The Principal Growth Fund has given excellent returns in the last four years after a superb turnaround in performance. This diversified equity flexicap fund was underperforming for many years but a major portfolio reshuffle in 2012 saw the funds outperforming its benchmark index and most of its peers in the last three years. While the return in the last one year has been muted because of turmoil in the market, over the past 4 years, Principal Growth Fund has given compounded annual returns of around 23%. The chart below shows the annual returns of Principal Growth Fund (growth option) and the benchmark index, S&P BSE 200 over the last ten years from 2004 to 2015.
The chart below shows the trailing annualized returns of the Principal Growth Fund (growth option) and the diversified equity funds category, over the last 1 year, 3 years and 5 years time periods. Returns are based on NAVs as on December 7 2016.
Rolling returns is the best measure of a fund’s performance in terms of consistency. Trailing returns have a recency bias and point to point returns are specific to the period in consideration. Rolling returns, on the other hand, measures the fund’s absolute and relative performance in the timescale in question, without bias. The chart below shows the 3 year rolling returns of the fund over the last 5 years. Rolling returns are the absolute returns of the scheme taken for a specified period on every day/week/month and taken till the last day of the duration. We have chosen 3 years as the rolling returns time period because it is always recommended that long term investors should hold equity funds for at least 3 years. In this chart we are showing returns on every day during the specified period and comparing it with the benchmark. The orange line shows the 3 year rolling returns of Principal Growth Fund (Growth Option) and the black line shows the 3 year rolling returns of the benchmark BSE 200 index. We can see that while the fund underperformed versus its benchmark from 2004 to 2012, it has consistently outperformed it over the past 4 years.
The Principal Growth Fund was launched in October 2010. It is a diversified equity fund which invests in a mix of large cap and midcap stocks. The fund has
र 370 crores of assets under management. The expense ratio of the fund is 2.53%, which is slightly on the lower side compared to most diversified equity funds. The manager of this fund is P V K Mohan. Value Research has a 4 star rating for this fund. The fund is suitable for making investments towards long term financial goals, like retirement planning, children’s education, wealth creation etc. The fund is open for both growth and dividend options.
The fund has a large cap bias with a growth oriented focus. Large cap stocks comprise 57% of the portfolio, while small and midcap stocks comprise 43%. Over the past 12 to 15 months the fund manager has increased the allocation to midcap stocks. The portfolio is overweight on cyclical sectors like BFSI, Automobile & Auto Ancillaries, Cement and Construction etc. To balance its exposure to cyclical sector, the portfolio also has allocations to defensive sectors. IT, FMCG and Pharmaceuticals, comprise nearly 24% of the portfolio holdings. In a long term secular bull market cyclical sectors are expected to do well. As such, the Principal Growth Fund has the potential to deliver good returns in the medium to long term. The portfolio is very well diversified in terms of company concentration. The top 5 companies in the fund portfolio, ICICI Bank, HDFC Bank, Infosys, SBI and TCS account for only 18% of the portfolio value. Even the top 10 companies in the fund’s portfolio account for only 31% of the portfolio holdings.
Source: Advisorkhoj Research
Risk and Return
In terms of risk measures, the annualized standard deviation of monthly returns of the Principal Growth fund is on the lower side, relative to the diversified equity fund category. Despite the slightly lower volatility, on a risk adjusted returns basis, as measured by Sharpe Ratio, the Principal Growth Fund has outperformed the diversified equity funds category. Higher the Sharpe ratio better is the risk adjusted performance of the fund. See charts below for comparison of volatilities and Sharpe ratios of the Principal Growth Fund and the diversified equity funds category.
Source: Advisorkhoj Research
र 1 lac lump sum investment in the fund NFO (growth option) would be at a value of nearly र 9.2 lacs as on January 7 2016. The lump sum annualized return since inception is 16%. The chart below shows the growth of र 1 lac lump sum investment in the Principal Growth Fund (growth option) since inception.
The chart below shows the returns since inception of
र 3000 monthly Systematic Investment Plan in the fund (growth option).
Source: Advisorkhoj SIP Calculator
The chart above shows that a monthly SIP of
र 3000 started at inception of the Principal Growth fund (growth option) would have grown to nearly र 20 lacs by January 7 2016, while the investor would have invested in total only about र 5.5 lacs. The good SIP return of the Principal Growth Fund since inception, despite the past underperformance, underscores the benefits of systematic investing.
The Principal Growth Fund has had 4 years of strong performance. This fund has definitely turned around and the outlook for the future is positive. Thus fund is suitable for investors with a long time horizon. Diversified equity funds which invest in a mix of large cap and midcap stocks are ideal for retail investors in the long term, because large cap and midcap stocks outperform one another in different market conditions. One can consider investing in the scheme both through the systematic investment plan (SIP) or lump sum route. Investors should consult with their financial advisors, if Principal Growth Fund is suitable for their investment needs.