A special section on Mutual funds and how we provide an innovative way to analyze Mutual Funds rather than simply looking at past performance and investing is covered in our Monthly Research Report. The fund that we have covered is Birla MNC Fund that has shown strong past performance in the past but looks to have reached an expensive zone on back of “Make in India” theme.
Bottom Line: Birla MNC Fund provides very interesting insights. The most important thing to observe is very high correlation between the top 6 holdings of the Fund – ING Vysya Bank, ICRA, Honeywell Automation, Bayer Cropscience, Bosch, Gillette.
Food for thought: Why top 6 holdings started showing near vertical rise post May 2014? We do not rule out benefits arising out of Make in India campaign but will it give boost to profitability that justifies such high PE ratios (shown below) in just few months’ time frame? For us the portfolio looks highly skewed and the risk is un-parallel.
Sector focus: The focus on FMCG and Healthcare sectors is nearly 27% which is high. These sectors have already showed the best of their up move post elections 2014 and should now start showing mean reversions.
Risk Parameters: Beta of the index looks acceptable at 0.83 but if there is a systematic reversal then this can increase drastically given the fact that almost 47% of the portfolio is in just 6 stocks with crazy valuations.
Momentum: The fund looks to be a good bet from momentum play perspective as we do not know how far and fast prices can travel and an investor with high risk appetite should only look for investing in this fund but should have an exit strategy in case there is a strong and sharp reversal!
Below NAV chart of Birla MNC fund shows that we can indeed apply the concepts of Elliott wave and Time cycles on the funds as well. Many might argue that the fund composition keeps on changing but as per Elliott wave it is the psychology and the perception of the future that drives any freely traded index. A mutual fund is no different than an index where the composition is very prudently tweaked to ensure maximum return. Also the redemption pressures are highest at the market lows. So the crowd that is responsible for producing the rhythmic movement is also responsible for producing patterned behavior on NAV of Mutual Fund.
Birla MNC Fund Elliott wave chart:
Elliott wave analysis: It is an innovative way to forecast a fund performance in future. Currently the industry practice is to look at the past few years of performance and extrapolate it in future that too linearly. We all know the sentiments and thought process that is responsible for movement of equity markets can be extrapolated simply looking at the past performance. A patterned nature is seen even in NAV of the funds even though the compositions might be tweaked more than often as compared against a major index. Nevertheless, when we apply Elliott wave, Time cycles along with momentum indicator and all of them points to the same outcome we know the movement cannot be random but predictable.
We can clearly see that Birla MNC Fund is in its 3rd wave and this is the reason we have seen exponential rise over past year. This wave (iii) has now achieved 2.618 * wave (i) along with the channel resistance which is valid since 2002 onwards. We should now start seeing some pullback on downside in the form of wave (iv) near 440 levels which will provide excellent buying opportunity as the long term trend for this fund is definitely positive.
Negative divergence on RSI: Relative strength index (RSI) measures the momentum of the fund and we can clearly see that even though prices are moving higher RSI has been constantly moving lower. This is a classical negative divergence and indicates the uptrend is in its matured stages.
Channels: This is the most basic technical analysis concept and it shows how prices moved within the black channel since 2002. The NAV has now arrived exactly at the channel resistance and also near the short term blue channel resistance which is valid since the lows of August 2013.
Time cycles: 335 weeks Time cycles have made important lows in the past. One was seen in 2003 followed by 2009 and the next low should be formed in November 2015. This means that we can get a good entry level in this fund by November 2015 at the levels of 440.
In a nutshell, it is possible to derive probable outcome on the NAV of the funds and investment should be done based on time tested technical analysis methods rather than simply looking at past performance. It is not possible to accurately time the investments and so staggered investments can be done for next few months in small proportions and post November 2015 one can start increasing the stake near 440 levels. We can see nearly 100% rise from those levels in the form of wave (v) on upside.
Waves Mutual Fund Research is a weekly publication which will cover in depth analysis with the help of Elliott Wave, Technical Analysis and Advanced Elliott wave concepts. Please contact us at email@example.com or call us on +91 9920422202/ +91 28831358 for any specific Mutual Fund requirement.