Recap 2023, Marching into 2024 (Mutual Fund Winners Club)

28 Dec 2023 , 09:21 AM

YEAR 2023 FOR EQUITY AND DEBT MARKETS

Year 2023 was a year when the Nifty and the Sensex managed to scale record high levels. However, it was also the year when bond yields were extremely volatile. The year saw the first signal from the US Federal Reserve that interest rates had topped out. The Fed even prepared the global markets for a total of 7 rate cuts in the next two years. Combined with the sharp fall in US bond yields and the dollar index, the bond yields in India also tapered towards the end of the year. But the real action was seen in the mutual funds. SIP flows on a gross monthly basis crossed Rs17,000 crore per month for the first time in November 2023 and is a good indication of how retail interest in mutual funds is building up.

In our annual review of mutual fund performance, we will focus on the one-year returns across 5 category of funds viz. Active Equity Funds, Active Debt Funds, Hybrid Funds, Treasury funds and Passive Funds. The funds will be ranked on 1-year returns, and longer term returns will not be considered, despite mutual funds being a longer term product. This is to just capture the yearly momentum. Also, to avoid the bias of differential TERs, we will consider direct plans also. However, if the direct plans and regular plans of the same fund appear in the rankings, then the lower ranked fund will be ignored to avoid duplication. Here is a bird’s eye view of the best performing mutual funds in India for 2023.

1. HOW ACTIVE EQUITY FUNDS PERFORMED IN YEAR 2023 

Active equity funds across generic equity categories have been looked at in this segment. All data pertains to the closing NAVs as of December 26, 2023 and compared with the NAV on a yoy basis to give you a feel of annual performance of the fund. Data source for all the tables is www.morningstar.in 

Equity Large-Cap Funds

Name of Fund	1-Year Return
Nippon India Large Cap Fund (G)	32.126%
Bank of India Bluechip Fund (G)	30.451%
JM Large Cap Fund (G)	29.660%
Category Average	23.559%
BSE 100 (TR) Index	22.295%

Equity Multi-Cap Funds

Name of Fund	1-Year Return
HDFC Multi Cap Fund (G)	42.118%
Kotak Multi Cap Fund (G)	41.769%
ITI Multi Cap Fund (G)	41.537%
Category Average	33.755%
BSE 500 (TR) Index	26.002%

Equity Flexi-Cap Funds

Name of Fund	1-Year Return
Bank of India Flexi Cap Fund (G)	40.898%
JM Flexi Cap Fund (G)	40.739%
Parag Parekh Flexi Cap Fund (G)	37.052%
Category Average	28.445%
BSE 500 (TR) Index	26.002%

Equity Mid-Cap Funds

Name of Fund	1-Year Return
Mahindra Manulife Mid-Cap Fund (G)	49.275%
JM Mid-Cap Fund (G)	49.097%
Nippon India Growth Fund (G)	48.566%
Category Average	38.139%
BSE Midcap (TR) Index	46.295%

Equity Small-Cap Funds

Name of Fund	1-Year Return
Mahindra Manulife Small Cap Fund (G)	60.646%
Bandhan Small Cap Fund (G)	56.900%
ITI Small Cap Fund (G)	56.868%
Category Average	43.501%
BSE Midcap (TR) Index	51.466%

Equity Linked Savings Schemes (Tax Saving)           

Name of Fund	1-Year Return
SBI Long Term Equity Fund (G)	39.576%
ITI ELSS Tax Saver Fund (G)	39.221%
Motilal Oswal ELSS Tax Saver Fund (G)	37.812%
Category Average	27.734%
BSE 200 (TR) Index	23.773%

Clearly, equity funds have done extremely well across categories in the year 2023. Here are some key takeaways.

• The real alpha has been generated by small cap and mid-cap funds, where stock selection has been a major factor in improved returns.

   

• In most cases, the top-3 fund have clearly outperformed the benchmark index. However, in the case of mid-cap and small cap funds, index funds too would have been lucrative.

   

• The category average returns underperformed the benchmark in many cases. The underperformance was stark in case of mid-cap funds and small cap funds.

Equity funds have done extremely well in year 2023 with the category average returns being attractive across equity classes. Large caps struggled, but it was the mid and small caps that dominated most of the action.

