Funds within each category have a similar investment mandate which determine their risk and return characteristics. Small/ mid cap funds are suited for a horizon of at least 7-10 years, whereas large cap funds are suited for 5-7 years.
In a volatile market, go for a diversified equity fund instead of sectoral fund
> Since stock markets are volatile these days, should I invest in a sectoral fund?
– Kabir Shah
Sectoral funds tend to be more volatile since performance is determined by the underlying factors driving that sector. Sectors may encounter different cycles lasting for varying periods, at times extending beyond five years. Overall, sectoral funds should be considered only if one has a specific view on the sector and can tolerate higher volatility. Else it is better to stick to diversified equity funds.
> What are the parameters I should look at while investing in a equity fund?
There are various categories of equity funds including large cap, diversified equity, small cap, mid cap, international equity, ELSS, sectoral, etc. Funds within each category have a similar investment mandate which determine their risk and return characteristics. Small/ mid cap funds are suited for a horizon of at least 7-10 years, whereas large cap funds are suited for 5-7 years. First, identify your investment horizon and risk appetite which would help determine the mix of equity fund categories to be held in the portfolio. Long-term consistency of fund performance is driven by multiple factors including quality of investment team, strength of the investment process and philosophy and guidance of the fund house. To assess historical performance, annualised returns over three to five years and above and calendar wise returns vis-à-vis peers and benchmark indices should be studied to evaluate consistency of performance. An additional filter of fund AUM can also be used to shortlist funds, for instance, equity funds with AUM of at least Rs 500 crore or Rs 1,000 crore can be shortlisted for further analysis. A few independent research companies provide analysis of the qualitative parameters and ratings for funds, online. Alternatively, consult an investment advisor.
> What type of funds should I select to invest Rs 5,000 every month for 10 years?
Considering your investment horizon of 10 years, you could choose to invest 60-65% of funds through a Systematic Investment Plan (SIP) into a diversified equity fund that invests in a mix of large cap, mid cap and small cap stocks and the remainder in a debt fund like a short term fund or a dynamic bond fund.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org