Prime Funds performance in 2023

It’s the end of the year – which means it’s time for year-end round-ups! As is our tradition, we publish our recommendation report card every year. Here, we take a look at how Prime Funds, our mutual fund recommendations, performed.

In Prime Funds, we look for consistency in performance compared to the category and/or the benchmark, ability to contain losses, and variety in strategy. We do not always have the top performer in the category or the 5-star funds because of the priority we place on these factors. That means, sometimes, you may see low-rated funds or seeming underperformers featuring in the list. But that doesn’t mean it’s not a fund to own! Barring short-term fund categories, calls we take in Prime Funds are always done keeping in view the long-term nature of most portfolios and that markets move in cycles.

Now let’s move on to how we did, lest you think we’re trying to justify ourselves too early!

Prime Funds – Equity

2023 was the age of small-caps in equity markets. While the large-cap segment had rapidly climbed back over the second half of 2022, the small cap stocks were yet to recover. But that story turned right around with the small and midcap segment rallying at a breathtaking pace over the course of the year.

In Prime Funds, our learnings from watching the rapid shifts in sector and stock movements and overall market movements over the past 3 years have led us to modify our approach. As we documented in our 2022 performance review, our intention in Prime Funds was to: 

• Become more dynamic in introducing funds without waiting for multiple quarters of outperformance in order to catch the rally early on. 
• Become stricter with underperformers. 

Changes we undertook over 2023 in Prime Funds have been in keeping with this approach, and to introduce a strategy variety in the funds. Here’s how our picks did.

Equity – moderate

In this set of Prime Funds, we draw from the large-cap, flexi-cap, value/contra and focused categories. We look for ability to beat the large-cap indices consistently, since these funds are primarily large-cap oriented. This is one bucket where we typically make the least changes, since our picks are steady long-term performers. We have, however, added funds here last quarter for the following reasons:

• To introduce more variety in fund strategy, especially with slightly more aggressive funds to include some higher-return options. 
• With the large-cap segment getting more broad-based than the narrow rally earlier, large-cap oriented funds are becoming better able to beat the Nifty 100. This opens up more options now to add active large-cap based funds to a portfolio. 
• To gear up for more opportunities in the large-cap segment in the event of a market correction or should large-caps try to catch up to the rest of the market.

Here’s how the Equity – Moderate Prime Funds did on an average in 2023:

Prime Funds beat the Nifty 100 TRI by a comfortable margin. However, the returns are marginally lower than the category average. This is for the following reasons:

• The value/contra category has seen a very strong year. The Prime Funds set has funds from growth-oriented funds as well that have seen more tepid returns. That has marginally impacted the overall Prime Funds returns.
• A key drag was Mirae Asset Large Cap, a fund whose underperformance we have been highlighting in our quarterly reviews as well. Excluding this fund brings the average returns up to 29.7%. We have been watching the Mirae’s fund performance; the extent of underperformance is currently not steep and the fund has a solid performance history. The fund has also gone through bouts of underperformance earlier. This apart, it is a pure large-cap fund (and the only one from the large-cap category in Prime Funds) that may find it harder to beat funds from other categories that could include mid-cap picks as well. We will continue to watch the fund's performance and take action if necessary.

Equity – Aggressive

This set of Prime Funds features funds that have a high allocation to mid-and-small caps. They come from a wide variety of categories – other than large-caps, any category is game for inclusion here! This set does not have only pure small-cap or pure mid-cap funds. We do this mix to avoid having too many highly volatile funds and because there is not much choice in pure mid-caps or small caps. A mix is also useful to allow investors across risk profiles add higher-returning funds to their portfolio without going to the small-cap basket. In this Prime Funds bucket, we prize downside containment and volatility here over just returns.

This Prime Funds set has seen more frequent changes than the Moderate set over 2023 as we overhauled it to remove drags and add more options in a rallying market. Here’s how this set performed:

This is one bucket of Prime Funds where we are unsatisfied with our overall performance. The Prime Funds beat the broad-market Nifty 500 by a good margin, and this is fine given the wide variety of funds in this category. However, the set has lagged the average of the key categories from which we build these recommendations. We had a hard time with being cautious in the runaway mid-and-smallcap rally in terms of quality of fund portfolios while still trying to include aggressive performers to add high-returning options.

