Tata Equity P/E Fund: Mutual Fund Review

“Mutual Fund Investments blahblahblahblah, please blahblahblahblah before investing”. We’ve all heard this line a bunch of times growing up as we saw advertisements for mutual funds.

Back then, all we saw was an ad with a funny and fast message at the end, but now, as we’ve grown, we know that mutual funds are more than an ad. For those of you who are still not in the know, fear not, I’ve got your back.

To simplify, or rather oversimplify, mutual funds are one of many investment instruments available to an investor. Mutual funds along with shares, debentures and bonds are some of the most commonly known investment instruments in the market.

But the focus of today’s blog is good old mutual funds. Mutual funds are instruments that collect funds from various willing investors to create a large pool of funds that the fund organisation then reinvests into the aforementioned traditional instruments.

“But why invest in mutual funds if they then invest the same funds into stocks? Why not invest in stocks and other instruments directly?” you may ask. Well, mutual funds function to alleviate specific financial issues that the average investor might face, should they try to invest directly in other traditional instruments.

These hurdles that retail investors face are also discussed in the ETF v/s Mutual Funds blog. But to summarise, mutual funds can avoid risks by diversifying their portfolio, which might be difficult for retail investors who might have insufficient funds to reach similar levels of diversity.

Mutual funds also operate under the decisions of a person called a fund manager. Fund managers often have greater stock market experience than everyday investors. This removes the somewhat inconvenient process of decision making and instrument selection for the retail investor.

That being said, mutual funds aren’t the “end all be all” solution to your investment problems. The gibberish line does mention that there are still risks involved in investing in these funds. Therefore, mutual funds are not an ideal solution. They are a convenient method of investing.

With that explanation out of the way, let’s cut straight to the chase and begin today’s blog on the review of Tata Equity P/E Fund.

Tata Equity P/E Fund

The Tata Equity P/E Fund (TEPF) is a value fund with a flexi-cap approach. The fund invests in instruments that it picks using the “bottom-up” filter. And as of 30/12/2021, its total equity and equity-related investment are at 96.73%. The equity instruments are selected on the basis that these stocks have a rolling P/E ratio in the last 12 months that is less than the rolling P/E ratio of the S&P BSE index.

Whew! That was a mouthful. While I believe some of you understood what that means, for those who didn’t, here is a little breakdown of the fund’s features.

These are the positive features that the brand chooses to “sell” the fund, so these double up as the fund’s major advantages as well.

• Value Fund:

The TEPF is a value fund. This means that if the fund were a book, its genre would be based around the fundamentals and idea of value investing. Value investing is an investment strategy that Benjamin Graham and Warren Buffett developed.

This strategy involves buying shares that are not “cheap stocks” but “good stocks that are cheap”. Good stocks can be cheap because the share market has certain inefficiencies. Owing to these inefficiencies, certain stocks sell at lower prices than the fair value of these stocks.

Value investing and value funds(like TEPF) buy these stocks when they are undervalued and hold on to them until they reach their fair market value. Since the stocks are undervalued, they appreciate to achieve their fair value, which benefits the investors.

• Flexi-Cap:

Most pooled investment funds, like mutual funds, often follow a particular index of the share market and sort of mimic these indices. This mimicry might lead to rigidity in the fund's operations as they are limited to the movement of the selected index. One example of a basis for choosing an index is market capitalisation.

When a particular market cap is chosen, the fund is limited to acting similarly to that index. With the flexi-cap approach, TEPF is not limited to companies that fall under a single market cap index. It can freely manipulate its holdings in various indices to ensure maximum profitability for the investors while keeping the risks at a healthily manageable level.

• Bottom-Up Filter:

Another basis for selecting shares by mutual funds is choosing a sector or industry that performs well and investing in shares from that sector/industry. This method has the same limitations of rigidity as choosing an index based on market capitalisation.

TEPF filters the shares to invest in using the bottom-up methodology to combat this rigidity. Using this technique, the fund doesn’t pick industries or sectors that are doing well and try to find well-performing companies in those sectors. Instead, it chooses companies that have merit in their standalone performance.

