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Want To Earn Extraordinary Returns In Current Markets? Read This!
Oct 24, 2019

The past few days we have witnessed a minor upliftment in investor sentiments. The uptick in demand during the on-going festival season, better Q2 profits resulting from lower tax rates, news of the Brexit deal, hopes of US-China trade talks, among other factors caused stocks to rally.

However, it would be too early to conclude that volatility is far behind. Low consumption, rising unemployment, weak agricultural and manufacturing output are the issues that remain to be solved. The markets may continue to be volatile in the near term.

[Read: Want To Multiply Your Portfolio Returns In A Volatile Market? Read This!]

At such times, it is important to build an active portfolio of equity mutual funds that holds the potential to generate alpha. The Modi 2.0 regime offers a perfect investment opportunity to build an `Alpha Funds' portfolio. The second phase of the government is expected to be a phase of recovery focusing on delivery of unfulfilled promises.

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In the recent past, the government and RBI have announced several measures to bring the economy back on track.

Some of the measures announced are as follows:

  • Corporate tax rate cut
  • Capital infusion in PSU banks and merger of PSU banks
  • Liquidity support to housing finance companies
  • Passing of rate cuts by RBI to the bank customers, etc.

The government has set a goal to make India a USD 5-trillion economy by 2025, unveiling a blueprint in its economic survey for 2018-19.

India Inc. is poised to grow well in the coming years, and this presents a golden opportunity for the investors to bring in some sweet investment returns.

[Read: How Announcements from Finance Minister Impact Your Equity Mutual Funds]

What is Alpha?

When a fund generates alpha, it means it gets more returns for the investors at a reasonable level of risk, much suitable for its investment style and strategy.

But not every fund is an alpha generator!

An alpha very much depends on the expertise and ability of the fund manager in taking the right call at the right time and reward investors, irrespective of the market movement.

According to the latest S&P Indices Versus Active (SPIVA) India scorecard for the period ending June 2019, 82.93% and 65.71% of large cap funds underperformed their respective benchmark in the 3-year and 5-year period.

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In case of mid and small cap funds, 47.83% of funds in the 3-year period and 26.98% of the funds in the 5-year period underperformed the benchmark.

Indicatively, generating alpha has been a challenge for most active fund managers. The underperformance has created doubts in the minds of the investors regarding the capability of actively managed funds.

Contrary to what you might think, investing in passively managed funds such as index funds is not the solution as you will only earn returns in line with the index and forgo any alpha opportunities. In fact, even during turbulent times there are few well-managed funds that have the ability to generate alpha for the investors, at a reasonable risk. The difficulty lies in selecting the funds that have such potential.

[Read: Why Bet On High Alpha Funds In This Gloomy Market]

At PersonalFN, our latest S.M.A.R.T. Alpha Score Model helps us identify the Alpha funds. We call these funds `winners amongst the winners'; these are ones that make rest of the winners shy of their performance.

So are the valuations favourable now?

Markets have been turbulent since the beginning of 2018 as various domestic and global factors hit the investor sentiments.

Graph: Valuations in large-cap and mid-cap space

The P/E of Nifty 50 is currently trading around 27x mark, while Nifty Midcap 100 is trading around 24x. As we can see in the chart above, while the large caps continue to trade higher, the mid-caps have sharply corrected, making it a good entry point.

This provides a window of opportunity for investors, who can handle short-term volatility, to step up their equity exposure. In due course of time, markets may bounce back and reward investors for their patience.

You can opt for the SIP route to strengthen the ability of your investments to tide over volatility and optimise the returns in well managed, fundamentally strong funds capable of tapping the long term growth potential of the equity markets.

So, don't miss out on the potential to boost your mutual fund portfolio returns by adding a worthy set of Alpha Funds to your investment portfolio.

Editor's note: The last few years have not been the best time for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors.

Based on PersonalFN's special 'SMART Alpha' methodology, we present our latest exclusive - The Alpha Funds Report - 2019 through which we have identified five high alpha generating funds.

Do not miss our latest research finding.

Get your access to this exclusive report right here!

Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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