1. HOW HYBRID FUNDS PERFORMED IN YEAR 2023

Hybrid funds across categories, as defined by SEBI, have been looked at in this segment. These refer to hybrid funds that combine equity, debt and other assets in different formula based proportions or in dynamic proportions. All data pertains to the closing NAVs as of December 26, 2023 and compared with the NAV on a yoy basis to give you a feel of annual performance of the fund. Data source for all the tables is www.morningstar.in

Balanced Funds (Aggressive Allocation)

Name of Fund	1-Year Return
BOI Mid & Small Cap Equity and Debt (G)	36.814%
JM Aggressive Hybrid Fund (G)	35.402%
ICICI Pru Equity & Debt Fund (G)	28.791%
Category Average	21.565%
CRISIL MIF Blended Index PR	9.798%

Balanced Funds (Conservative Allocation)

Name of Fund	1-Year Return
Kotak Debt Hybrid (G)	15.112%
HDFC Hybrid Debt Fund (G)	14.473%
Parag Parikh Conservative Hybrid Fund (G)	14.187%
Category Average	10.938%
CRISIL MIF Blended Index PR	9.798%

Dynamic Asset Allocation Funds (BAF)

Name of Fund	1-Year Return
HDFC Balanced Advantage Fund (G)	32.312%
Motilal Oswal Balanced Advantage Fund (G)	27.291%
NJ Balanced Advantage Fund (G)	25.551%
Category Average	18.918%
Benchmark Index	N.A.

Multi-Asset Allocation Funds (MAAF)

Name of Fund	1-Year Return
UTI Multi-Asset Allocation Fund (G)	30.292%
Nippon Asset Allocation FOF (G)	29.830%
SBI Multi Asset Allocation Fund (G)	25.028%
Category Average	21.384%
Benchmark Index	N.A.

Equity Savings Funds (ESF)

Name of Fund	1-Year Return
SBI Equity Savings Fund (G)	18.834%
HSBC Equity Savings Fund (G)	18.364%
Invesco India Equity Savings Fund (G)	17.413%
Category Average	13.618%
Benchmark Index	N.A.

In a sense, hybrid funds also performed well across categories in the year 2023. Here are some key takeaways.

• If you look at the outperformance of hybrid funds, it is largely on the back of cases where the equity exposure has been higher.

   

• The category average has done better than the benchmark in many cases. However, this could be more due to the way such indices have been designed to underplay.

   

• Many of these hybrid fund categories have also benefited in terms of post-tax returns as they get classified as equity funds due to 65% equity exposure via derivatives.

Hybrid funds have done very well in year 2023 but that has been largely on account of the outperformance of equity as an asset class.

1. HOW ACTIVE DEBT FUNDS PERFORMED IN YEAR 2023

Active equity funds across generic and specific debt categories have been looked at in this segment. They are at the longer end of the duration curve. All data pertains to closing NAVs as of December 26, 2023 and compared with the NAV on a yoy basis to give yearly feel. Data source for all the tables is www.morningstar.in

Government Securities Funds (Gilt Funds)

Name of Fund	1-Year Return
ICICI Prudential Gilt Fund (G)	8.670%
Tata Gilt Securities Fund (G)	8.371%
Kotak Gilt Investment Fund (G)	8.224%
Category Average	7.109%
I-SEC MIBEX Index TR	7.611%

Corporate Bond Funds

Name of Fund	1-Year Return
ICICI Prudential Corporate Bond Fund (G)	7.762%
Nippon India Corporate Bond Fund (G)	7.548%
Tata Corporate Bond Fund (G)	7.527%
Category Average	6.947%
CRISIL ST Bond Fund Index PR	7.302%

Credit Risk Funds

Name of Fund	1-Year Return
DSP Credit Risk Fund (G)	16.555%
Invesco India Credit Risk Fund (G)	12.980%
SBI Credit Risk Fund (G)	9.049%
Category Average	8.243%
CRISIL ST Bond Fund Index PR	7.302%

Dynamic Bond Funds

Name of Fund	1-Year Return
DSP Strategic Bond Fund (G)	8.595%
ICICI Prudential All Seasons Bond Fund (G)	8.319%
Baroda BNP Paribas Dynamic Bond Fund (G)	7.965%
Category Average	6.880%
CRISIL Composite Bond Fund Index PR	7.387%

Debt fund returns in the year 2023 were largely volatile on account of the sharp volatility in bond yields. The year had begun with hopes of sharp rate cuts, but that did not materialize till the end of the year. With the Fed taking the initiative on rate cuts in 2024 and 2025, things could change for the funds managing longer duration debt in India. 