Primarily, the lower returns compared to the category average are due to the following factors:

• The category average is lifted by the very strong returns of the smallcap segment. The Nifty Smallcap 250 TRI delivered about 45% in 2023. However, Prime Funds – Aggressive features only 3 pure small-cap funds. In addition, of these 3, SBI Smallcap was an underperformer. We had retained it because of its prudent strategy and quality history; these funds form part of long-term portfolios – we did not want to simply add the top-returning funds given the extremely rapid rise of the stocks in the smallcap segment. We added HDFC Smallcap mid-year as its performance was turning around. The same holds with our mid-cap picks such as Kotak Emerging Equity and Mahindra Manulife Midcap that are otherwise solid performers that took a backseat in this rally.
• The biggest drags here were PGIM Flexicap and PGIM Midcap Opportunities. In fact, removing these two funds lifts the Prime Funds average to 35.2%. We had added both funds in 2022 given their strong portfolio quality. However, a drop in performance widened through the year; despite sound stock picks, early exits and underperforming sectors weighed on returns. Both funds also saw a fund manager change. We removed the midcap fund owing to steep underperformance compared to the Nifty Midcap 150. We have retained the flexicap fund, since longer-term performance was intact and the new fund manager has a history of turning around performance. We will continue to watch performance and make changes if necessary.
• There were two other long-time Prime Funds we removed as underperformance widened which were Mirae Asset Emerging Bluechip and SBI Focused Equity.  

Overall, in this Prime Funds set, we do see the need to include more aggressive or opportunistic funds. However, we will also need to balance this against the current market exuberance. Our aim is to pick funds that will not disproportionately hurt portfolio returns should markets correct and which will still deliver strong returns over time. We have become stricter now with underperformers than we were earlier as well, and that has helped us maintain the better options in Prime Funds.

Equity – Strategy & thematic

We have been more active in adding to thematic recommendations this year. We issued specific calls on commodities in February, healthcare in May, banking in August, consumption in August, IT in September. These calls were also added to Prime Funds Strategy & Thematic set as soon as we issued them. The thematic set features themes that are:

• Tactical plays to build on markets favouring a theme such as healthcare and commodities. DSP Healthcare and UTI Transportation & Logistics are two such Prime Funds that have played out very well this year.
• Contrarian or given when sectors are down, such as banking and IT. We further added one more IT fund to the Prime Funds list, as its portfolio offered a different set of stocks from the other IT funds.
• Long-term potential such as consumption. 

Overall, thematic Prime Funds returned an average of 27.6% in 2023 compared to the Nifty 500’s 23.9%.

Prime Funds – Hybrid

Hybrid funds are an extremely wide-ranging set that have different allocations to equity, debt, derivatives (and gold and other commodities in multi-asset funds). In Prime Funds, we split these between low and moderate risk based on funds’ equity allocations. In 2023, we also added a couple more funds to our hybrid recommendations to offer more variety for those looking to replace debt funds post the tax change in April 2023. 

For the Moderate Risk Hybrid Funds set, here’s how performance shaped up in 2023.

On the whole, our recommendations have beaten the category average. Of course, a couple of our picks Quant Absolute and Canara Robeco Equity Hybrid, weren’t necessarily the chart toppers but both funds have managed to hold up performance. Quant Absolute saw lower returns owing to sticking to very short-term debt papers even as other hybrid aggressive funds used dipping yields to their advantage and generated good returns from their debt portfolios. In fact, removing this fund lifts the average Prime Funds returns to 22.5%.

Our picks such as ICICI Equity & Debt, ICICI Multi-Asset and Edelweiss Balanced Advantage have all beaten their categories. We also added HDFC Balanced Advantage to introduce another hybrid fund that actively manages both equity and debt.