This approach prevents the fund and its investors from getting stuck to an industry's overall performance and allows them to benefit from the company’s solo performance.

• Equity-Based Fund:

If you remember the beginning of this article, you will realise that mutual funds do not just invest in shares. They also invest in other instruments that companies use to raise funds. Thus there are debt-based funds and, like TEPF, equity-based funds.

Equity-based funds mean that the fund's corpus is invested in equity instruments like equity or preference shares of a company. As mentioned before, TEPF’s total equity or equity-related investment is 96.73% which means that 96.73% of TEPF’s corpus is invested in shares. The rest is invested in other instruments for the sake of diversification.

• Basis of Selection:

As mentioned above, the fund’s corpus is utilised to invest in the shares. These shares can belong to small, mid and large-cap companies. While these filters do refine the companies eligible to be invested in, they lack structure and leave the selection process a bit too open-ended.

To remedy this, TEPF has a final criteria when selecting shares to narrow down its stock selection process. This criterion is looking for shares whose companies have had a rolling P/E ratio for the last 12 months lower than the S&P BSE index for the same 12 months.

Rolling P/E ratio is the weighted P/E ratio of the past 12 months. The purpose of rolling P/E ratio is to allow for equal comparison between the P/E ratio of various companies by applying different weights to the months of the accounting period. This is done to avoid inconsistencies as different companies may calculate the same ratio for different periods without a set standard.

The rolling P/E ratio can be forecast-based and historical, but for TEPF, historical P/E is used, as forecasts are speculative and not in line with the fund’s operation.

Downsides of the Fund

While the features mentioned above also make the fund beneficial, the fund is not perfect. Some of its flaws are as follows:

• High-Risk Fund

The fund is almost wholly invested in equity-oriented funds. Currently, the bias is towards large-cap companies that are relatively more secure than their small-cap variants. But this bias might shift owing to the flexi-cap strategy, as small-cap companies have higher possible earning potential. This potential, however, comes at the cost of greater risk.

Shares themselves are riskier than other traditional instruments as they can be affected more negatively by aspects such as market volatility, company’s performance in general, etc.

Debt-based mutual funds are relatively more secure as repayments of debts are obligatory for companies and are not as significantly affected by the company’s performance.

• Barrier to Entry

One of the greatest benefits of mutual funds is that they allow potential investors that have low fund availability to invest in them. The conception of mutual funds was fuelled by the need of underfunded investors who wanted to invest in higher priced avenues.

This same benefit is foregone by TEPF as it sets a minimum “initial purchase amount” and “additional purchase amount” for the fund. The minimum initial purchase amount is ₹5,000, and the additional purchase amount is ₹1,000. Due to these restrictions, people with lower investable capital are barred from investing in this fund.

Fund Details

These are some of the essential details of the TEPF:

• The fund has Mr Sonam Udasi and Mr Amey Sathe as the fund manager and assistant fund manager with 24 and 15 years of experience respectively.

• The current NAV as of writing this blog is ₹211.5.

• The fund was launched on 29/06/2004.

• A monthly investment of ₹10,000 per month since the fund’s inception would have resulted in an investment of ₹21 lakh. The result would be an amount of over ₹1 crore till 31/12/2021.

This yields a return rate of 15.89%, while a similar investment in the NIFTY 500 TRI index would have produced an amount of ₹82 lakh at only 14.10%.

• The fund has an average monthly Asset Under Management of ₹5038.79 crores.

• The fund charges an exit load of 1% if the withdrawal or switched out amount is more than 12% before the expiry of 12 months from the date of allotment.

Conclusion

The fund seems suitable for people with a high risk appetite that are willing to invest for a more extended period. In my humble financial opinion, the entry investment amount seems a bit too high for comfort.

But is this the right mutual fund for you? Or are their other investment better suited for you? Is there a way to find out your appetite and capitalise on it? The answer to these questions can be found on Recipe by Finology.

With features like Financial Appetite, Goal Planner, Prosperity Ingredients and more, you can rest assured that your next personal financial decision will be well informed (psst! we also have recommendations on mutual funds😉).

So what do you think; is TEPF the mutual fund for you, or is your fund with shining returns in another organisation? Let us know in the comments below.