Over 90% of equity mutual fund schemes have an allocation of above 90% to equity

Jason Monteiro 23 March 2015

If the market heads lower, a lot of the funds will underperform, causing grief to investors who are rushing in now

Are equity mutual funds set for a period of underperformance? They are certainly not prepared for a market decline. Out of the 193 open-ended equity mutual fund schemes, only 16 schemes or 8% have an investment in 90% or less in stocks while 177 of them are invested 90% or more in stocks. The average allocation towards stocks works out to 95% for the 193 schemes, as per their February 2015 portfolio disclosure.

Given the high market valuations, fund managers still seem to be bullish, even as investors have rushed in again into equity funds. As on 28 February 2015, the Nifty’s trailing price-to-earnings (PE) works out to 23.80. Over the past 15 years, the Nifty PE was above this level on just about 6% of the occasions. In just 18 months, the market, represented by the S&P BSE Sensex, has run up by 67% from a low of 17,968 on 27 August 2013 to 30,024 on 4 March 2015. This humongous rally along with the high valuations does not seem to deter fund managers.

The last time the Nifty reported a PE of 24 or higher was in December 2010. The average allocation to stocks by the 170-odd schemes in existence at that time worked out to 93%.

As many as 42 schemes or 25% had an allocation of 90% or less towards stocks. That market peak was not crossed in the three years and three months.

We have observed that above a PE of 22, one could say that the market is grossly overvalued. Over 13 such monthly occurrences (in the past 15 years), the Nifty’s five-year subsequent return, from the beginning at each of these periods, averaged just 5%.

In our analysis we excluded close-ended schemes, equity linked savings scheme (ELSS), arbitrage schemes, sector schemes and index schemes. IDFC Dynamic Equity has kept the lowest allocation towards equity of 47%. A couple of other dynamic schemes that make it to the list are HSBC Dynamic and ICICI Prudential Dynamic. Quantum Long-Term Equity has reduced its equity allocation to 70%.

Will investors again regret if they jumped into the market at a late stage?

Comments

User

Naresh Narasimhan

1 decade ago

Does this mean that its not advisable to invest in MFs now ?

Naresh Narasimhan

Replied to Naresh Narasimhan comment 1 decade ago

I think the answer to my question is there in a previous MF 2014 issue

VGANESAN

1 decade ago

Dont compare SUNDARAM EQUITY PLUS WITH OTHER SCHEMES BECAUSE THE SCHEME invests in gold upto 35 percent. Only balance is invested in equity. This is for ur information.I am surprised to see moneylife not taking into account for comparison .In future i expect moneylife to compare similar schemes.

Nilesh KAMERKAR

1 decade ago

“Never underestimate the power of stupid people in large groups.” â€• George Carlin

Pramod Bajaj

1 decade ago

An equity fund should be invested in equity between 90% and above. Fund manager should not take the call on the market movement. His responsibility is to give market returns or beat those returns. It is the responsibility of investor to do proper asset allocation as per his risk appetite and his specific schedule of goals for which he is making investments. If investor can do this himself then he should take the advise of some trusted advisor.

Anand Doctor

Replied to Pramod Bajaj comment 1 decade ago

Agree completely!