Which equity mutual fund scheme to invest?
- Senthil Kumar V
- Sep 17, 2022
- 3 min read
Introduction
Once we decide to invest in equity mutual funds, we are not sure of which scheme to invest. There are forty plus fund houses and thousands of schemes available in the market today. To zero-in on one or two mutual fund schemes is not an easy task. In this post, we will explore the various options available in equity mutual fund space and how an investor can choose the funds suitable for him/her. Our recommendation for most users would be to invest in flexi cap funds.
Factors to consider
Time Horizon
Investors should consider equity mutual funds only when their investment holding period is more than 5 years. Holding period of 10 years or more is even better.
Return expectations
We can expect to get 10 to 15 percent returns per year in equity mutual funds when held for long time.
Risk profile
Equity mutual funds come with volatility (value of investments fluctuates). We might get negative returns in short term. Investors not willing to see any losses in their portfolio should not consider equity mutual funds.
Options available
Diversified equity funds
Diversified equity mutual fund schemes invest in shares from multiple different sectors. Exposure to any one sector, company or group is capped by the regulator. These funds are less risky when compared to sectoral or thematic funds. We can classify diversified equity funds by market capitalisation of companies in which they invest. There are large cap funds, mid cap funds, small cap funds, multi cap funds and flexi cap funds.
Large cap funds
Large cap funds invest 80% of the money in top 100 companies by market capitalisation. Large cap funds are less risky when compared to other diversified equity funds as they invest in well established, large and strong companies in India.
Mid cap funds
Mid cap funds invest 65% of the money in companies that fall between 101 and 250 when ranked by market capitalisation (150 companies after large cap companies). Mid cap funds are more volatile compared to large cap funds and usually fall more when the stock market falls. We may get higher returns in mid cap funds compared to large cap funds.
Small cap funds
Small cap funds invest 65% of the money in small companies (outside the top 250 companies). We can get higher returns in small cap funds compared to large and mid cap funds but they are more volatile. We can consider small cap funds if the investment horizon is more than 10 years and the investor is ready to take higher risks.
Multi cap funds
Multi cap funds invest in 25% each in large, mid and small cap companies. This is a new category and not very popular. We would not recommend investing in multi cap funds.
Flexi cap funds
In flexi cap funds, the fund manager can invest in any combination of large cap, mid cap and small cap companies. The fund manager has full freedom to choose companies of any size (market capitalisation). These funds can give higher return than large cap funds.
ELSS/Tax saving funds
ELSS/Tax saving funds come with a lock-in period of 3 years. We can redeem the investments after completion of 3 years only. ELSS/Tax saving funds provide tax exemption under section 80C of the Income Tax Act. These funds also operate as flexi cap funds.
Index funds
Index funds mimic stock market indices like Sensex and Nifty 50. These funds invest in stocks that are part of the index (in the same proportion as in the index). These funds are known as passive funds as the fund manager does not decide in which stocks to invest and how much to invest. Whenever there are changes to the index constituents, these funds also make the same changes ro their portfolio. We can get market returns with index funds.
Sectoral/Thematic funds
Sectoral funds invest in a particular industry sector and thematic funds invest in a theme (few related sectors). These funds carry highest risk. Timing the entry and exit is very important. These funds are not suitable for new or less experienced investors.
Our recommendations
We suggest investing in flexi cap funds for most investors as these funds have potential to give higher returns than large cap funds and have less volatility than mid and small cap funds. Investors can consider investing in the following flexi cap funds.
Canara Robeco flexi cap Fund
Canara Robeco flexi cap Fund invests in Indian stocks only. It has given 13.36 % return over five year period.
Parag Parikh flexi cap fund
Parag Parikh flexi cap fund invests a minimum 65% in Indian stocks and up to 35% in foreign (mostly US) stocks. It has given 17.24 % return over five year period.
In case the investor wants to claim tax exemptions, he/she can consider the following schemes.
Parag Parikh Tax Saver Fund
This scheme has given 23.84% return over 3 year period. It invests 100% in Indian stocks only.
Mirae Asset Tax Saver Fund
This scheme has given 21.66% return over 3 year period. It invests 100% in Indian stocks only.
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