The year so far has been far from great for diversified equity mutual funds. Most portfolios have slipped to abysmally low returns, while the not so lucky have found themselves staring at losses. Up to March 7, the BSE Sensex has lost (-) 21.35 per cent while the S&P Nifty has regressed (-) 22.34 per cent. We ran a very simple query to assess who lost the most. We also went one step further to make sense of these losses. In some cases these were very apparent and in others, the funds slipped inspite of sticking to investment basics of maintaining well diversified portfolios.
We picked the 20 largest losers of this year so far. Our consideration set comprised of a total of 161 diversified equity funds that are open ended. Not many would like to be included in this list, but upon going through it we found that they were predominantly made up of mid-cap oriented funds. A look at key benchmark Indices bears the story out, as the biggest losers on the exchange have in fact been mid-cap companies with the large 31.53 per cent meltdown of the BSE Midcap Index as of March 7. However, the list does feature a few surprise contenders, the otherwise robust Infrastructure funds were caught on the wrong foot with Birla Infrastructure and Taurus INFRA TIPS making it to the laggard’s list. Taurus Starshare is another fund that has often been criticized for its concentrated portfolio. The result of which is truly felt in market downturns such as the present one.

The explanation for the mid-cap oriented funds is clear. In line with their benchmark these funds have faced the wrath of the stomping bears. But what about the eight other funds that managed to figure in this list? On closer inspection we found that many of these funds were over extended in their exposure to select stocks and many others were too concentrated on a few sectors. Take Birla Infrastructure for example, the top five sectors accounted for 58.52 per cent of its corpus (Based on January portfolio). Being an Infrastructure fund, there isn’t anything wrong with that, however, of this close to a fifth of the fund’s AUM was invested in the Housing and Construction segment! But Taurus INFRA TIPS went a little too far in its concentrated bets with top five sectors amounting to 71.07 per cent of the fund’s portfolio, within which Power sector was allocated 26.81 per cent of assets, with Reliance Energy being entrusted 12.69 per cent of assets.
On the other hand JM Hi Fi’s restrictive investment mandate got it into trouble, with top five sectors taking the lion’s share of assets (72.4 per cent), and Housing and Construction companies monopolised the portfolio at 30.8 per cent of AUM.
One fund that we were sure of finding in this list was Taurus Starshare; the top five holdings of this fund stand at 62.36 per cent, with Jai Prakash Associates consuming 33 per cent of AUM. JM Emerging leaders, although by virtue of its investment mandate is a multi-cap fund, found itself overextended in the mid and small cap space, which pulled down returns. At the same time the poor performance of funds such as Optimix Multi Manager Equity – Plan A is not explained so easily. The fund looks adequately diversified. As do the two LIC funds. In case of LIC Growth, the fund’s close to 20 per cent allocation to the banking sector hit quite hard in the first week of March, pulling returns down significantly.  

At every such downturn we are reminded of two investment basics. Its that time again to take cognizance of these simple lessons. Firstly, mid caps are in fact more volatile, and this is not just theoretical reasoning, they almost always under perform their larger peers in market meltdowns. While this should not disqualify them from your portfolio, exposure to these stocks should be capped at rational levels. At the end of the day over the long-term the mid and small cap indices have outperformed their larger peers in India, albeit with short term disturbances. Secondly, a well diversified portfolio is always a better bet in a market slip like this. So stick to funds that manage to outperform in downturns like these, even if they don’t emerge as the largest gainers in a bull run.