Infrastructure, Jan Dhan, Swachh Bharat – these three themes have defined the Modi government's first two years in office. But have they also affected investor returns? The answers are surprising, to say the least.
The aam investor tends to spread his investments over time rather than invest in one go. Many investors are salaried and hence can invest only on a monthly basis. Even a huge believer in the Modi promise would've increased his equity allocation but not necessarily gone 'all in' on the swearing-in day. These factors have caused a large increase in systematic investment plans (SIPs), which typically invest a set amount periodically in chosen funds. Given the popularity of SIPs, we chose to look at the their performance rather than that of lump-sum investments since the BJP's landmark victory in 2014 to see how investors have done.
The table lists the top 20 funds (direct plans) on the basis of SIP returns. We have taken the SIP amount as ₹10,000 per month. The SIP period is since June 2014 (23 installments totaling ₹2,30,000). The SIP values are as of May 26, 2016.
|DSP BlackRock World Gold Fund||3,02,055||Equity: International|
|Kotak World Gold Fund||2,93,688||Equity: International|
|Escorts Tax Plan||2,89,116||Equity: Tax Planning|
|DSP BlackRock Micro Cap Fund||2,88,475||Equity: Small Cap|
|Escorts High Yield Equity Fund||2,86,652||Equity: Small Cap|
|SBI Small & Midcap Fund||2,86,629||Equity: Small Cap|
|SBI Magnum Midcap Fund||2,80,668||Equity: Small Cap|
|Sundaram Rural India Fund||2,79,860||Equity: Others|
|Franklin India Smaller Companies Fund||2,77,248||Equity: Small Cap|
|Birla Sun Life MNC Fund||2,76,307||Equity: Others|
|Escorts Leading Sectors Fund||2,75,620||Equity: Mid Cap|
|Mirae Asset Emerging Bluechip Fund||2,74,484||Equity: Mid Cap|
|Kotak Emerging Equity Scheme||2,74,389||Equity: Small Cap|
|ICICI Prudential Global Stable Equity Fund||2,73,274||Equity: International|
|Birla Sun Life Small & Midcap Fund||2,72,538||Equity: Small Cap|
|Motilal Oswal MOSt Focused Multicap 35 Fund||2,70,757||Equity: Multi Cap|
|Motilal Oswal MOSt Focused Midcap 30 Fund||2,70,756||Equity: Mid Cap|
|Franklin India Prima Fund||2,69,972||Equity: Mid Cap|
|SBI Magnum Children's Benefit Plan||2,69,703||Hybrid: Debt-oriented Aggressive|
|Kotak Mid-Cap||2,69,668||Equity: Mid Cap|
|Please note: The funds listed above are not necessarily recommended by Value Research|
The top two performers are gold-related funds – DSP Blackrock World Gold Fund and Kotak World Gold Fund. They invest in the shares of gold-mining companies across the world and have very little to do with the Modi story. Most of their outperformance occurred in 2016, with both the funds rallying more than 50 per cent in this year. Investing systematically allowed investors to get more and more units of these funds as their net asset values (NAVs) kept declining in 2014 and 2015. The sudden spurt in their NAVs in 2016 magnified returns, since the bulk of investments in them had happened in the 'dark' years of 2014 and 2015. However, it is unlikely that many investors would have put large amounts in these funds. Their combined size of about 350 crore is a small fraction of investor wealth in mutual funds. Buyers would have also seen nearly five years of negative returns on them before the spurt in prices in 2016 – not a typical characteristic of a good fund. All in all, it is best to ignore their appearance here as an anomaly – a bit like Leicester City's win in the English Premier League.
The little guy wins
The bulk of the top performers' list is comprised of mid- and small-cap funds. These funds normally follow an equity rally led by large-cap funds, but this did not happen during the Modi rally. Large caps failed to perform due to an adverse commodity cycle, the indebtedness of large corporations and their dominance by foreign instead of domestic investors. It is important to keep in mind that there are various factors that cause mid- and small-sized stocks to outperform large-cap stocks over the long run. A smaller base has the potential for higher growth, and the lower liquidity and higher risks in mid and small caps also enable investors to enter them at lower valuations. We think that this combination of secular and cyclical factors caused the mid- and small-cap outperformance. The secular factors are likely to sustain; the cyclical ones, less so.
Beyond our shores
Two funds, both with an international bent, bucked the small- and mid-cap dominance. Birla MNC Fund, which, as the name suggests, focuses on multinational corporations listed in India is one of them. Its outperformance is a testament to the better corporate governance and powerful branding of multinational companies in India. ICICI Prudential Global Stable Equity Fund, which seeks to make its returns by investing in overseas mutual funds, is the other. It acts as a feeder fund to Nordea Global Stable Equity, which has a heavy exposure to the US market. Its returns were thus supported by both rising equity prices and a strong currency.
At first glance, this rather unexpected list calls into question the Modi story itself. Can it be that the government efforts at road building, environmental clearances and rural electrification are just empty slogans? We think instead that a better explanation for it may be that the Modi reforms are still to play out. Infrastructure spending typically stimulates the economy with a lag. Banking is still reeling under non-performing assets (NPAs) from previous booms. Modi's children have yet to grow up.