Prime portfolios – Performance review and quarterly changes

Prime Portfolios are a set of 19 unique portfolios that meet over 30 different investor needs, aspirations, and timeframes. You will find them under the head Ready-to-use-portfolios (listed in the Recommendations menu, post login). With Prime Portfolios completing close to 2 years, we are now presenting the performance of some of the key portfolios in this article. 

Along with this, you will also find the details of portfolios where we have made changes this quarter. 

If you’re new to PrimeInvestor, the first part of this report may be of help as it explains Prime Portfolios. Else, directly go to the section that you’re interested in, in the Table of Contents below.

Construction of Prime Portfolios

We have classified portfolios in Prime Portfolios based on popular financial needs/goals you may have. The basis for many of these would be the goal’s timeframe. We have therefore segregated many of these goals further into timeframe buckets. For those looking for passive investing options, check the Odds and Ends portfolios.

Prime Portfolios largely draw from Prime Funds and mix funds with different strategies to minimize duplication within a portfolio. However, there may be a few cases where funds are outside of Prime Funds too. We use other products, primarily on the fixed income side, in portfolios where they will be good options.

The asset allocation in Prime Portfolios is done based on the ‘ideal’ allocation for a given timeframe, or a given goal. But this is not cast in stone. Assess your own capacity to take risk before choosing a portfolio. These portfolios are not ‘advisory’ in nature. They are bundled MF products with a mix of equity and debt funds and fixed income options with varying strategies for diversification.

Using Prime Portfolios

Prime Portfolios are useful in the following cases:

1. If you are new to mutual fund investing, or don’t know how to mix funds and want a readymade basket of funds to invest in
2. If you are an existing investor but have new goals and want an asset-allocated portfolio for that purpose
3. If you wish to build your own portfolio by taking cues from the asset allocation and category allocation that we use
4. If you wish to add or modify your existing portfolios by taking cues from Prime Portfolios’ construction using Prime Funds or MF review tool. You can read this article on building your own portfolio.

The following points need to be noted if you follow any of the Ready-to-use portfolios:

• We internally review these portfolios every quarter after the review of our ratings, recommendations, and Prime Funds. So, this will typically take 2-3 weeks after the end of a quarter.
• In the review, where we make changes, we will explicitly specify whether a fund needs to be exited or only SIPs should be stopped and investments held. Please take note of the same.
• If you wish to track changes to a portfolio, please click the ‘Follow’ button to ensure you receive alerts about the changes. Your Dashboard will also show you portfolios that have been changed when you Follow a portfolio.
• We typically send alerts on changes only for those who ‘Follow’ a portfolio. However, we will also publish a blog on the same every quarter.
• We will mention only those portfolios where there are actual changes or portfolios to which we wish to draw your attention on any performance dip. Otherwise, you can assume that there are no changes.
• The changes we suggest may involve fund changes or individual fund allocation changes. Apart from this, some asset classes in your portfolio may have strayed from the original asset allocation as market rallies. This is something only you need to run a check on (as each of you would have invested in different times), once a year, to see whether you need to rebalance. The rebalancing concept is explained in detail in this article on rebalancing, and we have built a calculator to tell you how much to invest/redeem in rebalancing.
• We will do a review of the portfolio performance since inception at the end of every calendar year. 

Essentially it is important for you to read and record our emails for all of the above. So kindly make sure you find some time to do this to keep your portfolio in good shape!

Performance of Prime Portfolios

With Prime Portfolios set to complete two years, we now have some track record to assess our performance and present them to you. In this review, we present the performance of five most popular portfolios with equity exposure. 

The remaining portfolios fall within the categories of liquid, emergency, income generation, capital preservation or passive. While we have kept a tab of those and can tell you that you are with the right choices, there is little to explain or show by way of ‘beating indices’ in those choices. 

Hence, we have picked only the portfolios below to review our performance and the reason for such performance. Please note the following:

• The portfolio performance consists of current funds plus funds in which we may have stopped SIPs but asked you to hold (in our earlier quarterly reviews).
• The performance is weighted based on the proportion of allocation to each fund.
• The benchmark used is a blended benchmark (with same weights as that of the portfolio) of different indices to represent each of the market-cap or category of funds. For example, a large cap fund would have a large-cap index benchmark, a midcap one a midcap index and so on. 
• Returns calculated are SIP returns (XIRR) since the inception of these portfolios which is January 1, 2020. Your own returns may vary based on when you entered. The idea here is to provide you with a track record of performance of the portfolios.

The table below summarizes the performance.

3-5-year portfolio performance

This is a portfolio with a 50% allocation each to equity and debt. This is among the portfolios that saw the least changes. We removed Franklin India Corporate Debt from this portfolio, although there was no untoward event in the fund, and stopped SIPs in ICICI Pru Equity & Debt.

This portfolio beat its blended benchmark returns despite the following: one, we took stiff ‘idealistic’ benchmarks in debt, which comprises half the portfolio - ICRA Composite Bond and ICRA AAA Composite Bond. These are indices that funds seldom beat, as they are mostly theoretical benchmarks with no churn and expense ratio, making it unrealistic for debt funds to beat. Nor can you invest in these debt indices, as an alternative to holding the fund.

