Equity mutual funds: Top 10 investment options

Most savers and investors want a piece of the equity market in their portfolio but not everyone has the skill to navigate the highs and lows of the stock market. For them, equity mutual funds (MFs) offer the best route to gain from a rally in the stock market.

Direct investment vs Mutual funds

Direct investment in equity comes with its own worries and risk. As a direct investor you will need to constantly track news and developments that can affect the performance of stocks in your portfolio. This can be time consuming and besides there is a risk that you may overreact to an event or ignore it completely. This can hurt the overall performance of your portfolio.

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Investors' emotions also come into play in direct equity investing. It’s not very uncommon for investors to get emotionally attached to their portfolio or particular stocks therein. This could be detrimental to the portfolio performance in the long-term.

However, this comfort comes with a cost. MFs charge an asset management or expense ratio to compensate them for the cost and effort that goes into investing and managing your funds.

The expense ratio is charged as a percent of your total investment every year in that particular fund. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 percent, then you are paying the fund Rs 150 a year to manage your money. In other words, if a fund earns 10 per cent and has a 1.5 percent expense ratio, it would mean an 8.5 percent return for an investor.

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However, the expense ratio declines as the fund size increases. For example, it can be as low as 1.25 percent for large funds with Assets Under management of Rs 20,000 crore or more.

Equity mutual Funds make a comeback

The last three years were tough for equity mutual fund managers and investors. Most diversified equity funds had underperformed the benchmark indices such as BSE Sensex and Nifty 50 in 2019 and better part of 2020. This was due to polarisation in the market with a handful of stocks leading the rally. This made it tough for fund managers to allocate capital and diversify their portfolio.

Things have now changed and the stock market rally is broad-based, which is an ideal hunting ground for fund managers. This also makes it tough for individual investors to track dozens of companies and sectors to invest.

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For example, the Quant Small Cap fund has 66.6 percent return in the last six-months followed by Kotak Small Cap fund at 55.6 percent, according to data from Mutual Fund India. Other top funds in the last six-months include Franklin India Smaller Companies Fund and BOI AXA Small Cap Fund.

Which fund to choose

As you can see, small cap funds have given the maximum returns in the recent past, but diversified funds and multi-cap funds are the best bet for equity investors over a three to five-year period. The sectoral and thematic funds may provide superior returns on a short to medium term horizon but they are very risky.

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Here is a list of top 10 diversified equity funds that have done well both in the short-term as well in the long-term. These funds have been selected on the basis of the consistency in their returns since their inception. Our analysis only includes funds with assets under management (AUM) of Rs 500 crore or more. Data has been sourced from ICRA Analytics Mutual Fund India.

Mirae Asset Emerging Bluechip Fund tops the charts, thanks to its consistent performance since inception. 

At this rate an investment of Rs 10,000 in this fund five-year ago is now worth around Rs 25,500. The fund delivered this return with a standard deviation of 19.1 percent which is lower than its 5-year return -- considered very good.

Other top funds include Parag Parikh Flexi Cap Fund with a five-year return of 17.4 percent. Some funds that look promising include ICICI Prudential US Bluechip Equity Fund (5-year return 17.8 percent), Axis Midcap Fund (17.3 percent) and Canara Robeco Equity Diversified Fund.

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However, as a rule of thumb ,you should never put all money in a single fund, however good it may seem. It's best to spread your money over at least 5-6 funds. And lastly, do consult an investment advisor before putting money in any of these funds.

How did we arrive at the list?

To arrive at the list, we analysed the returns of all 193 diversified equity funds that meet the AUM threshold. The returns were compared on six-months, 1-year, 3-year and 5-year basis. We also looked at returns delivered by the fund since its inception. While the six-months returns and one-year are absolute, more than one-year returns are annualised.  

We also looked at the variance in their short-term and medium term returns from the average returns in the last five-years.

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Then these funds were ranked on their return consistency and its variance to get a list of funds that offered returns with least volatility over a 5-year period. Finally, the funds were ranked according to the spread between their 5-year return and standard deviation. The final rank was the sum of ranks on all parameters.

Happy investing. 

(Advice: The article is for information purpose only and we advise you to consult a financial advisor before making any investment in equity markets.)

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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