining Ground Investment Services, said, “Most of the established equity funds have diversified their schemes across many sectors and sub-sectors over the last few years as the broader market participated well.” This diversification reduces the impact on a fall in single stock and sector, which will eventually deliver better returns in the long run.
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Allocation to international equities, too, helped the schemes contain the downtrend well. US equities have been in positive territory despite short-term blips. The S&P 500 TRI (in rupee term) delivered about eight per cent over the last three months. Diversified schemes that held notable position to international equities include Parag Parikh Flexi Cap (13 per cent), DSP Value (29) and SBI Focused Equity (12).
Active cash calls
Higher cash holdings can be a double-edged sword. While it helps to contain the fall well, it could preclude the schemes from benefiting from market rallies. Fund managers prefer to increase cash levels during times of uncertainty or excessive valuations. Cash levels anything more than five per cent could impact the portfolio significantly. However, cash levels of few funds had gone much higher (see table).
This has now come to the rescue of these funds. Schemes with higher cash holdings based on their last six months average include Samco Active Momentum (22.9 per cent, an average of last six months), Parag Parikh Flexi Cap (18.5) and Parag Parikh ELSS Tax Saver (17.5).
Parag Parikh Flexi Cap is one of the schemes that gained from all the above-mentioned metrics on containing the market downtrends. It has been sitting on cash with more than 10 per cent over the last two years. Cash holdings of active equity schemes as of December 2024 was ₹1.68-lakh crore or 5.5 per cent of their total AUM of ₹30.6-lakh crore. Significant inflows from SIPs and NFOs , too, contributed.