Prime Funds – Debt

Debt funds came in for a shock taxation change in 2023 that saw their long-term indexation benefits taken away for investments made after April 1^st, 2023. While this certainly impacts returns, we still think that debt funds are an essential component to any portfolio. They offer return opportunities that cannot be found in equity markets and are good diversifiers. Low-risk hybrid funds are not debt funds – they will still move based on equity markets - and cannot be used to replace debt entirely. 

With this view, we have not changed our approach to debt funds in Prime Funds. We have been issuing strategic recommendations when rate cycles and yields throw up opportunities – as we have done several times especially over 2022 – and will add or remove funds based on performance and rates. We continue to recommend that you add debt funds to your portfolio based on your timeframe.

Fund performance and yields had been picking up over the past year after the long low-rate cycle suppressed debt fund returns across the board. Government bond yields also dipped for a while this year on lower inflation expectations and this helped several long-maturity funds notch up some gains.

We had also adopted a more positive view on credit as the economy picks up and on improving credit quality in 2022. We continued to hold that view over 2023 as well and even added a couple of funds in shorter-maturity buckets that took marginal exposure to credit for better returns.

Debt – very short term

In this, we made very few changes. The Bharat Bond April 2023 target maturity fund was merged into the 2025 fund as it neared maturity. We removed Nippon India Money Market and added HDFC Low Duration as portfolio yields were marginally higher in other funds. since these funds are meant for very short holding periods, going for quality funds that offer even a little higher yield would work well. Here’s how performance of this Prime Funds segment fared. Remember that even small return differentials are significant in the debt category.  

All our picks did better than the category average. Funds such as Aditya Birla SL Floating Rate Fund and Aditya Birla SL Money Manager were especial good performers with average 2023 return of 7.3%. 

Debt – short term

In this Prime Funds set, we have made a few changes to bring in better portfolio yields and to prepare for any rate cut cycle that may play out next year. For example, we removed the Bharat Bond April 2025 target maturity fund as other short duration funds offered better yields. We added ICICI Banking & PSU debt fund to gain from a rate cut cycle and due to the fund’s ability to deftly juggle its portfolio to play different maturities and instruments. Here's how this Prime Funds set fared against the category:

Our approach of picking from different fund categories and using portfolio build and maturity to categorise & recommend funds has helped us pick varied opportunities and beat the category average. The two floating rate funds in Prime Funds, for example, managed a 2023 return of 7.15% and 7.51%. The marginal credit in HDFC Short Term helped higher returns.

Debt – medium & long term

Here, we have bunched together our Medium Term and Long Term Prime Funds, since there are similarities in funds and because all suit timeframes of more than 3 years. In these sets, we tried to introduce specific fund strategies given that long-maturity funds were hit with a double whammy – the long low-rate period up to 2022 saw portfolio yields and returns stay low. The rate hike cycle in 2022 then pushed down bond prices and that in turn hit returns. 

While these do offer good investing opportunities, we also tried to introduce funds that could work even in these markets through funds that shifted between maturities to play yield opportunities. Here is how performance has fared compared to category:

On the whole, Prime Funds beat the average for long-maturity debt categories. As mentioned above, we added ICICI Pru Gilt, a fund that shifted between maturities in gilts as yield movements were rangebound. This paid off well and the fund is among the best performers in this set. Our other gilt constant maturity fund has also done very well, gaining from the let up in yields. Our other corporate bond picks have by and large also stayed above category average. In the long-term bucket, ICICI Credit Risk has also done very well. A pick that didn’t quite match up is Edelweiss Banking & PSU Debt fund for its long-maturity portfolio with steady roll-down, as a tactical play given the rate cycle. However, a drop in returns gave us pause and we removed it in our September review. 

In Prime Funds, overall, we will continue with our current approach. Our quarterly review of all our recommendations helps us spot brewing performance issues early on and take action where necessary. Based on market scenarios, we also alert you on specific opportunities even within Prime Funds. We will publish our 2024 outlook for equity and debt markets in January; based on our assessment and how markets shape up, we will issue strategy or tactical calls when necessary. So do keep an eye out!