Nippon India Growth Fund - Growth INF204K01323

This methodology assigns a four-level risk rating to every stock in the team's coverage, measured on a six-factor framework — balance sheet leverage, management efficiency, management capital allocation, normalized return on equity of the business, EBITDA to operating cash flow convergence, and corporate governance. Each stock's risk rating dictates the maximum exposure a fund can have to ensure limited exposure to unwarranted risk. These well-considered improvements have significantly strengthened the stock-selection process.

Rupesh Patel is valuation-conscious in portfolio construction, adhering to a growth-at-a-reasonable-price investment style, which differs from the more growth-focused approach of his predecessor, Manish Gunwani. His investment process includes a few risk-management practices as well, such as avoiding concentrated stock exposure and maintaining a diversified portfolio. He is mindful of liquidity risk and takes steps to mitigate its impact on the fund. Patel also avoids significant macro bets away from the benchmark index. Additionally, there is a defined active share range as well. His investment approach is primarily buy-and-hold. While he includes a tactical portion in the portfolio, it is aligned with specific triggers that may materialize either over the short term or long term.

We see no structural issues with this process. However, given that the past few years have been particularly favorable for the mid and small-cap segments, we believe it is prudent to let the process withstand the test of time before building further conviction. Therefore, we are maintaining an Above Average score on the process pillar for now.

Patel’s investment style and portfolio construction was different from that of Gunwani, and that led to changes in the fund’s portfolio after he took over its mantle. He plies a bottom-up style to investing in stocks. While constructing the portfolio, he assigns his stock selections in three distinct buckets. The first bucket is the core of the portfolio, which will have compounding characteristics. These are the businesses that the manager buys from the long-term perspective. These companies have strong business models, high corporate governance standards, better execution quality, strong entry barriers, and the ability to keep getting market share to scale up without eroding profit margins. Before investing in a stock, he also looks at how its profit after tax, EBIDTA, and ROE will look over a three- to five-year period.

The second bucket contains stocks experiencing a temporary hit on performance or fundamental setbacks. The third bucket includes companies with potential optionality, which could lead to significant upside if realized. Together, these two buckets form the satellite portion of the portfolio. Patel ensures that, at any given time, the fund have a bare minimum 66%-67% of exposure in mid-cap stocks. The balance can be allocated to large caps, small caps, or mid-caps, depending on where the manager sees the opportunity. Here, the idea is to look at a stock based on its individual merit and where it fits on a relative risk/reward basis, regardless of its market capitalization. He doesn’t believe in taking cash calls, and instead he uses large-cap stocks in the portfolio to maintain portfolio liquidity. Consequently, the fund is well-positioned in terms of liquidity.