This article elaborates the selection methodology, the benefits and how to best invest in the MF Stars smallcase.
Every quarter, the top 10 equity mutual fund schemes are selected (measured by trailing 1 year return) from all the equity mutual fund schemes available in India. This universe of 10 schemes remains constant for the quarter (next 3 months).
At the beginning of each month, companies in which the above mentioned schemes have cumulatively increased their stake over the previous month are shortlisted. The top 10 companies, sorted on the basis of percentage of stake increase are selected to be included in the smallcase.
This smallcase selects those companies where top performing mutual fund schemes are increasing their exposure.
- Simplification –Instead of getting bogged down by tracking the performance of 200+ schemes across 40+ fund houses, you take exposure to the favourite stocks of mutual funds in 2 clicks!
- Expertise – Instead of betting on the performance of one or two fund managers, this smallcase relies on the collective outlook of managers, across top performing funds. Thus, it leverages on the collective stock picking and market timing skills of the MF industry
- Diversification – This smallcase scans different schemes and shortlists stocks across sectors, thereby providing diversification benefit and lowering volatility
- Due Diligence – Mutual funds conduct extensive due diligence about the company’s management before investing in the stock. This smallcase will benefit from this exercise and contains stocks with good future prospects
The MF Stars smallcase is updated every month to reflect the latest set of stocks bought by mutual funds. Hence, the churn rate of the portfolio will be high. This will result in high transaction costs, via demat charges, when selling stocks.
The best way to offset this is to put in higher amounts on a regular basis (Rs. 50,000 and above), to maximise adjusted profits, as shown in the table below.
|Cost of Purchase||Profit %||Absolute Profit Earned||Demat Charges*||Adjusted Profit||Adjusted Profit %|
*Assuming 5% profit, Rs.15 DP charge per debit transaction and 7 debit transactions (7 stocks gets replaced)
How to invest
As on 2 January 2018, this strategy has outperformed the mutual fund industry substantially. One should invest in this strategy exactly like mutual funds – investing fixed amount at regular intervals. Regular investments will ensure that your investment increases and thus the adjusted profits as well.
This is a high cost strategy and investors should clearly understand that with this strategy, investing small amounts will not result in healthy profits in long-term.