1. HOW TREASURY MANAGEMENT FUNDS PERFORMED IN YEAR 2023

We look at 3 categories of active treasury management funds in India. These are purely for short term parking of liquidity. All data pertains to the closing NAVs as of December 26, 2023 and compared with the NAV on a yoy basis to give you a feel of annual performance of the fund. Data source for all the tables is www.morningstar.in

Liquid Funds

Name of Fund	1-Year Return
ABSL Liquid Discipline Advantage Plan (G)	7.297%
Canara Robeco Liquid Fund (G)	7.179%
Quant Liquid Fund (G)	7.165%
Category Average	6.171%
CRISIL Liquid Fund Index PR	7.124%

Money Market Funds

Name of Fund	1-Year Return
Tata Money Market Fund (G)	7.659%
ABSL Money Manager Fund (G)	7.582%
Axis Money Market Fund (G)	7.532%
Category Average	7.140%
Benchmark Index	7.124%

Arbitrage Funds (Cash-Futures)

Name of Fund	1-Year Return
Invesco India Arbitrage (G)	8.024%
Kotak Equity Arbitrage Fund (G)	7.981%
SBI Arbitrage Opportunities Fund (G)	7.957%
Category Average	7.813%
Benchmark Index	N.A.

The short term treasury management funds have seen a very consistent pattern in the last few months. There has been a shift of corporate treasury money out of liquid funds and into money market funds. At the same time, a lot of the HNI money is also going out of liquid and money market funds and into arbitrage funds. While arbitrage funds gave higher returns in 2023 due to higher volatility in the equity markets, the bigger story is of the positive post-tax benefits as arbitrage funds are classified as equity funds under the Income Tax Act due to exposure of more than 65% to equities. That makes arbitrage funds a high yielding, yet tax efficient product for short term parking of funds. 

1. HOW PASSIVE FUNDS PERFORMED IN YEAR 2023

Passive funds are the new kids on the block. Here the focus is on tracking the underlying index or asset class and minimize the tracking error. All data pertains to the closing NAVs as of December 26, 2023 and compared with the NAV on a yoy basis to give you a feel of annual performance of the fund. Data source for all the tables below is www.morningstar.in

Index Funds (Equity)

Name of Fund	1-Year Return
Motilal Oswal BSE Enhanced Value Index Fund (G)	64.008%
ABSL Nifty Small Cap 50 Index Fund (G)	62.915%
Axis Nifty Small Cap 50 Index Fund (G)	62.430%
Category Average	29.673%
Benchmark Index	N.A.

Index Funds (Debt)

Name of Fund	1-Year Return
SBI CRISIL IBX Gilt Index June 2036 Fund (G)	8.284%
Nippon India Nifty G-Sec June 2036 Fund (G)	8.275%
HDFC Nifty G-Sec July 2031 Index Fund (G)	8.172%
Category Average	7.224%
Benchmark Index	N.A.

While the passive funds have come of age in the Indian market in terms of size and flows, it is the equity index funds that have dominated in terms of returns. Even within the equity index funds, the outperformers appear to be smart beta funds, where long term risks cannot be wished away.

KEY MUTUAL FUND TAKEAWAYS FOR 2024

It is apparent that mutual funds in India have come of age in terms of flows and stability of performance. SIPs at Rs17,000 crore per month and growing are likely to be the funnel for the future growth of the mutual fund segment.  Here are key takeaways for year 2024.

• While 1-year returns have been more volatile, fund rankings have been more stable if you look at 5-year rankings. That shows that not only are the leaders the top performers, but they are also consistently delivering results.

   

• Across the board, at least in the case of equity funds, the top 3 performers, across most of the equity fund categories have done better than the benchmark. That is an indication that the top performers are actually generating alpha for their investors. 

   

• Let us get back to the point on consistency of top performers over a 5-year period?. It is proof of the fact that; past returns in most mutual fund categories are a reliable barometer of future performance; adding to their analytical value.

The mutual fund story in 2023 largely belonged to equities. They were the true blue outperformers of the year.