Two, we compared a passive fund like ICICI Pru Nifty Next 50 with its benchmark index. Expense ratio and a higher tracking error (true of other Next 50 funds as well) resulted in the fund trailing the index. 

Steady performance by Mirae Largecap as well as the bounce back in ICICI Pru Equity and Debt (where we gave a hold on investments already made, but stop on SIPs) helped lift performance. This portfolio suits all those who are conservative want to keep their downside contained even if their time frame is higher than what we have mentioned.

5–7-year portfolio performance

We mince no words here. Our performance in this portfolio is not good! We owe you a proper explanation on this one. We are unhappy with the way we have performed in this portfolio for two reasons, beyond the actual underperformance: one, we made more than a few changes in a span of 2 years, triggered by our own judgement and extraneous factors. Two, no portfolio can afford more than one equity fund underperforming. In this case, we had 2 of them underperforming and one ‘hold’ call underperforming as well. 

Now, the reason for underperformance: The biggest reason is DSP Midcap – a fund that we resonate with quite well as it reflects our philosophy in stocks (if you checked our stock performance review 😊). We built a 5–7-year portfolio laden with equity but one that is designed to contain downsides first. And a bull rally for 1 year and 9 months out of the 2 years of this portfolio’s existence, did not help our noble thoughts 😊

DSP Midcap missed the massive bull rally by staying away from mid and small cap stocks with inferior financial metrics and business fundamentals. A screener of this fund’s portfolio will tell you that it did not compromise on quality or growth metrics on its stock holdings. In other words, we find its portfolio well-constructed with quality stocks. Unfortunately, these simply didn’t rally as much as other ‘rocket’ performers.

Could the fund have taken some tactical calls on commodity stocks or value bets or sectors that moved swiftly? It could have. It did not and stuck to its filters. But what’s redeeming is that it seems to be course-correcting and narrowing the margin of underperformance over shorter periods of 1- and 3-month rolling returns. 

But this is going to be a slow process until such time an overdue correction pulls down this market cap segment, allowing DSP Midcap’s portfolio to work. We are awaiting that. If it takes longer than we think it should, we will rethink our strategy. Meanwhile we introduced the Midcap 150 index fund in April 2021 to ensure your returns are at least in line with the market for a portion of your midcap investment. This was a course-correction we did midway to reduce the pain of waiting for the DSP fund’s performance to bounce back. 

The other fund that slipped but is also now improving is Kotak Multicap. This fund has shown its mettle in the volatile quarter ending December 2021 and is trying to narrow the underperformance margin. We are optimistic but will continue to watch this fund closely and make changes if necessary. 

Another fund in this portfolio, Invesco India Growth opportunities that we gave a ‘stop SIP and hold’ call in April 2021 continues to underperform. What we’re planning is to wait for a year since we moved this fund’s call to a Hold, so that tax benefits are not lost. Once this period is done, we will undertake a complete clean-up of this portfolio with exit calls on funds that are poor performers and make this portfolio more agile. If you had invested post March 2021, your portfolio underperformance would be less as you would not have exposure to this Invesco fund. 

We replaced the above Invesco fund with Invesco India Contra, and we see no concerns there right now although the bull rally may not bring the best in this fund either. The debt funds in this portfolio held up well, performing as much as they could in this low-rate scenario. We have no qualms there.

Greater than 7-year portfolio performance

The earlier portfolio may almost seem to suggest that we punished you for holding for a lesser time frame! 😊 The greater than 7-year portfolio has done quite well, even without any high-risk funds, thanks to the top-performing Parag Parikh Flexicap with its international exposure.  

Even the gilt fund there has beaten its benchmark comfortably. So, the learning – some diversification to a different market made a difference. Why did we not have such diversification in the 5–7-year portfolio as well? Unfortunately, our data tells us that international investing can also go way wrong in a different market phase, have prolonged sideways phases and can pull down returns (it did in the last 2 quarters of 2021, actually). We therefore wanted only our long-term portfolios to be exposed to international stocks. Perhaps this notion needs a revisit with newer and less volatile international passive options coming up!

Coming back, the only fund that needs a rehaul in the greater than 7-year portfolio is the Invesco India Growth Opportunities fund that we gave a ‘stop SIP and hold’ call in April 2021. As is the case with the 5–7-year portfolio, we will do a clean-up at the end of March 2022, to provide some tax advantage on exit.

High-growth portfolio performance

Against the 7+ year portfolio, the High Growth portfolio may actually come as a disappointment. This is the second portfolio where we are unhappy with performance. 

This portfolio’s underperformance against the blended benchmark is not steep like it is with the 5-7 year portfolio - it is mostly due to three factors: one, the Nifty Next 50 index fund (these funds typically have higher tracking error). Two, the debt component (where beating index is hard, for reasons explained earlier, above). Third, the slight lag in Invesco India Contra, which we are not concerned about as it is turning around. None of these are matters of concern to us.

Our disappointment primarily comes from the returns itself, as we built this portfolio to deliver high growth which it has not lived up to. This is because, the high-growth component of this portfolio comes from a heavy weight of 45% to small-cap funds and the Nifty Next 50 index. This is where the portfolio has not delivered.

First, take the small-cap space. We started out with HDFC Small-cap but replaced it with SBI Smallcap early in 2020 as the HDFC fund’s performance started to dip. With investment restrictions unfortunately introduced in the SBI fund, we changed it to Axis Small Cap in late 2020. 

HDFC Small-cap beats the Smallcap 100 index, but is not a chart-topper. SBI Smallcap has been an underperformer, undershooting the Smallcap index by a wide margin for much of the small-cap rally over the past two years – at one point, the fund’s gap with the index was over 20 percentage points. Like in the mid-cap space, the nature of the upswing saw funds that were more fundamentally-driven take a backseat in performance. The fund is turning around now, narrowing the underperformance against the index.

Besides dragging overall portfolio returns, SBI Smallcap’s underperformance also contributes to the gap with the blended benchmark index. Finally, the current small-cap fund – Axis Smallcap – did not set the category on fire, either. While it beat the index well, its actual returns have been far below peers in this rally.  

Second, take the Nifty Next 50. The Next 50 also did not return as much as we expected it to; the index, based on trends in earlier market cycles, typically soared during market rallies. Returns did not turn out quite that way, thanks to the heavy weights of financial services, consumption, and pharma in the index – segments that took a backseat in this rally.

We’re still positive on both the Next 50 and Axis Smallcap. A key factor that’s in Axis Smallcap’s favour is its ability to keep losses well in check in times of market correction, at which it is among the best in its category. With this portfolio already an aggressive one, keeping downsides contained is especially important to retain the gains made during upswings.

Given that we’re in an over-heated market territory, we’re wary of switching into more aggressive funds at this time, in the small-cap space. We see that funds that have been taking short-term calls in small-cap stocks are the ones topping the charts and we are clear we would not take exposure to such funds as the strategy cannot sustain for long. 

We can only be on a wait and watch mode with small caps at this time. 

The other calls in the portfolio made up for part of the slack in the small-cap segment. The Nasdaq 100, for instance, served up a good booster.

Active NRI portfolio performance

This portfolio has delivered well, beating the blended benchmark index. This performance is thanks in part to Parag Parikh Flexicap’s stellar returns. The steady returns of Mirae Asset Largecap also helped deliver index-beating returns. These two funds make up more than a third of the portfolio weight. The only portfolio drag is Invesco Growth Opportunities, which is still lagging the index. Like with other portfolios that hold this fund, we will clean this up post March 2022.

Changes made in this quarter

In this quarter, we have made changes only to one portfolio – the Emergency portfolio. All other portfolios see no changes at all.

Emergency portfolio

This portfolio is made up of liquid funds and money market funds. It is mainly for you to hold your investments set aside to meet emergencies or any other short-term need. 

In this review, we have replaced Kotak Money Market with Nippon India Money Market. The replacement is simply because the Nippon fund has been sporting better portfolio yields for a few quarters now and to this extent can offer better returns.

If you hold Kotak Money Market, continue to hold it. Do not exit. The fund remains a good performer within the money market category, it is just not a chart-topper. It takes no credit risk and sees very low volatility. The aim in an emergency portfolio is to hold stable, safe investments. It is not to keep churning to eke out marginally higher gains or beat peers/benchmark. If you have SIPs in the fund, you may choose to stop and start in the Nippon fund but we do not think doing so is necessary. 

The changes are summarised below.

Key notes in the 3-5 year and 5-7 year portfolios

Both these portfolios have Axis Banking & PSU Debt funds. This fund was part of our Prime Funds list, in the Debt - Short-term 1.5 to 3 year bucket. We removed the fund from Prime Funds in this review, for the following reason – it followed a roll-down strategy, where it gradually reduces its portfolio maturity. This brought the fund’s average maturity to less than 1 year. For this reason, we did not think it fit investors entering this fund afresh for 2 year and longer goals. We also need to watch the tenure to which the fund rolls back (increases maturity) once it completes its current rolldown strategy. 

In a portfolio, though, it is a different matter. In both our portfolios, the Axis fund is blended with HDFC Corporate Bond fund. The aim in using both funds was to have a mix of short-term and medium-term maturities so that different opportunities were captured, no matter what the rate cycle was. This logic continues to hold. Axis Banking & PSU is now a very short-term play, from the approximately 2-3 year play it was earlier. This still blends well with HDFC Corporate Bond’s 4-4.5 year maturity. 

We see no reason at this time to replace Axis Banking & PSU with any other short-term fund. The fund is also a buy in our MF Review Tool. We’ll keep an eye on how the maturity changes once the roll-down strategy completes and then take a decision on whether to make any changes. As of now, we are not changing the two portfolios. Continue SIPs and/or fresh investments.